Investing in ETFs: a practical guide
Seems like everyone’s investing in ETFs these days? For beginners and experts alike, it can be a smart move. That’s because exchange-traded funds have a few key things going for them: Affordable: ETFs are passively managed and available as a monthly savings plan. Lower risk: They generally offer average returns and a high level of diversification. Easy to understand: ETFs are often a good pick for new investors. Read our comprehensive guide to learn how and where you can buy ETFs, and much more.
What is an ETF?
Imagine only eating yogurt every day. That’s way too much of a good thing — you also need vegetables, grains, and protein for a balanced diet. Well, exchange-traded funds (ETFs) are similar. Think of them like a balanced investment.ETFs are made up of stocks from various companies, sorted by different sectors, regions, commodities, or currencies. With just one ETF, you can invest in 100 or even 1,000 companies — and just like that, you’re building a diversified portfolio.
Learn more about ETFs
How ETFs work
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.
Benefits of Investing in ETFs
Diversifikation
Since ETFs are made up of stock in hundreds of companies, the price movements of individual stocks have less impact — so there’s more protection against losses.
Low fees
ETFs are passively managed, which means lower costs and fees than actively managed funds.
Liquidity
It’s easy to buy, shift, or sell ETFs if you need more cash on hand, and their price movements usually aren’t as drastic as individual stocks.
Transparency
There’s plenty of information available about the composition, costs, fund size, and performance of most ETFs — unlike some mutual funds, which may not share as many details.
Types of ETFs
Index ETFs
They track the performance of a specific index such as the S&P 500, MSCI World, or EURO STOXX 50.
Sector ETFs
These focus on companies from specific sectors, like technology, healthcare, or finance.
Commodity ETFs
With these ETFs, you can indirectly invest in various commodities, for example, in precious metals or the energy sector.
Income ETFs
They consist of stocks, bonds, and other asset classes, have low volatility, and can be a source of passive income.
How to start investing in ETFs
Define your financial goals
Be clear about why you want to invest your money in ETFs and what you’re trying to do — for example, save for retirement or repay a loan.
Set your budget
Get an overview of your monthly income and expenses, then determine how much money you have to spare for investing in ETFs.
Choose an investment strategy
Think about which types of ETFs interest you, how often or when you want to buy, and what level of risk you can take.
Set up a brokerage account
Choose a platform you trust where you can buy your preferred ETFs or set up ETF savings plans.
Choosing the right ETFs for you
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.
The hands-off approach to investing: investment plans
ETF savings plans have plenty of pros:
- Automated: You can set an amount to invest automatically every month.
- Low cost: Unlike individual trades, there usually aren’t any fees.
- Small amounts: Depending on the provider, you can buy ETFs starting from just €1.
- Flexible: Adjust or pause your savings plan if money is tight.
- Long-term investment: ETF savings plans let you build wealth gradually.
- Easy to set up: Pick an ETF, set your savings amount, and relax — it's that simple!
Risks and other considerations with ETFs
Market risks
Economic factors, financial or political events, or market sentiment can all affect the prices of ETFs.
Tracking errors
The ETF might not perform exactly like its underlying index once taxes and fees are factored in.
Costs and fees
The total expense ratio (TER) can be quite high for some ETFs, such as sector or commodity ETFs that have a more complex makeup.
Synthetic index replication
Unlike physical replication, synthetic ETFs are formed from swap transactions, which means they’re dependent on the collateral of the swap partners.
Strategies for Investing in ETFs
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.ETFs compared to other investment options
By now, you’ve probably noticed that there are a lot of factors that go into choosing which ETFs to invest in. Your goals, risk tolerance, and resources play just as much of a role as the volume, the total expense ratio, and potential risks. But let’s rewind a bit further: how do ETFs compare to other investment products?
ETFs vs. individual stocks
Buying shares of a single company can be risky, because you only get a return on your investment if the company does well. With common shares, you receive voting rights and can participate in decisions at the general meeting. But this isn't the case with ETFs, as you don't hold direct shares in a company. For investors with short-term goals and relatively high wealth, buying stocks directly might be more attractive.ETFs vs. investment funds
Investment funds and ETFs both invest in many different stocks, bonds, commodities, or real estate. They also inherently have more diversification and liquidity than other types of investments. However, investment funds are significantly more expensive because they’re actively managed. Fund companies regularly change the composition of the funds to try to provide higher returns. This makes them riskier than ETFs, as the weighting of individual shares is ultimately in the hands of the fund manager — and if they make a mistake, it’s your money on the line.ETFs vs. lower-risk investment options
ETFs are considered safe, but they still carry risks. An even safer option is something like an interest-bearing savings account or a fixed-term deposit account, a savings bond, or a government bond. With fixed-term deposits, for example, you can invest your money for five or ten years at a guaranteed interest rate — even if the central bank raises or lowers the interest rate in the meantime. On the other hand, during the term, you won't have access to your money unless you close the account early and pay hefty penalties. Remember: You can diversify your portfolio with different ETFs. However, for truly broad risk distribution, it makes sense to also invest in other financial products, not just ETFs. For example, if you’re aiming for high returns, you could invest in stocks, crypto, and ETFs, while also setting some money aside for future purchases. Or, if you prefer to grow your savings in the long term, you could combine ETFs with some particularly low-risk options, such as bonds or a savings account.Invest in stocks, ETFs, and crypto
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FAQs
It's super simple! Once you choose a trading platform, you can browse a wide variety of ETFs for different indices, sectors, themes, and more. Find the right ETF for you, choose between a savings plan or a one-time investment, set the amount you want to invest, and place your order.
ETFs are traded on stock exchanges, such as the New York Stock Exchange, the London Stock Exchange, or Xetra. You can access these through your broker — a trading platform that allows you to buy and sell investment products like ETFs. For example, there are banks and specialized providers that offer access to the stock market.
The platform that’s best for you depends on several factors. For example, if you want to set up ETF savings plans, you need a broker that offers them — not all platforms do. You can also compare brokers based on fees, promotional offers, and ease of use. However, the most important thing is that the platform is trustworthy and transparent. Always check the legal notice on the broker’s website, as well as the fees and available payment methods.
ETFs are a popular type of investment for beginners because they’re generally considered to be safe, easy to handle, and cost-effective. Investors who aren't familiar with the stock market and ETFs should focus on well-established ETFs with broad risk diversification and high liquidity.
ETFs that have been around for at least five years, have a fund volume of €100 million or more, and cover thousands of companies or a large part of the global market are better for beginners.
There’s no better time than now! It’s never too late to invest money. The earlier you start, the more you can build wealth and protect your money from inflation. Of course, market slowdowns are especially good times to start investing, because prices are lower. But this isn’t a must, and anyways, if you invest long-term, you’ll ride out lots of highs and lows over time — volatility is completely normal in the stock market.
One advantage of ETFs: Many are available as savings plans. This means you can start with a small amount of money and don't have to constantly monitor the prices. Instead, you can automatically invest the same amount every month. When prices are high, you get fewer shares for your money. But when prices drop, the same amount of money buys you more shares of an ETF — this is how you benefit from the cost-averaging effect.
ETFs and mutual funds are similar types of investment, as they invest money in a variety of companies, commodities, or real estate. Mutual funds are actively managed, and fund managers shift shares around depending on market developments, hoping to generate more profit.
In contrast, passively managed ETFs simply track the index they replicate. Their composition only changes when the index changes. This results in average returns, but it also reduces the risk. And because the fees are lower, ETFs are generally cheaper and have a better total expense ratio (TER) than mutual funds.
That depends on your personal circumstances. The question isn't how much you should invest in ETFs, but how much you can invest.
It's important not to endanger your fixed monthly expenses, such as rent or groceries, or your emergency savings. Before you invest, get an overview of your income and expenses. This way, you can figure out how much money you have available or where you could adjust your spending and free up some money to buy ETFs. Try our 50/30/20 rule calculator and don’t be shy about getting professional advice.
Compared to other asset classes such as stocks or cryptocurrencies, ETFs are considered relatively safe. That’s because they’re passively managed, have good diversification, and generate average returns. However, keep in mind that the price of ETFs can also change, such as if there are major economic or geopolitical events. If you need to sell your shares unexpectedly, they might go for a lower price than what you paid for them. Only invest as much money as you’re willing to lose.
To open a securities account, you just need a broker. This might even be available in your banking app. You’ll also need to have the minimum amount to invest in ETFs. For many online providers, this is between €1 and €25. If you want to set up a savings plan, you should have enough money in your account for the recurring investment.
Exchange-traded funds are usually best for long-term investments. Their performance over time is steady. Most experts therefore recommend a minimum investment period of ten years. Especially with ETF savings plans, you should plan long-term so your wealth can grow steadily.
Decide what’s important to you personally. The main criteria are your risk tolerance, your strategy (active vs. passive), the level of annual fees, the availability of ETFs or ETF savings plans at your broker, and your personal values and interests (e.g., sustainability or innovation). Also, consider whether you want to reinvest your profits (accumulating ETFs) or have them paid out regularly (distributing ETFs). All of this will help you narrow down your options. Still want to learn more? Read our guide on what you should know about investing.
Most ETFs are very transparent compared to other types of investment. You can find a lot of information online about their composition and ongoing costs. Typically, issuers charge annual fees of 0.05% to 0.8% of the fund volume to cover management costs, usually deducted automatically. Depending on the broker, there may be additional fees for trading ETFs, but some brokers offer free monthly trades. Be sure to read the terms and conditions of your preferred platform to avoid unexpected fees.
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