What is an ETF?
The ETF stands for exchange-traded fund, ie an exchange-traded fund. An ETF is in many ways the same as an mutual fund, with the exception that units in an ETF are traded and sold on the stock exchange. If an ETF wants to expand its capital, it does so through a share issue where new shares are issued (often to a single major investor), just as we know it from listed companies. Exchange-traded funds have grown significantly in popularity over the past 30 years.
Why you should buy low-cost index funds
In 2016, well-known investor Warren Buffett wrote a letter to all investors in his joint stock company Berkshire Hathaway:
When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.
If you want to follow Buffett’s advice, ETFs are by far the easiest way to invest broadly in the cheapest index funds. Today, there are many exchange traded funds that follow a market index. This is often the easiest way to invest in an index fund.
Warren Buffett is a big supporter of following the US stock index S&P 500 such as VOO or SPY (The largest ETFs following the S&P 500). If you are located in the EU you can invest in Vanguard’s S&P 500 UCITS ETF. The on-going costs is as low as 0.03% if you select VOO from Vanguard. It is difficult to find a cheaper fund manager with any active managed Mutual funds or ETFs.
ETFs are typically passive funds that follow an index of stocks or bonds, but there are also active ETFs and ETFs that invest in other things such as renewable energy, real estate and more but beware of fees.
When was the first US traded ETF available?
The first ETF available in the United States was created in 1993, but since then the development has been strong, as you could see in the graph here at the beginning of the article.
In the US, ETFs accounted for more than 30% of all stock trading in 2017, at least measured by value. ETFs have received many good words along the way due to the good opportunities to create a large spread and be exposed to many different markets, combined with low administration costs.
How many ETFs exist on the market today?
6,970 ETFs globally as per 2019, I got the number from here. This mean when finding an ETF for your portfolio your selection is huge. Myself and FIRE community is a big fans of Vanguard, which has some lowest cost ETFs. You will find plenty of ETFs at most brokers. I would recommend that you search for ETFs with low annual costs such as VTI, VOO, SCHD, and DGRO.
An ETF makes the most sense with a low annual cost.
To avoid high fees, you could choose to invest through eToro, where you do not pay ETF investment fees.
What is the Advantages and Disadvantages of investing through ETFs
Investing in ETFs has clearly become more popular in the last few years, and this trend is likely to increase around the world. Many are lured by the low cost, but find it difficult to see through the disadvantages.
There are both advantages and disadvantages to investing in ETFs, I will here give my own, very concrete suggestion of what is good and bad about trading ETFs:
Advantage of index ETFs
- Low costs: An ETF often has only an APR of 0.1-0.5% (even available to less than 0.1% at certain funds) compared to Danish index and investment funds, which often have an APR of 0.75 -2%
- Spread: You easily achieve a great diversification on different stocks, sectors, countries and currencies. It would be very demanding and expensive if you yourself had to achieve the same spread solely by trading individual stocks.
- Transparency: You can easily see what you are investing in.
- Follows the market price: There is no risk of a lower return than what the market dictates, which risk by investing in an actively managed fund or single stocks.
Disadvantages of index ETFs
- Passive management: Index ETFs follow the market, so if the market falls, your ETFs fall – here, actively managed funds have the advantage that they can change their portfolio so that it becomes less vulnerable to fluctuations.
- Complicated rules, as ETFs can be taxed as either stock income or capital income