8 questions about ETF investments
You’ve probably heard about them now and then: ‘Exchange Traded Funds’, otherwise known as ETFs. This is a popular way of investing, particularly among young and first-time investors. So why is that? What different types of ETFs are there? And what do you need to know before you start investing in ETFs? We asked Adriaan Kootstra, head of the ABN AMRO Fund Centre and ETF expert, to tell us more about it.
Investing involves risk. You could lose all or part of your initial investment.
1. What are ETFs and how do they work?
Adriaan: “Investing in ETFs is a form of passive investment, with an ETF tracking an index but not trying to outperform it. An ETF is an investment fund that’s listed on the stock exchange and traded continuously.
So now we’ve covered the jargon, let’s try to break it down. The first thing to understand is that there’s a difference between passive and active investing. An active investor tries to do better than the index, while a passive investor (such as an ETF investor) tracks the index. You could see it like this: with active investing, the fund managers look through the windscreen and try to anticipate what they think will happen on the market. With passive investing, they look in the rear-view mirror and go with the flow.
An investment fund is just a basket full of financial instruments, such as bonds and shares. ETFs are listed on a recognised stock exchange and can be traded continually, which means that they can be bought and sold virtually every five minutes, not just at a particular time every day like regular investment funds.”
2. How long have ETFs been around?
“Passive investing was introduced about 50 years ago by John C. Bogle, founder of the American asset management company Vanguard. He wanted to make it as cheap as possible for investors to track an index. Investing in ETFs really took off in the 1990s, and its popularity has just kept rising in recent years.”
3. What are the different types of ETFs?
“ABN AMRO’s Self-Directed Investing Basic service allows you to invest in over 200 ETFs. You can choose from shares and bonds, spread across countless global sectors, themes and regions. The choice is yours; from German government bonds to Asian shares. There’s a huge range and you can choose sectors or themes that aren’t usually available to private investors. What’s more, you don’t pay transaction fees for ETFs if you choose from ABN AMRO’s basic range.
ABN AMRO doesn’t offer all the ETFs that are available on the market. We do a thorough analysis of the provider and the index they track before we include an ETF in our range.”
4. Why are ETFs so popular?
“Several reasons really. First: ETFs are transparent; you always know exactly what they’re made up of. There are no surprises, they do what you expect of them, i.e. track the index. And as ETFs come in all shapes and sizes, and you invest in baskets of shares or bonds, it’s possible to spread your risk. They’re easy to trade and as they track the index rather than trying to outperform it, the product costs are generally lower than those for active investment funds. It’s this combination of convenience, transparency, spread and price that appeals to many investors.
But ETFs aren’t without risk. If the index that the ETF is tracking starts to fall, the price of your ETF will drop with it. The risks involved can vary between ETFs too. Some of them invest in high-risk sectors, for example, or in a single sector or region, which increases your risk.”
Investing involves risk. You could lose all or part of your initial investment.
5. Which investment goals are ETFs best suited to?
"Well, that depends on which ETF you choose. It’s good to have a clear plan when you start investing: think about your risk appetite, your reasons for investing and your investment horizon. The ETF you choose should fit in with your plan.”
6. Can you take ESG criteria into account when investing in ETFs?
“Sure you can. Here too, there’s a huge range of ETFs that promote environmental or social objectives. We call them ESG investments. You can also get an ESG version of many of the benchmarks. And then there are thematic ETFs, so you can invest in the energy transition, for example. Every ETF states its ESG classification to help you invest in line with your own sustainability preferences.”
7. Who should invest in ETFs, and who would do better to avoid them?
“I think that ETFs are suitable for all kinds of investors, because they usually have a good spread, and they’re transparent, easy to trade and relatively cheap. But if you’re out to beat the market, ETFs probably aren’t your best bet as they don’t aim to outperform the index. When you make your choice, you’d do well to consider the risks of ETFs mentioned above.”
8. What do I need to know before I start?
“Read the information about the different types of ETFs and the terms and conditions carefully. As there are so many ETFs to choose from, it’s important to work out what suits you best. For example: what’s the currency of the ETF? Which index (e.g. AEX, Dow Jones or S&P500) is being tracked? What’s the sustainability classification? Is it an ETF that reinvests or distributes dividends? You’ll find more information in the ETF’s fact sheet or PRIIP KID.”
In his job as head of ABN AMRO’s Fund Centre, Adriaan Kootstra’s day-to-day duties involve the asset mix and management of our clients’ investment fund portfolios. He keeps a close eye on the financial markets.
Want to learn more about ETF investing, by depositing an amount on a regular basis, for example? Find out how this works at ABN AMRO.
If you want a team of specialists to help you invest in ETFs and index funds, or if you’re considering investing some of your savings, the Index Mandate might be just what you’re looking for. Read more about the Index Mandate.
