Exchange Traded Funds
Exchange Traded Funds (ETFs) are investment funds traded on the stock exchange with no fixed maturity date. These financial products combine the advantages of three asset classes: stocks, mutual funds, and certificates. ETFs are considered flexible financial instruments since, like stocks, they can be traded at the current market price at any time. Their composition provides broad diversification, making them relatively secure investment vehicles. Additionally, ETFs often offer cost-efficient structures similar to certificates, making them appealing to individual investors.
Another term used for ETFs is "Index Funds" because they typically aim to replicate the performance of a specific index, such as the DAX or the S&P 500, often in a 1:1 ratio. When an investor buys ETF shares, they become partial owners of the securities held in the fund and, thus, participate in the performance of an entire stock market index comprising several dozen companies. Nowadays, ETFs cover nearly all asset classes. Some ETFs replicate stock market indices like the DAX or S&P 500, while others focus on commodities, currencies, or bonds. This transparency is a significant advantage of ETFs since investors always know precisely what they are investing in, as the composition of these indices is publicly available.
In contrast to actively managed funds, ETFs typically operate without active portfolio management and are often passively managed, with long-term performance often exceeding that of active management. The goal of an ETF is to closely mimic a specific benchmark index, where the underlying index dictates the composition. There is no fund manager constantly trying to actively adjust the fund to match market developments. Consequently, the management fee is generally lower due to the absence of active management compared to traditional mutual funds. Only the costs associated with buying and selling ETF shares on the exchange need to be paid without any front-end loads.
However, ETFs are also dependent on market performance as they strive to closely replicate their benchmark index. If the underlying index loses value, the ETF value will also decline. As a result, ETFs can never outperform the performance of the corresponding index.
ETFs are easily comparable among themselves, with several ETFs often tracking the same reference index. This allows for straightforward cost and fee comparisons, which are easily accessible. The Total Expense Ratio (TER) is especially important for this purpose. Additionally, all exchange information, such as current prices, trading volumes, and spreads, is readily available.
Unlike index certificates, which are legally considered debentures, the capital invested in ETFs is treated as special assets. This means that the assets of an ETF are separated from those of the issuer and remain protected even in the event of the issuer's insolvency. ETFs thus offer an attractive opportunity for investors to easily and diversely invest in a wide range of asset classes.