E.Simple, transparent, flexible – this is how the fund industry often translates the cumbersome abbreviation ETF. But that stands for Exchange Traded Funds, and it’s not always that simple. Admittedly, the products are quick and easy to trade, and the investor usually knows which 30 stocks are in a Dax fund, for example. But it gets complicated when you look a little behind the scenes. Readers keep wondering why their ETF is not performing exactly like the index to which it refers.
After all, the ETFs often develop better than their index. Two things mainly cause the discrepancies. Point one (which is bad for investors): ETFs cost fees. They are low, sometimes less than 0.1 percent, but they do exist. The provider has to buy and sell the stocks for the ETF, pay license fees to the index provider, and so on.
Point two (which is good for investors): the dividends. With the exception of the Dax, they are not fully included in any major index, but they benefit ETF investors. The ETFs are often based on net total return variants of their index, i.e. the price development of the shares plus the inflow from dividends minus tax. The ETF provider can, however, usually reclaim a large part of the withholding tax through double taxation agreements. This makes it look good in comparison to the index, benefits the investor and usually exceeds the fees for the fund.
Further reasons for the better development of the ETF: They often lend shares, which can bring them additional income, especially in emerging markets or small caps. The provider HSBC has also achieved quite a bit of added value for its investors, for example by leaving arms manufacturers out of the S&P 500 ETF for ethical reasons. The ETF owners benefited particularly from the poor performance of their prices.
So don’t be surprised if the ETF performs a little differently than the index. Most of the time, that’s even good for investors. And even if ETFs may not be as simple as expected, they have provided investors with a diversified investment at low costs for years.
Do you have any questions about money? Gladly to our editor Daniel Mohr at email@example.com