ETFs

What Are ETFs? A Beginner’s Guide to Exchange-Traded Funds and How to Invest in Them [2024]

What are ETFs?

Exchange-traded funds (ETFs) are investment funds that trade on stock exchanges, much like stocks. They are a basket of securities that track an index, such as the S&P 500, or a specific sector or commodity. ETFs allow investors to diversify their portfolios and gain exposure to a broad range of assets with a single investment. Like stocks, they can also be bought and sold throughout the trading day. ETFs are generally considered to be a low-cost and convenient way to invest. Still, they do carry some risks, so it’s essential to do your research and consult a financial advisor before investing.

Why are ETFs better than individual stocks?

ETFs offer several advantages over individual stocks:

  1. Diversification: ETFs allow investors to spread their money across diverse assets, reducing the risk of investing in a single stock.
  2. Lower costs: ETFs generally have lower expense ratios than mutual funds, which can lead to higher returns over the long term.
  3. Liquidity: ETFs trade on stock exchanges, meaning they can be bought and sold throughout the trading day, just like stocks.
  4. Flexibility: ETFs can be used to gain exposure to various markets, sectors, and asset classes, making them a versatile investment option.

However, it’s worth noting that ETFs also have some drawbacks, such as the potential for tracking error or the risk of a fund being too heavily concentrated in a single stock or sector. That’s why it is important to buy ETFs that are diversified. Check out my recommendations below. It’s always important to do your own research before making any investment decisions.

What are the differences between ETFs and mutual funds?

ETFs and mutual funds are investment funds that pool money from multiple investors to purchase a diversified portfolio of securities. However, there are some critical differences between the two:

  1. Trading: ETFs trade on stock exchanges, like stocks, and can be bought and sold throughout the trading day. Mutual funds, on the other hand, are typically bought and sold at the end of the trading day at the net asset value (NAV) price.
  2. Diversification: ETFs and mutual funds diversify by investing in a basket of securities, but ETFs may provide more specific diversification as they can track a specific index or sector.
  3. Cost: ETFs generally have lower expense ratios than mutual funds, which can lead to higher returns over the long term. But some brokerages charge a fee when buying or selling ETFs similar to stocks.
  4. Transparency: ETFs provide real-time pricing and portfolio information, while mutual funds release this information at the end of the trading day.
  5. Flexibility: ETFs can be used for short-term and long-term investment strategies and traded like stocks, allowing for more flexibility than mutual funds.

It’s important to note that ETFs and mutual funds have advantages and disadvantages, and the best choice depends on an individual’s investment strategy and goals. To keep things simple, just buy ETFs instead of mutual funds because they are cheap and can be bought easily with a brokerage account.

What are the globally diversified ETFs available?

There are several globally diversified ETFs available, and I have invested in all of them:

  1. Vanguard Total World Stock ETF (VT) in USD, domiciled in the US
  2. Vanguard FTSE All-World ETF USD Acc (VWRA) in USD, domiciled in London
  3. Vanguard FTSE All-World UCITS ETF (VWRL) in CHF, domiciled in Switzerland
  4. iShares Core MSCI World UCITS ETF (IWDA) in USD, domiciled in London

These ETFs provide exposure to a diverse range of global stocks and can be a good option for investors looking to diversify their portfolios.

It’s important to remember that these ETFs’ specific holdings, fees, currency and domicile vary, so it’s a good idea to review the prospectus and do your research before investing.

What is Vanguard Total World Stock ETF (VT)?

Vanguard Total World Stock ETF (VT) is an exchange-traded fund providing broad exposure to the global stock market. The fund tracks the FTSE Global All Cap Index, including developed and emerging market stocks. VT holds over 7,000 stocks from companies based in more than 50 countries.

The fund is managed by Vanguard, known for its low-cost investment options. The expense ratio for VT is 0.07% (2024), which is relatively low compared to other global ETFs.

Regarding sector allocation, VT has the most significant allocations in the Information Technology and Consumer Discretionary sectors, while the smallest is in the utility sector. The top country allocations are the United States (over 60% of the fund), Japan, China and the United Kingdom.

It’s worth noting that VT is heavily tilted towards the US, as the US stocks make up over half of the fund’s assets. This means that investors should know that a significant portion of their investment is exposed to the US market and economy.

VT can be a good option for investors looking for a low-cost and diversified way to gain exposure to the global stock market. However, as with any investment, it’s essential to consider the specific holdings, weightings, and risk factors before investing in VT or any other ETF.

If you plan to stay in Switzerland for the rest of your life or the US or a country with a tax treaty with the US, buy VT. However, if you plan to return to your home country at some point in your life, get VWRA, VWRL, or IWDA. The main reason for this is that any ETFs domiciled in the US are subject to estate tax. That means those ETFs may be subjected to a 40% tax if you pass away. To avoid this tax, you must stay in Switzerland (or any country with a treaty with the US) or buy any ETFs not domiciled in the US.

Conclusion

Global ETFs can be a good option for investors looking to diversify their portfolio, as they provide exposure to a wide range of stocks from different countries and sectors. This can help to reduce the overall risk of an investment portfolio. And my favourite ETF is Vanguard Total World Stock ETF (VT).

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