There are many ways to make provisions for old age, but none are as attractive to ordinary households as buying exchange-traded index funds. This is because ETFs combine several advantages.
Last we dealt with the question how ETFs – exchange-traded mutual index funds – work. This post is about why ETFs are so amazingly attractive to retail investors.
ETFs offer you a combination of advantages that is almost too good to be true. I would now like to introduce you to eight of these advantages.
1. No large start-up capital required
You can invest with ETFs from as little as EUR 25 per month. You do not need tens of thousands of euros of start-up capital and a steady, stable income as would be necessary with a home – especially if you finance it with a loan.
2. It couldn’t be more relaxed
ETFs give you the opportunity to invest in hundreds, and in many cases even thousands, of stocks (or bonds) at once. And that across all industries and – as it is called in technical jargon – “diversified” worldwide. Because that is so, you as an ETF investor do not need to know anything about individual securities.
You don’t have to keep an eye on your portfolio, and you don’t have to read any financial news. In fact, for your returns and your peace of mind, it’s best to leave your ETF portfolio alone and only take a closer look at it once or twice a year. The best way to treat your ETF portfolio in the long term is to take it easy. In stock market jargon, this is called buy-and-hold.
The “ETF Pope”
Dr. Gerd Kommer has been a best-selling investment guide book author for more than 20 years. At the same time he is the managing director of Gerd Kommer Personal-Financial.com GmbH, a digital asset management where customers can start with small amounts, as well as the Gerd Kommer Invest GmbH, a fee consulting company. In his t-online column, he and his colleagues Felix Großmann and Daniel Kanzler write every two weeks about his specialty: long-term wealth accumulation with ETFs.
3. ETFs are cheap
The costs are unrivaled for a broadly diversified ETF investment. They are typically less than 0.5 percent per year – both in terms of purchase and running costs.
4. Built-in safety advantage
As far as we can judge, it is impossible for you to lose money in the very long term with a very broadly diversified equity ETF, such as an ETF on the well-known MSCI World Index. All you have to do is hold the ETF for 15 to 20 years by not selling even when the stock market declines sharply. Sharp downturns inevitably happen every few years, but they pass.
A loss is simply ruled out because 1,600 large companies from all sectors that are economically active in 190 countries around the world cannot all shrink permanently or go bankrupt. That would literally be the end of civilization or even humanity.
Because these 1,600 companies, whose performance can be tracked with a single ETF, represent the companies that manufacture the goods and services that more than seven billion people on this planet need every day to live and survive.
No other investment has this structural security advantage – neither a home nor individual rental properties, individual stocks, individual government bonds or endowment insurance. And certainly not bank balances.
5. ETFs are easy to understand
ETFs are basically very easy to understand, much easier than life insurance, a building society loan agreement or any other financial product. If you continue reading this column in the coming weeks and months, you will be able to understand this statement directly, I promise you.
6. ETFs protect you from going bankrupt
With an ETF custody account, the investor bears no risk from a conceivable bankruptcy of his custodian bank or from a possible bankruptcy of the ETF provider. Both the bank and the ETF provider are only “custodians” or “administrators” of your assets, they are not the owners. The owners of the assets – the securities in an ETF – always remain the investors.
This is an extremely important difference to a bank balance. With this, the account holder lends the bank money, which then belongs to the bank. If the bank goes bankrupt, that money could be gone – at least if it goes beyond the deposit insurance. It has often been the case with thousands of bank failures around the world over the past 300 years. The most recent one happened in Germany a few months ago in the form of Greensill Bank AG. In two weeks’ time, we’ll be delving into this important difference in more detail in this column.
7. ETFs bring you higher returns
Stock ETFs represent the stock market, i.e. listed company investments. In the last 250 years, no other form of wealth has brought investors such high long-term returns as the stock market – neither real estate, nor gold, nor interest-bearing investments, and certainly not “packaged” financial products like Life insurance, Home loan and savings contracts or Certificates.
8. ETFs develop better than traditional active funds
ETFs are passively managed investment funds, often also called index funds. It therefore makes sense to compare their returns with actively managed, ie “normal”, investment funds. The highlight: over a period of five years upwards, ETFs typically outperform 80 to 90 percent of their directly comparable actively managed funds.
With ETFs, you will be among the top ten or 20 percent of all fund investors in the long term. Science has dealt intensively with why this is so over the past 60 years and has proven this fact over and over again. I will come back to this in a later post.
First of all, in two weeks’ time we will devote ourselves to the bankruptcy protection through ETFs mentioned here in more detail and explain why ETF investors do not have to worry about the solvency of their bank or the solvency of the ETF provider.