How do I find the right ETF?

When it comes to saving and investing money, hardly anyone can avoid ETFs these days. Exchange traded funds are a simple and inexpensive way to invest in the stock market and build up long-term assets.

Savings plans are available from as little as one euro per month. But the selection of different ETFs is already in the thousands. Not all are suitable for every investment strategy. A guide on how investors can find the right ETF for them.

1. Choose a diversified index

ETFs always reflect the performance of entire stock market indices. If the index rises, the return on the ETF also develops positively. Well-known indices include the German stock index Dax and the American Dow Jones. In addition to country indices, there are also industry or strategy indices. The more stocks are included in an index and the more industries are represented, the greater the spread of risk. For this reason, Stiftung Warentest or the consumer advice centers recommend ETFs with a global focus. For example, the MSCI World Index contains 1600 individual stocks, the MSCI All Country World Index even around 4000, while an ETF on the German stock index Dax only has 30 individual stocks. There are always several ETFs from different providers on an index. For example, 20 ETFs are currently launched on the MSCI World.

2. Note fund volume and fund age

In order to decide between the many ETFs, it helps to look at the fund volume and fund age. “The fund volume should not be less than 100 million euros, and the ETF should also have been on the market for at least three years,” advises Jan Altmann from the justETF platform. The consumer centers even advise only choosing funds that have at least a fund volume of 500 million euros. “The lower the assets that are managed in an ETF, the greater the risk that the fund company will close the fund at some point or that it will be merged with another fund,” according to the consumer advocates’ assessment. The result: Investors would get their assets paid out, but would have to pay tax on them directly.

3. Pay attention to low costs

ETFs are cheaper than actively managed mutual funds. That’s because an ETF doesn’t require a fund manager to actively pick stocks. After all, the ETF is based directly on the index. Nevertheless, there are running costs that are between 0.1 and 0.5 percent per year. “It’s worth comparing providers and looking for the cheapest one,” says Altmann. In addition to the total expense ratio, the so-called Total Expense Ratio (TER for short), investors also have to consider custody account and order fees. Here, too, the providers differ. Some online brokers still offer free ETF savings plans without custody fees.

4. Decide between physical and synthetic ETF

Anyone looking for an ETF will also come across the terms “physical” and “synthetic”. These are two different types of ETFs that differ in how an index is tracked. While a physical ETF actually simply buys all securities in the index, a synthetic ETF does not actually contain the corresponding stocks from the underlying index, but other securities independent of the index. The ETF provider can be assured by a bank that the value will develop in the same way as the index. Ultimately, this can be cheaper than buying all the shares exactly like in the index. If an investor always wants to know exactly which securities their money is invested in, they should use physical ETFs. “But neither of the two variants is better or worse,” says Altmann.

5. Decide between distributing and accumulating ETF

There are also two different ways in which investors participate in company profits. With a distributing ETF, the investor receives the dividends once a quarter or year. He therefore regularly benefits from small profits without having to dissolve the fund. With an accumulating ETF, also known as “reinvesting”, the dividend is credited to the fund’s assets. The investor does not have to worry about anything else and the dividends can also benefit from the fund’s performance. On the other hand, distributing ETFs have another advantage: “If the distribution is below the savings allowance of currently 801 euros per year, I don’t have to pay tax on this profit,” says Altmann. So there is a small tax advantage.

6. Set your own preferences: ability to save? Focus sustainability?

Investors can invest in ETFs with a one-off investment of several thousand euros or transfer a certain amount to a savings plan every month. Although almost all ETFs are now eligible for a savings plan, if you choose this option, you should still check beforehand whether a savings plan is possible with the desired ETF.

Even those who value a specific investment focus – for example only want to invest in companies that operate sustainably – must do specific research.

An overview Investors can find out about specific products and features (distributing or accumulating, etc.) at stiftung-warentest.de or special ETF portals such as justetf.com or extraetf.com.

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