ETF investing: from zero to hero - episode 1: the ABCs of exchange-traded funds

2. How do ETFs differ from mutual funds, stocks, and index funds?

Let’s break down how ETFs are different from other popular investment options:

• ETFs vs. mutual funds:
  • Mutual funds: These funds also hold a collection of assets, but they can only be bought or sold once per day after the market closes. At that time, the fund’s total value is calculated (called the net asset value, or NAV), and that’s the price investors pay when buying or selling shares.
  • ETFs: ETFs trade like stocks, meaning investors can buy or sell them at any time during market hours. This offers greater flexibility and allows investors to react quickly if market conditions change.

Simple analogy: Think of a mutual fund like a bakery that sells fresh bread only at 5 PM every day—investors have to wait for that time. An ETF is like a grocery store that’s open all day, so bread is available whenever it’s convenient.

• ETFs vs. stocks: Buying a stock means owning a small part of one company, which can be risky if that company performs poorly. An ETF, however, holds multiple stocks or bonds, spreading out risk by diversifying the investment.
• ETFs vs. index funds: Both ETFs and index funds aim to track the performance of a group of stocks or bonds (like the S&P 500), but there’s a key difference: ETFs can be traded throughout the day, while index funds only trade once at the end of the trading day.

Lower annual fees:

• ETFs generally have lower costs, called annual fees, than mutual funds. This fee is a small percentage of the total investment. For example, if an ETF’s annual fee is 0.20%, an investor would pay $2 per year for every $1,000 invested. Because ETFs often require less management, they are cheaper, helping investors keep more of their money growing over time.

Actionable tip: Investors interested in knowing how much they could save by using ETFs instead of mutual funds can use tools and resources available through Saxo Bank to compare costs. Seeing how fees impact investments over time could help in making more informed decisions.

3. Why are ETFs so popular among investors?

ETFs are a favorite for both beginner and experienced investors. Here’s why:

• Diversification (spreading out risk): When an investor buys one ETF, they get exposure to a variety of assets, which reduces the risk associated with relying on a single investment.
• Low annual fees: Since ETFs typically have lower costs than actively managed funds, the savings add up, helping investors grow their money faster over time.
• Flexible trading: ETFs trade like stocks, so investors can buy or sell them any time the market is open. This makes them an excellent option for investors who want to react to market changes or have the flexibility to manage their investments as needed.

Actionable insight: ETFs are ideal for capturing market trends. For example, if an investor believes clean energy is a long-term growth area, they could explore options such as the iShares Global Clean Energy UCITS ETF (ISIN: IE00B1XNHC34) or the Amundi MSCI New Energy ESG Screened UCITS ETF (ISIN: FR0010524777), which provide exposure to this sector.

4. A brief history of ETFs: evolution and key milestones

ETFs have evolved significantly since the launch of the first one, SPDR S&P 500 ETF (SPY), in 1993. This product allowed investors to access the entire S&P 500 index with one purchase. Today, there are ETFs for almost every market and theme imaginable, including technology, real estate, bonds, and commodities like gold.

Current opportunities: New ETFs are continually being introduced to match emerging trends, like sustainability or artificial intelligence. Staying informed on these trends through Saxo Bank’s research tools can help investors find new opportunities for growth.

5. Key benefits: diversification, liquidity, and cost efficiency

Here’s why ETFs are such a valuable tool for investors:

• Diversification: With one ETF, investors get exposure to a wide variety of investments, reducing the risk tied to any single company or asset.
• Liquidity (easy buying and selling): ETFs trade on the stock exchange like individual stocks, so they can be bought or sold anytime the market is open. This flexibility is particularly valuable when market conditions are volatile.
• Low annual fees: The cost of owning an ETF is usually lower than owning other types of funds. For example, the iShares Core MSCI World UCITS ETF (ISIN: IE00B4L5Y983) it offers global exposure with annual fees as low as 0.20% - 0.22%, meaning investors pay around $2 to $2.20 per year for every $1,000 invested. These low fees can help investors keep more of their money invested and growing over time.

How to build a simple, low-cost portfolio with ETFs

If an investor is ready to build a diversified portfolio, here are two sample mixes with multiple options to demonstrate different approaches:

Example 1: balanced global portfolio

This example focuses on achieving broad diversification and risk management through global exposure:

• 40% in a global stock ETF, such as:
  
  • iShares MSCI ACWI UCITS ETF (Acc) (ISIN: IE00B6R52259) for international equity exposure.
     
• 30% in a bond ETF, such as:
  • iShares Euro Government Bond 7-10yr UCITS ETF (Acc) (ISIN: IE00B1FZS798) for stability and fixed income.
     
• 15% in a thematic ETF, such as:
  • iShares Global Clean Energy UCITS ETF (Acc) (ISIN: IE00B1XNHC34) or
  • Lyxor New Energy UCITS ETF (Acc) (ISIN: FR0010524777) to target growth opportunities in the clean energy sector.
     
• 15% in a commodity ETF, such as:
  
  • UBS (CH) Gold (USD) (Acc) (ISIN: CH0106027193) to provide a hedge against inflation.

Example 2: diversified growth portfolio

This example focuses on long-term growth, with exposure to different markets and sectors:

• 50% in a U.S. stock ETF, such as:
  • iShares Core S&P 500 UCITS ETF (Acc) (ISIN: IE00B5BMR087) or
  • SPDR S&P 500 UCITS ETF (Acc) (ISIN: IE00BFY0GT14) to capture the performance of large-cap U.S. companies.
     
• 20% in an emerging markets ETF, such as:
  • Xtrackers MSCI Emerging Markets UCITS ETF (Acc) (ISIN: IE00BTJRMP35) or
  • iShares MSCI Emerging Markets UCITS ETF (Acc) (ISIN: IE00B0M63177) to add exposure to rapidly growing economies like China and India.
     
• 15% in a European stock ETF, such as:
  • Xtrackers MSCI Europe UCITS ETF (Acc) (ISIN: LU0274209237) or
  • iShares MSCI Europe UCITS ETF (Acc) (ISIN: IE00B1YZSC51) for diversified exposure to developed markets outside of the U.S.
     
• 15% in a small-cap global stocks ETF, such as:
  
  • SPDR MSCI World Small Cap UCITS ETF (Acc) (ISIN: IE00BCBJG560) to access smaller, high-growth companies globally.

These examples demonstrate different approaches to building a diversified portfolio. Remember, these are illustrations intended to show how ETFs can be used to create a balanced or growth-focused investment strategy, providing multiple options to avoid favoring specific products.

Conclusion: taking the first steps with ETFs

This is the first episode in our ETF investing: from zero to hero series. ETFs offer a straightforward, flexible, and cost-effective way to diversify a portfolio. Whether an investor wants exposure to global markets, specific themes like clean energy, or a mix of assets for balance, there are various ETFs available to meet different investment needs.

Getting started with Saxo Bank: Investors who are ready to invest can use Saxo Bank’s platform, which provides everything needed to buy the first ETF. Simply log in, use the ETF screener to find an ETF that fits the investor's goals, and enter the ISIN code to make a purchase. Saxo also offers research tools and resources to help choose the right ETF for a portfolio.