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Courtney Henry

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Investing in ETFs

22 Dec. 2021

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Investing in ETFs: Strengths and Weaknesses

ETFs are used by many investors to build investment portfolios. On the one hand, they are similar to stocks in the way they trade, but on the other hand, they represent a wider investment range. Exchange-traded funds have many advantages and a wide variety, which allows the investor to choose the one he needs.

Advantages of Investing in ETFs

Passive management strategy allows the investor to know the structure and composition of the selected index all the time.

• Easy control

Selecting promising companies for investment requires a certain amount of analytical knowledge that not everyone has. While investing in ETFs, a person buys a ready-made package of documents, which the company manages as a whole according to its strategy.

ETF, unlike closed or open-ended funds, allows you to constantly trade on the exchange (create and redeem shares), combining the characteristics of closed and open-ended funds.

• Diversification

One ETF share represents portions of securities purchased by an exchange-traded fund.

• Low cost

ETFs are not required to track individual shareholders. It brings the average expense for ETFs to 0.1% versus 0.3% of index funds. Buying one ETF share is about 5 times cheaper than buying one share, considering diversification. ETFs are one of the cheapest ways to invest in the Swiss stock market.

• Intraday trading

ETFs trade throughout the day, due to which they provide high liquidity (the ability to sell shares at a market price quickly, even during one trading session).

• Low cost ratios

While buying ETFs, a lower commission is paid to the broker than while buying individual securities.

• Dividends are immediately reinvested

Typically, ETFs are immediately reinvested with earnings from stocks, which reduces income taxation.

• Tax efficiency

ETFs are more efficient than traditional mutual funds. No taxes on capital gains before the sale of securities (only taxes on dividends are possible). It follows that holding ETFs in a taxable account creates less liability than holding a fund with a similar structure.

• Ease of usage

ETFs can be traded as easily as a regular stock.

• Security

ETFs issue securities according to UCITS (Undertakings for Collective Investment in Transferable Securities) standards, which ensure strict compliance with regulatory requirements.

• Investment flexibility

Using ETFs, you can invest in completely different areas: pharmaceuticals, real estate, construction, science, or some specific area of business. You can invest on a specific basis, for example, companies do not conduct business in a specific region.

• Low level of risks

Investing always carries some level of risk. By investing in ETFs, you put yourself at lower risk than buying stocks or bonds. The country of investment also influences the level of risks. Strong economy, low inflation, currency and price stability, efficient capital markets, highly professional international banking system. All these points mentioned above make Switzerland the best place to invest in our company in particular.

Disadvantages of ETFs

• Limiting diversification

Perhaps limiting investments for certain sectors or foreign stocks to only those with high capitalization (companies with a market value of more than $ 10 billion).

• Costs may be higher

When comparing ETFs to other funds, the costs are usually lower. But when compared with investments in specific stocks, the costs can be higher (depending on the frequency of buying and selling and the broker’s fees for managing and collecting stocks).

• Low dividend profit

The risks of owning an ETF are usually lower, and therefore lower returns. However, if the investor is willing to take risks, then the profit can be much higher. On average, the return on owning ETFs is lower than on owning stocks.

• Low liquidity

One of the most important characteristics when buying securities is the ability to sell them at market prices quickly. Low liquidity can prevent you from getting out of your investment quickly.

The most important feature of such investments is a large difference in offers on the market. The best way to determine ETF liquidity is to study market recessions and advances.

• ETF return using lending

While using derivatives and financial debt, it is possible to increase the value of the underlying securities index. However, this method is extremely risky. So, if the fund’s shares fall, the assets that the fund bought will fall 2-3 times (depending on whether the index is tripled or doubled).

• Impact of volatility

Despite the fact that ETFs include more than one position, they are also subject to market volatility. The likelihood of large price fluctuations primarily depends on the volume of the fund, for example, the Swiss SMI index (the main stock market index that tracks the dynamics of the 20 largest and most liquid stocks on the Swiss stock exchange) will be more stable than securities that track a single industry or sector.

⠀⠀If we are talking about international or global exchange-traded funds, the countries in which ETFs are received are important. The creditworthiness of the currency, the level of economic and social stability: all these factors play an important role. If you look at the images below, you can see that the countries on the list are changing, but Switzerland is one of the leaders in both the long and short term.

• Distribution of capital gains.

Sometimes ETFs distribute capital gains to shareholders, which is not always beneficial for investors, since they are then liable for income taxes. Usually, the more profitable option is the option in which the fund reinvests the profits.

It is important that investors are aware of the distribution of profits in an exchange-traded fund prior to investing.

ETFs are a good way to invest with their pros and cons, but you shouldn’t overlook that in specific cases, advantages can be disadvantages and vice versa. The most important thing is to find the right portfolio for you.

This article is neither an advertisement nor a call to invest. The content that we write and publish has only informative character and exists only as a subjective opinion of the author.

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Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and Simplewealth AG charges and expenses.

Simplewealth AG is a Swiss-based advisory service, designed to assist clients in achieving discrete financial goals. We are not intended to provide comprehensive tax advice or financial planning with respect to every aspect of a client's financial situation and do not incorporate specific investments that clients hold elsewhere.

Past performance is not an indicator of future performance. Unless otherwise specified, all return figures shown above are for illustrative purposes only and are not actual customer or model returns. Actual returns will vary greatly and depend on personal and market conditions.

Investing implies your capital is at risk. The value of your account depends on market movements and you may get back less than you invest.