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What are ETFs and should I invest in them?

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By Bitpanda

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The steadily increasing popularity of ETFs (exchange-traded funds) comes from several factors - these index funds, which are generally managed passively, enable broad diversification and provide an affordable alternative to buying individual stocks. Read more about them in this article.

As a newcomer to investing, the wide range of investment products and the associated advantages and disadvantages can cause considerable confusion and uncertainty. Lots of questions come up: How can I start investing? How can I diversify my assets as broadly as possible, even with a small budget, and how can I still keep an overview? The magic word consists of only three letters: ETF. ETFs are exchange-traded funds, each of which replicates an index and enables a broad diversification of risk right from the start.  

The increasing popularity of simple investment products

Let's face it. Fundamentally, almost everyone who is interested in the topic of investing money but hasn't started yet is more or less dealing with the same question: How can you invest money in a simple and uncomplicated way while dealing with the most important risks in investing responsibly?  

Beginners are mostly looking for products that achieve the highest possible returns over the medium to long term under the most stable market conditions possible, with reasonable fees and a transparent structure. Therefore, it is hardly surprising that investing in ETFs has been enjoying steadily growing popularity since the beginning of the 2000s.

What can ETFs do?

In the commodities trading environment of the 1980s, which was plagued by poor profitability, a resourceful product developer named Nate Most at AMEX had the idea of developing an investment fund that traded like stocks, inspired by the warehouse documents used in commodities trading. No sooner said than done - and it is hard to believe that his superiors initially met this idea with little enthusiasm.

Unlike a regular mutual fund, which is a managed portfolio or pool of stocks, bonds and other investor-acquired securities, ETFs are exchange-traded funds that track the performance of an underlying index faithfully.

As a reminder, it is not possible to invest in an index directly, as it is a measure of the change in a value that replicates data such as prices. For this reason, investors instead invest in a securitised investment product such as an ETF.

Why are ETFs interesting products?

ETFs not only follow the performance of an index and therefore ensure broad diversification, but are also a low-cost alternative to buying equity funds and individual stocks. With ETFs, important markets will be represented and investors need to spend less time and money than diversification with individual stocks or actively-managed mutual funds.

Unlike ETFs, managing investment funds requires active management through investment companies which select various securities for a fund and, where necessary, intervene and reweight them. Of course, investors who invest in investment funds have to pay the respective fees for the high level of management effort involved. An ETF, on the other hand, replicates an index 1:1 and is managed passively.

Since its inception, the spectrum of ETFs available to investors has evolved from simply designed products with a high degree of comprehensibility to mixed products that are sometimes complicated. Entire industries and sectors are covered. ETF savings plans are also very popular with investors, as they allow them to benefit from the cost-average effect and even out price fluctuations.

How can I invest in ETFs?

With Bitpanda Stocks*, you can invest in ETFs such as the Developed World Stocks on a pro rata basis fractionally, from as little as €1, commission-free and with tight spreads. This is made possible by derivative contracts covered by the underlying stocks and ETFs. The Developed World Stocks is an exchange-traded index fund (ETF) that replicates the performance of the MSCI World Index as closely as possible.

*Bitpanda Stocks enables investing in fractional stocks. Fractional stocks in Europe are always enabled via a contract which replicates the underlying stock or ETF (financial instruments pursuant to section 1 item 7 lit. d WAG 2018). Investing in stocks and ETFs carries risks. For more details see the prospectus at bitpanda.com.

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