You may have heard of people investing in ETFs. But what are these exactly? Why would you choose this? And what are the risks? Joost Schmets of the Association of Effectenbezitters (VEB) and financial planner Ramón Wernsen explain.
The number of private investors is still growing. The Netherlands Authority for the Financial Markets (AFM) saw the number of investing households rise to almost two million in 2021. The need for more return (after all, saving does not yield anything) was the main reason for starting. However, investing for beginners can seem very complicated due to all types of stocks and prices.
What is an ETF?
Investing in ETFs is becoming increasingly popular, says Joost Schmets of VEB. “The costs and risks are low, the purchase is easy and you have little to worry about.” Financial planner Ramón Wernsen also sees in his work that more and more of his clients are opting for this way of investing. But what exactly are ETFs?
An ETF is actually a collection basket containing several stocks that belong to an index.
Joost Schmets, Association of Securities Investors
An ETF stands for Exchange Traded Fund. “An ETF is actually a collective basket containing several stocks that belong to an index,” says Schmets. “An example of such an index is the AEX, which is filled with the 25 largest and most traded companies in the Netherlands. Companies such as Heineken, Shell and Philips, among others, are part of the AEX.”
An ETF is also known as an index tracker, he continues. “The ETF ‘tracks’, or follows, an index and thus tries to achieve the same return. If you invest in this ETF, you invest in all companies from that index in one fell swoop. This maximizes your investment and reduces your risk at a loss.”
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‘You don’t have to be an expert’. But why not just buy shares of the companies from the AEX yourself? “It is possible,” explains Wernsen. “Only if you want one share of all those companies, you often lose thousands of euros. With an ETF you can easily invest in multiple companies without it having to cost a lot of money. There are now more than a thousand index trackers to choose from And you can buy and sell them all day long, as long as the stock market is open.”
Iris Newman (37) from Eindhoven invests in these ETFs. “I have a young family and my time is scarce. With investing in ETFs you don’t have to be an expert and analyze stocks one by one. Instead, I spread my investment over many companies. The next door ipo is found online. This reduces the risk.” “It is also accessible, less hassle and a good alternative to saving”, she adds. “It does its thing, and that appeals to me.”
There is no such thing as free investing: pay attention to the costs
She does advise other investors to take a good look at the costs. “There are parties who claim that you can invest in ETFs for free with them. That is not true. There is no such thing as ‘free’ investing. You always pay management and transaction costs. Or they charge costs for something else, which you don’t immediately realize at first glance.”
Wernsen also warns people to keep calculating the costs properly. “Suppose you have 1 percent per year in management costs. That seems little at first glance. But suppose you achieve a return of about 7 to 8 percent in thirty years’ time. Then that 1 percent is converted to 15 percent of your achieved return. That’s a big loss of profit.”
Even if you spread your risk optimally, you can lose money if the price falls. You always take risks. Schmets emphasizes that there are risks, just like with any form of investing. “Even if you spread optimally, you can lose money with a falling price. You always take a risk.” In addition, he explains that investing in ETFs is not a short-term plan. “Don’t invest money that you will need within a few months. Chances are that you will have less than what you started with. With this form of investing you can build wealth over the longer term. If you have enough patience have.”