{"id":8699,"date":"2018-03-03T09:23:08","date_gmt":"2018-03-03T08:23:08","guid":{"rendered":"https:\/\/www.smolio.ch\/wissen\/this-is-how-it-works-invest-in-etfs\/"},"modified":"2024-09-17T08:34:48","modified_gmt":"2024-09-17T06:34:48","slug":"this-is-how-it-works-invest-in-etfs","status":"publish","type":"post","link":"https:\/\/www.smolio.ch\/en\/wissen\/this-is-how-it-works-invest-in-etfs\/","title":{"rendered":"This is how it works: Invest in ETFs"},"content":{"rendered":"Lesedauer<\/span> 5<\/span> Minuten<\/span><\/span>\n

A simple guide for anyone who wants to buy an automatically managed fund for the first time and is looking for the right product.\nAnd also for those who are looking for a way to invest their money for fewer fees. <\/span><\/p>\n\n\n\n

What is an ETF?<\/h2><\/div>\n\n

Exchange traded funds (ETFs) are listed, passively managed funds.\nThe securities contained in the fund track a specific index and the funds distribute their assets (i.e. investments) according to the market value of the investments in the index.\nThis means that the performance of these funds always develops in line with the index. <\/span><\/p>\n\n

ETFs follow an index that is regularly calculated by an index provider.\nWell-known providers are MSCI, FTSE or STOXX.\nThe composition of the investments that belong to an index differs slightly from index provider to index provider. <\/span><\/p>\n\n

ETFs are not actively managed by a fund manager.\nInvestment is passive and automated.\nThis results in lower costs.\nThe performance is generally slightly worse than that of the underlying index.\nThe difference between the index return and the ETF return is known as the tracking difference.\nSkillful providers can keep this difference small. <\/span><\/p>\n\n

How do I find the right ETF?<\/h2><\/div>\n\n

There are thousands of passive funds on the market.\nThese include exchange-traded funds (ETFs) and index funds.\nYou can compare ETFs on various platforms.\nFor example, justetf.com<\/a> is simple and comprehensive.\nUnder \u201cETF search\u201d (no registration required) you can search for ETFs by topic or index, for example, and compare them with each other.\nAt the same time, it is also worth checking which ETFs you can actually buy via your custody account provider.\nSometimes not all of them are available.\nBut how do you find the right ETF? <\/span><\/p>\n\n

Determine asset class<\/h3><\/div>\n\n

Depending on your risk appetite, you can choose ETFs on equities, bonds (also known as debentures or bonds), the money market (i.e. very short-term fixed-interest investments), commodities, precious metals or real estate.\nEquity ETFs are the riskiest and therefore more suitable for a long-term investment horizon (7-10 years and more), as they have historically achieved the highest average annual returns over long periods of time. <\/span><\/p>\n\n

Determine investment focus(es) and allocate investment amount<\/h3><\/div>\n\n

The question is: Which market should your ETF cover?\nAs a rule, ETFs are chosen as a long-term investment with the aim of spreading risk, i.e. diversification <\/a>across as many companies of different sizes and regions as possible.\nOtherwise you could bet on individual stocks.\nTherefore, if you don\u2019t have any ETFs yet, it\u2019s best to start with a broad-market ETF that covers as many regions as possible.\nThis is a so-called world ETF.\nIf your portfolio is already well diversified and you want to focus on a specific market, there is a wide selection of ETFs that focus on specific regions (e.g. emerging markets or Asia) or themes. <\/p>\n\n

Choose distribution strategy for income: Payout or reinvestment?<\/h3><\/div>\n\n

There are two different types of ETFs: distributing and accumulating.\nThe ETFs hold investments and these investments generate income.\nThe income flows into the fund assets, for example dividends in the case of equity ETFs or interest in the case of bond ETFs.\nYou are entitled to this income as a shareholder.\nHow would you like to receive them?\nDistributing index funds automatically pay you the share of income attributable to your unit into your custody account: you have a regular income. <\/span><\/p>\n\n

Distributing funds reduce your risk and are usually easier from a tax point of view because a distribution slip is sent along.\nIt is also motivating to \u201cget something out\u201d of your savings on a regular basis. <\/span><\/p>\n\n

Accumulating ETFs reinvest the income directly for you.\nYou either receive further fund units or the value of your units increases.\nThis accelerates the accumulation of assets through the compound interest effect<\/a> and as you do not receive the money, you cannot spend it.\nYou also have to declare the income from accumulating funds in your tax return. <\/span><\/p>\n\n

Select the desired index replication: physical or synthetic<\/h3><\/div>\n\n

Decide between physically replicating and synthetically replicating.\nPhysically replicating ETFs replicate the performance of an index by either buying its components in full (full replication) or by replicating the majority of them using optimized sampling.\nSynthetically replicating ETFs replicate the performance of an index through swap transactions with a counterparty.\nSwap transactions can be thought of as a contractual promise to exchange future cash flows between financial institutions.\nSynthetic products are usually somewhat cheaper.\nThe trend in the market, both among fund providers and customer demand, is clearly moving towards physically replicating products \u2013 there is no counterparty default risk and it is clear in which securities your money is invested. <\/span><\/p>\n\n

What do I need to bear in mind when investing in ETFs?<\/h2><\/div>\n\n

Choose a tax-efficient ETF<\/h3><\/div>\n\n

Choose a product that doesn\u2019t cause you any stress when completing your tax return, i.e. is tax-simple.\nIt\u2019s easy if the provider transmits the tax values and income data to the Federal Tax Administration.\nYou can find out whether this is the case, for example, at <\/span>justetf.com<\/span><\/a> to check.\nIf it says \u201cESTV-Reporting\u201d for an ETF under Tax status Switzerland, it will transmit the tax-relevant data for the corresponding financial year to the Swiss Federal Tax Administration.\nIf you do not receive the necessary information with the annual custody account statement from your online broker<\/a>, you can then go to the <\/span>webpage<\/span><\/a> of the EStV. <\/span> <\/p>\n\n

Pay attention to low costs<\/h3><\/div>\n\n

ETFs incur one-off and recurring costs. <\/span>One-off costs<\/b> are incurred when buying and selling the ETF.\nThese include the brokerage fee for your online broker as well as stamp duty, stock exchange fees and the so-called spread.\nThe spread is the percentage range in the price at which the ETF is offered or demanded.\nThe smaller the spread, the better for you. <\/span><\/p>\n\n

Recurring costs<\/b> are charged annually either directly to you (as a flat-rate or percentage custody account fee) or to your ETF investment assets and reduce your return.\nThe total expense ratio (TER) essentially comprises the costs for fund management fees, advertising and product distribution, but not the transaction costs at ETF level.\nThe lower the TER, the better for you. <\/span><\/p>\n\n