Why invest in ETFs?
Exchange-Traded Funds (ETFs) have become increasingly popular in recent years. For one thing, these financial products have not been around as long as traditional investment funds, for example. ETFs have only been available since about the turn of the millennium. What should interest investors even more: ETFs are significantly less expensive than Unit Trusts and traditional Mutual Funds.
ETFs refer to an index.
What distinguishes ETFs from traditional Unit Trusts or Mutual Funds? ETFs imitate a reference index, for example, the JSE SA Top40 (South African stocks), the S&P 500 (US stocks), or any other index. Thus, the ETF investor can participate in line with the performance of the reference index. If, for example, the JSE Top 40 rises by 10 percent, the Top 40 ETF should increase by the same amount. Of course, this also applies vice versa. If the reference index falls, the value of the ETF falls accordingly.
More cost-effective than funds
There is a simple reason for the favourable cost structure of ETFs: the management of these financial products involves considerably less effort than regular funds, as index funds "only" imitate an index. With them, fund managers can monitor the markets and buy and sell positions depending on developments. This is why ETFs are said to be passively managed, whereas mutual funds are actively managed. And that
Better than the market
One further advantage of ETFs is that they often deliver better performance than regular funds. Empirically, the majority of fund managers do not manage to beat the market, i.e., the comparative index or benchmark. On the other hand, ETFs are not an "all-in-one solution for everything." Investors take market risks with ETFs because they follow the performance of the underlying index. In the event of a stock market decline, this leads to negative performance. An ETF investment makes sense for the long term, i.e., at least 5 to 10 years. With this investment horizon, phases of weakness in the market can be compensated for again. For many years, well-known stock indices have historically increased. Such as with the JSE Top 40, DE, S&P 500, and EuroStoxx 50 (Eurozone equities): Viewed over several decades, the stock market barometers had a positive performance.
The ETF world has grown.
The ETF world has grown.
In recent years, unique indexes have been created so investors can invest in them via ETF. Examples are trending themes on digitalization, robotics, or green investments. Newer approaches also choose equal weightings of the index members in the index's composition instead of weighting the shares according to stock market turnover and free float, as is the case with classic stock market barometers. Incidentally, ETFs can also refer to asset classes other than equities, such as bonds. The principle is the same. So, investing in hundreds or even thousands of different bonds with a single bond ETF is possible. As with equity ETFs, the result is that investors use the products to spread market risk across many different securities.
The advantages of ETFs:
- ETFs are usually less expensive than funds
- ETFs replicate price movements in stock indices or other underlying 1:1
- Investment funds rarely manage to outperform benchmark indices.
