How ETFs Are Better Than Mutual Funds

ETF versus equity funds: And the winner is ..

As an investor, you can choose between passive and actively managed funds. In contrast to the passive ETF, which replicates an index 1: 1, a fund manager actively decides on the selection of stocks in an investment fund. This means that he actively manages the shares in his portfolio, i.e. decides in which shares he wants to invest and in what amount. He is usually supported by a team of analysts and researchers who analyze the companies (balance sheet figures), industries, economic and economic developments and the market environment. In this article, we at Oskar have compared ETFs and actively managed equity funds for you.

Very few fund managers beat the market

According to a study by financial analyst Morningstar, active bond and equity funds beat their comparable ETFs in only three of 49 categories. Categories are, for example: Chinese stocks, European stocks, standard stocks and US small caps.

In the case of the European standard stocks, only 17.7 percent of all active funds recorded a higher increase in value than the ETFs in this category. In the case of US standard stocks, it was only about one in five actively managed equity funds that outperformed the corresponding ETF. In this category, for example, an ETF would track the S&P 500 index, which contains the 500 US companies with the largest market capitalization.

ETFs are cheaper than active equity funds

Since a stock ETF tracks a stock index, for example the DAX or the MSCI World, no fund manager has to make active investment decisions. The fund manager and a large part of the expensive analysis and research are therefore eliminated. That saves a lot of money.

Investors can buy ETFs for a small fee through direct banks and online brokers. With a global equity fund, investors pay around 1.5 to two percent of fees per year, the so-called total expense ratio (TER). This means that the fund manager's strategy must be so good that it beats the performance of the underlying index by at least one to two percent annually - this is the only way to offset the management fees on the investor side. For ETFs, on the other hand, a TER of 0.2 to 0.5 percent is common. Oskar is even cheaper with a total expense ratio of 0.14 percent.

When buying an investment fund, there may also be high sales charges. In particular, the active funds popular with investors quickly incur a front-end load of five percent or more. This amount does not go to the fund company, but to the advisor to cover the sales, advisory and administration costs of the fund. So if you want to buy fund units in the amount of 10,000 euros at an issue surcharge of five percent, your investment amount would be reduced by 500 euros. The prices vary depending on the distribution channel and type of fund; online brokers usually also offer funds without a front-end load.

ETFs can be traded like stocks - traditional funds cannot

You can trade with an ETF share like you would with a share. Funds that are not traded on the stock exchange can usually only be returned to the fund provider at the daily rate. ETFs, on the other hand, offer the same trading opportunities as individual stocks on the various stock exchanges and are listed continuously during trading hours. Many of the trading techniques that are common for stocks, such as limit orders, in which the ETF is automatically sold as soon as a self-selected threshold is fallen below or exceeded, can also be used with most ETFs.

ETFs are more transparent than equity funds

You can usually get the weighting of the ETF's positions on a daily basis, for example via the daily updates from the ETF provider such as iShares. This means that you can see which stocks have which percentage weighting in the ETF. The composition of the indices can also be viewed by the public. When buying ETFs, Oskar only uses physical ETFs, which means ETFs that actually invest in the stocks and bonds of the underlying index ‘in the same amount or distribution. This has a great advantage: Because Oskar's ETF savings plan is based almost exclusively on physical ETFs, your assets are fully protected as a special fund in the unlikely event of the ETF provider's bankruptcy.

When it comes to costs, ETFs are usually more transparent than active investment funds: You can view all the fees for your ETF at any time. Pay particular attention to the total expense ratio (TER). The TER makes it easy to compare fees from one ETF fund to another. ETFs are also easier to compare than active equity funds: You will often find several ETFs on the same reference index. The costs and returns of different ETFs can therefore be easily compared with one another.

ETF investments are legally protected

Compared to other investment products, ETFs are very safe because they are legally special assets. The investor's capital is consequently separated from the business assets of the ETF provider (issuer). Should the issuer go bankrupt, your ETF assets will not be part of the bankruptcy estate. So you get back your invested and saved capital in full. However, this also applies to investment funds, which are also special assets.

There are a lot of arguments in favor of ETFs: the predominantly higher returns, greater transparency, lower costs when buying and holding the funds, as well as protection in the event of the insolvency of the fund provider. At Oskar, your money is also protected by the statutory deposit insurance up to 100,000 euros. In addition, you have protection from the deposit protection fund of the Federal Association of German Banks.

With the ETF savings plan from Oskar, you can invest in up to ten ETFs worldwide - in this way you also benefit from developments in growth markets. Oskar is independent, tax-smart and particularly cheap. With the complete package from Oskar, you can also choose from five investment strategies. This is how you can find the right strategy for you.