Four things to know about ETFs

HOW AN ETF WORKS

In addition to stocks, the value of an ETF varies according to the performance of the underlying products. To have characteristics similar to those of the index, the fund manager must create a portfolio with similar securities and monitor its composition so that the performance of the ETF deviates as little as possible from the index it follows. The primary role of the fund manager is to monitor the index weighting and ensure that when changes occur, they have an impact on the ETF’s portfolio.

COST OF INVESTING IN ETFs

Compared to traditional mutual funds, ETFs have no subscription/redemption fees, but in exchange for holding the product, the issuer charges a fee which is usually built into the price. As these are so-called passive management products, the administration fees are low, generally between 0.1% and 1%. Before buying, you can find these costs and other product details in the prospectus.

In addition to the administration fees paid to the issuer, you may also pay transaction fees to your broker when you buy or sell the ETF. These costs can be found on your preferred broker’s website.

VARIETY OF ETFs

An ETF can track or replicate many things, such as a selection of stocks, securities from a certain sector, and even the value of commodities. Therefore, if the investor intends to diversify his portfolio and follow market developments, a diversified ETF is the ideal product.

Unlike regular ETFs, which are similar in value to the underlying assets, it is also possible to buy leveraged ETFs. If an ETF is leveraged, it means that the issuing party lends money to invest more in the product than its initial amount paid. In this way, the results are magnified, for example, by a ratio of 2 to 1. This means that with a market decline of 1%, the ETF would fall by 2%. To borrow money and increase risk, the issuer usually charges high fees, sometimes over 3%. These high costs and increased risk make this product an unpopular choice for long-term investments.

WHERE TO INVEST IN ETFs

To invest in ETFs, you need a broker to place the order. DEGIRO is an online broker that values ​​the importance of diversification. As such, it offers a list of ETFs you can invest in with no buy/sell fees (see terms and conditions). They can be supplemented with products from more than 50 markets around the world. Find all the financial products offered by DEGIRO here. DEGIRO is a wholesale broker that provides an online platform for all types of investors. Launched in the Netherlands in 2013, it now offers its services in 18 countries. Consequently, DEGIRO quickly became one of the largest brokers in Europe.