ETF REPRESENTS THE REVOLUTION
OF INVESTING

ETF index funds offer many advantages
over other forms of investing.

Don't look for the needle in the haystack. Just buy the haystack.

John Bogle
John Bogle

Why the investments to ETFs are the
most reasonable choice for you?

  • ETFs represents the most suitable investment tool for smaller investors
  • ETFs are fulfilling all of the 9 principles of successful investing
  • ETFs are the most ideal tool of passive investing, which should be preferred by all the small investors

Benefits of ETFs over other investments:

  • tool of passive investment
  • investing in indices
  • wide diversification
  • the lowest fees
  • returns at the level of market returns
  • no or low taxes
  • high liquidity
  • high transparency
  • flexibility
  • meets the UCITS criteria

The basic question of every investor is, what return the investment will bring at which level of risk.

Here is a demonstration of the difference in performance of popular mutual funds in Slovakia and ETFs with the same focus:

Mutual fund performance vs. performance of ETF (p.a.)

Mutual fund ETF 3 years 5 years 10 years
TAM Americký akciový iShares S&P 500 -1,65% -2,23% -2,15%
IAD Global Index iShares MSCI World -5,45% -5,43% -4,93%
TAM Európsky akciový iShares MSCI Europe -1,77% -2,86% -3,85%
SPORO Fond max. výnosov iShares MSCI World -1.37% -5,51% -5.86%
Pioneer Global Select EUR iShares MSCI Europe -4,02% -2,60% -2,51%
Pioneer Emerging Markets Eq iShares MSCI Emerging Markets -8,29% -5,96% -4,80%
AXA Selection Global iShares MSCI World -2,96% -3,69% -3,70%
Pioneer Rytmus P3 Dyn. iShares MSCI ACWI -2,53% -3,08% -3,55%

*source www.peniazesucas.sk, 31. 12. 2018

What are ETFs?

ETF is a fund traded on a stock exchange (ETF stands for exchange-traded fund). In principle, ETFs work on the same way as other funds, such as popular mutual funds accessible for public investors, however in addition the shares (stocks) of ETFs are being traded on the stock exchange.

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What is fund?

Fund is an investment instrument designed for retail investors. It issues the units of the fund (shares) to which the public invests (purchases those). The units expresses a share in the total assets of the fund, that is, the right to a part of it (a fraction). The collected accumulated value is then invested by the fund. From there comes the name of the collective investment sector, whose tool is the fund – the fund invests the common assets of all its investors. Assets of the fund are created by all its investments.

In a simplified way, the fund can be explained on the example of your colleague's birthday. With 9 other colleagues, you've agreed to buy a gift for his birthday. Each of is raising 20 euros and for 200 euros you buy him a weekend stay which he talked about for a long time. The fund's assets are collected at 200 euros, the share of each colleague is 20 euros and the fund's investment is a stay for the birthday boy. None of the colleagues would buy that alone, but together it's not a problem. This exemplary principle is also applicable for funds that allow small investors to invest in securities that they would never be able to buy in their own.

ETFs are functioning on the same principle.

The main difference between investing in ETF and in mutual funds - liquidity

However, the classical funds are not traded on stock exchanges. Entry and exit to and from a mutual fund usually takes a few days.

ETFs are flexible and liquid thanks to being traded on a stock-exchange. Whenever you decide to sell your shares, you can do so on the stock-exchange via your broker and your funds are immediately credited to your account. Therefore while investing in ETFs you don't have to wait for your money as you would had to with mutual funds.

Difference in ETF portfolios and mutual funds - diversification

ETFs are in general index funds. What is an index is explained in the section Passive investment. Index funds are copying indices, so are investing in the same securities at the same proportion of weights as which the underlying index is being composed from.

Therefore the ETFs are nowadays considered as the fundamental tool of passive investments.

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ETFs provide excellent diversification – risk distribution. With one small investment you are able to buy a lot of stocks. In case you would like to buy all 500 shares of the US S&P 500 index, you would need to invest a few tens of thousands of dollars. You can buy ETFs with only few tens of euros and invest in all 500 stocks.

Conversely, Classic Mutual Funds typically tend to stick to active asset management strategies which prefer more concentrated portfolios with fewer amount of stocks.

The great advantage of the ETF is the fact that you know exactly what you invest in before and during the entire investment.

Difference in fees

In case you are not investing in ETFs, charges and fees will cost you a great deal of revenue. The advantage of ETFs is in the amount of fees. By simply imitating indexes, they do not need personal workforce and technical equipment in the process of securities selection.

Nowadays the ETF administration and management costs are approaching zero. The cheapest ETFs are charging 0.1% annually for administration and management of assets.

Mutual fund management and maintenance fees are typically between 0.5% and 3% per year. The average among the best-selling equity funds in Slovakia is around 2.3% per year.

ETFs do not have any entry and exit fees. Entry fees of mutual funds are somewhere between 1% to 5% of the amount of the investment.

Fee
Entry fee
Management fee
Finax
0%
1,4%
Equity mutual fund
up to 5%
2%

Average fees of the 10 best selling mutual funds in Slovakia.

Difference in performance

Thanks to passive investing and low fees the net performance of ETFs is on average more than 2 times as high as the performance of mutual funds offered in Slovakia.

Comparison of the performance of a chosen ETF investing in global stocks (db x-trackers MSCI World Index UCITS ETF 1C) and the 3 best selling mutual funds in Slovakia investing into global stocks (Iad Global Index, Pioneer Global Select EUR and SPORO fund of maximized returns) during the past 10 years.

The reasons of the difference are being explained in the sections of Successful Investor Rules and Passive investment.

Differences by tax domiciles

Certain countries in CEE region has better tax implications for exchange traded mutual funds to those that are not traded on an exchange.

There are two basic categories of mutual funds: accumulating and distributing. While building portfolios we consider this aspect to maximize clients’ after tax return.

Inform yourself with us, and we will advise you based on your tax domicile.

In some countries ETFs may have better tax impications than clasic mutual funds.

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Safety & Security

ETFs can be classified as one of the safest securities. They are intended for the general public and are traded on stock-exchanges, therefore they are subject to the highest level of control and regulations.

ETFs fall under the regulatory framework of UCITS, a European-wide harmonized regime governing the management and sale of mutual funds.UCITS unifies the regulation of funds within Europe, introduces the required standards for funds and uniform consumer protection requirements.

Majority of the European ETFs are UCITS, as well as the most of the mutual funds. For investors, this means that tools with this designation are safer and controlled. Essentially, it is the highest possible protection for the consumer of financial services in the context of collective investment in Europe.