Investing in ETFs: a practical guide

Index tracking: ETFs try to replicate the performance of certain sectors or stock indices like the Nasdaq, Nikkei, or DAX. If you buy an ETF that tracks the DAX, that means you're indirectly investing in all the DAX-listed companies. Passive management: ETF managers don’t try to outperform the market. Instead, they manage passively — when the underlying index changes, then they adjust the mix of assets in the ETF. Diversification: By buying an ETF, you’re purchasing shares in a whole basket of stocks or bonds, which spreads out the risk. If the price of one stock falls, others can offset the loss.

There are over 10,000 ETFs worldwide. But don’t panic: You don’t need to review every last option before you buy. To help filter for the ones that are best for you, think about your investment goals, risk tolerance, and values. Then, consider other factors, such as: Fund volume: Experts consider ETFs with a fund volume of over €100 million to be economically viable‌ ‌and more cost-efficient. A higher volume also contributes to the liquidity of the ETF, as there are more investors. Age of the ETF: Generally, older ETFs are considered safer because they usually have high trading volumes, are more liquid, and have a more proven track record. Some experts recommend choosing ETFs that are at least 5 years old. However, if the ETF has a low volume, then even an older fund could be closed at short notice due to lack of demand. Diversification: What’s the composition of the ETF? This question is especially important if you want to invest in sector-specific, consumer goods, or sustainable ETFs. For example, if gold is heavily weighted in a commodity ETF, it could mean more volatility. In the tech sector, hyped AI companies could underperform and cause a bubble to burst — dragging the value of the ETF down with it. Issuer: ETFs are generally issued by banks and fund companies. Well-known names include BlackRock, Amundi, Xtrackers, or BNP Paribas Easy, but new ETF issuers are constantly coming onto the scene. One important thing to know: The broker or trading platform where you buy or sell an ETF isn’t the same as the issuer. Fees: ETFs come with ongoing costs, like management fees from the ETF issuer. This money is deducted directly when you purchase the ETF. There are also order fees from your broker as well as potential taxes. Be sure to include these costs in your budget planning. Total expense ratio (TER): The TER indicates how much the ongoing costs will reduce your return. Not only can very high management fees be an issue for your budget, they also impact the potential income you’ll be able to generate. For ETFs, the TER is usually between 0.05% and 0.8%. Accumulating vs. distributing: Do you want to reinvest your profits? Then choose an accumulating ETF. Prefer to have your returns paid out? In that case, you can buy a distributing ETF and generate a small side income. Offer: Do you want to invest a large amount of money in one go and buy an ETF, or set up a savings plan? Finding out which brokers offer savings plans can help you narrow your ETF search. Some platforms also attract customers with discount promotions or welcome bonuses. Just be mindful of any ongoing costs you’ll have to pay after the promotion ends. Availability: Are the ETFs you want available in your country or through your broker? If you choose a platform first, you’ll have a clear overview of which ETFs you can‌ invest in. This saves you time researching and prevents the frustration of wanting to buy certain ETFs that you can’t access.

Are you in it for the long haul, or are you short on time? The right strategy for investing in ETFs depends on your personal time horizon — that is, how long you can keep your money invested before you need to access it. For short-term investors, ETFs from high-growth sectors can be interesting (but also risky), while dividend ETFs can be a good longer-term investment. If you care about certain values or you want to invest in a specific sector, you can focus on specialized ETFs — for example, you could invest in semiconductor ETFs or sustainable ETFs. Also, think about how you want to manage your portfolio. If you want to adjust your investments based on how they perform, you’ll need to do more active trading. If you prefer to let your investment run on its own, you can set up ETF savings plans and automatically invest the same amount every month. Here are some of the most common ETF investment strategies:

Buy-and-hold

Buy-and-hold means that you purchase an investment — in this case, an ETF — and hold it long-term, no matter what the market does in the meantime. The goal is to benefit from market growth over a long period — often many years or even decades. Advantages: Low transaction costs, less time commitment, well-suited for long-term goals like retirement. Risks: Short-term market fluctuations can lead to losses, but the long-term focus helps to lower the risk.

Core-satellite

This strategy combines a broad core investment (e.g., in a global equity ETF) with targeted investments in specialized ETFs (known in this context as satellites) or stocks focused on specific sectors, regions, or themes. Advantages: Diversification, option to still focus on certain market segments. Risks: The satellite investments may be more volatile and need to be monitored more closely.

Dollar-cost averaging (DCA)

Dollar-cost averaging means regularly investing a fixed amount of money in a particular investment, no matter if the price is high or low. Instead of investing a large sum all at once, you break your investment into smaller, regular amounts over a longer period, often through a savings plan. Advantages: Reduces the risk of investing at the wrong time, spreads the base cost out over time. Risks: If the market starts rising quickly, overall costs could be higher than if you had just invested a lump sum at the beginning.

Value investing

A value ETF buys stocks in companies that are considered undervalued. These companies usually have low prices/earnings ratios (P/E), high dividend yields, or other valuation metrics that show they're undervalued on the market compared to their real value. Advantages: Potential for above-average returns once the market re-evaluates the undervalued companies. Risks: Companies may be undervalued for good reasons, and there could be extended periods of poor performance.

Growth investing

With a growth investing strategy, investors buy ETFs that concentrate on high-growth companies. These ETFs include stocks of companies that show fast growth in their revenue and earnings. The idea is that stock prices of these companies could potentially rise faster than the overall market over time. Advantages: Potential for high returns in emerging sectors and technologies. Risks: If growth slows down, those high valuations could turn into significant losses.

Dividend investing

Dividend ETFs are exchange-traded funds that invest in companies known for paying regular and stable dividends. These ETFs aim for a combination of capital growth, dividend yield, and dividend growth. Advantages: Steady passive income, potential price growth. Risks: Dividend-paying companies are often more mature and may have less growth potential.

Sector rotation

The idea of sector rotation for ETFs involves shifting investments by sector, depending on the current or upcoming phase of the economic cycle. For example, an investor might invest more in technology and industrial ETFs during an economic recovery period, but then shift to healthcare or consumer staples ETFs during a recession. Advantages: Uses normal market cycles to maximize returns. Risks: It’s all about good timing — you need to know what you’re doing and regularly monitor your investments.

Global diversification

Global diversification means investing your money in various assets around the world rather than concentrating everything in a single region, industry, or asset class. This spreads out risk because different markets and regions respond differently to economic events. Advantages: Reduces risk by diversifying across different markets. Risks: Some regions might come with more currency risks and political uncertainties.

Passive investing

Passive investing means investing in an ETF that tracks a specific market index. Instead of actively trying to select individual stocks or time the market, you put your money into a broadly diversified portfolio that mirrors an index (or several indices) and hold it over a long period. Advantages: Low costs, easy to manage, diversification. Risks: You are still exposed to market downturns.

Tactical asset allocation (TAA)

Some investors will make temporary adjustments to their asset allocation based on short-term market opportunities or risks. Advantages: Chance to profit from short-term market changes. Risks: You need to actively manage your investments and might end up paying more in transaction costs.