Investing in Index Funds (ETFs) – Pros & Cons

0
(0)

More and more investors are now switching to other investments than they were a few years ago because classic savings models simply no longer yield interest. Index funds, also known as ETFs, are particularly popular. But where does this great popularity come from? And are there any disadvantages that potential ETF investors should be aware of?

What is an ETF anyway?

ETF is short for Exchange-Traded Fund. Investors invest in a specific index - this can be a stock index, but also a commodity or crypto index. If the overall index performs well, which is the basic assumption when saving ETFs, the shares of the investors also increase in value. ETFs are considered long-term investments and can provide solid returns over the years. Unlike normal stock trading, you don't invest in individual stocks.

Many advantages of ETFs

ETFs are becoming increasingly popular with investors because they have many advantages. Nevertheless, the choice of the right savings plan and also the broker is decisive for how successful the investment will ultimately be. in the ETF savings plan comparison prospective investors will find all the important information they need.

Low cost

ETFs run automatically and are not actively managed like other types of funds. As a result, the running costs for that Online depot (also for children) very low. Lower costs translate into higher profit margins because profits are not eaten up by unnecessary costs.

liquidity

Although ETFs are considered long-term investments, investors still have the option of canceling their savings plan at any time. In contrast to many other investments, the capital of ETFs is not permanently tied up, but can be liquidated at any time.

security

Fund saving is considered a very safe investment. If you look back at the past, you can see that the economy – and thus also individual indices – have grown steadily. If this development continues in the future, ETFs will not lead to drastic losses.

Because ETFs to special assets of banks count, they cannot be touched in the event of insolvency. Investors' money is therefore safe.

transparency

Investors can check the market value of their savings plan at any time, pause the savings plan or even terminate it themselves. The costs are also manageable and therefore as transparent as possible. This makes ETFs a very popular investment, even for beginners.

spread of risk

Diversification is the golden rule in stock market trading. With the widest possible diversification, losses in individual values can be offset by gains in other assets. By spreading the risk, you reduce your risk of loss. ETFs are the epitome of diversification because they track a complete index, not individual stocks.

Also suitable for the small budget

The basic assumption on the stock exchange is that noticeable profits can only be achieved through large investments. Because the investment volume in ETFs increases continuously from savings rate to savings rate, even people with a small budget can work profitably with their capital in the long term. Even small savings rates from €20 per month can be extremely lucrative for a term of ten to 15 years.

However, ETFs also have disadvantages

Every coin has two sides - this also applies to ETFs, of course. Even if the advantages outweigh the disadvantages, potential ETF investors should also be aware of the disadvantages of automated funds:

Counterparty Risk of Swap ETFs

Investors who enter into a swap agreement when concluding an ETF lose security. Namely, the bank enters into a trade with a third party (counterparty or swap partner). If the latter is no longer able to pay, the investors' capital is gone. Unfortunately, swap shares are not part of the special fund.

Swap ETF costs

The banks' swap business can also damage investors in another way: the fees involved are often not clearly understandable for investors. Sometimes they are even too high. However, swap ETFs can also be very profitable, which is why the reasons mentioned do not have to be an exclusion criterion. However, it is important that investors are aware of the risk.

Physically replicating ETFs

Physically replicating ETFs contain actual shares of the securities included in the index. Speculators often borrow such securities from the bank and pay a fee to the ETF owner. This procedure can therefore lead to an increase in income. However, if the borrower becomes insolvent, this can lead to losses for the investor, because increased returns are always accompanied by increased risk.

Cover photo: https://www.pexels.com/de-de/foto/marketing-frau-kreativ-entwurf-6289065/

How useful was this post?

Click on a star to rate it!

Average rating 0 / 5. Vote count: 0

No votes so far! Be the first to rate this post.

We are sorry that this post was not useful for you!

Let us improve this post!

Tell us how we can improve this post?

Leave a Comment

en_US