Money secret No. 17: What are ETFs?

ETFs are basically a basket of different types of stocks all wrapped up into one product that you buy as a package. ETFs have become very popular in recent years because they’ve made investing accessible to many more people.

ETFs usually track a stock index, such as the DAX. They generally try to hit the same benchmark or return as this underlying index. The annual return is the growth of your money per year. For example, if you start out the year with 100 euros and finish it out with 107 euros, you’ve achieved an annual return of 7% this year. A benchmark is the model the ETF is built on – the recipe, so to speak. An example of a benchmark is the DAX, which is an index composed of the 30 largest German companies traded on the Frankfurt stock market. If you buy a German ETF that tracks the DAX, it’s tied to the returns of the DAX.

In comparison to other financial products, ETFs are always pretty inexpensive. This is because they’re just a copy of the benchmark. They’re also known as passive products because no financial analyst is trying to choose the stocks that, in their opinion, will outperform or deliver a better return than the index. Because no major research or selection process is required when compiling an ETF, they’re generally cheaper than active investment funds.

ETFs are the best way to get started in investing. Because they’re diversified, they help you to control risk and access the market’s returns in a cost-effective manner. Give it a try!

Money secret No. 17: Find a provider that can help you choose a diversified ETF portfolio and you’ll be well on your way to building long-term wealth.