Why ETFs are a good start for your investment career

Throughout the last 20 years, Exchange Traded Funds (so called ETFs) became an increasingly important investment vehicle. From 2003 to 2019 assets under management (AUM) rose from roughly 200 to almost 6200 billion US dollars, which is an increment of more than 2900% (Source: Statista). As indicated by their name, ETFs pool advantages of both funds and exchange-traded stocks.

One of the most important insights from finance research is to reduce risk by diversifying your assets. Preferably, you should diversify stocks, industries, asset classes and countries of your portfolio. With ETFs you can fullfill that need. For example, holding an ETF on the S&P 500 lets you diversify throughout 80% of the total available US market capitalization. Two of the most prominent ETFs are the iShares Core S&P 500 UCITS ETF (per 2020/06/30: $32 billion AUM) and the Vanguard S&P 500 UCITS ETF (per 2020/06/30: $22 billion AUM). Furthermore, by holding an ETF on the MSCI World or the EuroStoxx 600 you can also diversify internationally. To diversify through asset classes you could, for example, buy additional Exchange Trade Commodities (ETCs). But note, that many ETCs bear a higher risk than ETFs (see also: How to profit from low oil prices).

Since ETFs are exchange-traded, they display another advantage: You can liquidly buy and sell them without large bid-ask-spreads, which boosts your flexibility and reduces costs. Talking about costs, there is another huge benefit: ETFs are way cheaper than mutual funds. While the latter display annual expense ratios of 1%-3%, most ETFs are well below 1%. Thus, when investing in a mutual fund, you would need to earn a return of 1%-3% just to be break-even. Also noteworthy: According to CNBC, over a time-span of 15 years more than 90% of funds trail the S&P 500.

In summary, ETFs are a cheap, reasonable and easy-to-understand investment vehicle, which is also suitable for beginners. Nevertheless, you should keep in mind that even ETFs constitute a risky investment.

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