Would you like to benefit from attractive investment opportunities, provide for your family financially, save for retirement, or do you have another long-term financial goal? ETFs offer a way to achieve such a goal. In this article, we’ll take a closer look at how you can invest money and build up your wealth using an ETF, how investing works, and what advantages and disadvantages you should be aware of.

In brief:

You should definitely bear these 9 points in mind to avoid typical beginner’s mistakes when investing
We’ll show you why ETFs are an attractive investment and whether or not they’re worth it for beginners
Before making a potential investment, you should consider these potential risks associated with this asset class

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1 What is an ETF?

2 Investing in ETFs – Bear these investment basics in mind

3 Conclusion: Investing in an ETF and building wealth

What is an ETF?

Before we look at the details you should bear in mind if you want to invest in ETFs, let’s take a closer look at how this asset class works and the potential opportunities and risks it presents.

If we write out the term ‘ETF’, we get ‘Exchange Traded Fund’, which already gives us an indication of exactly what it is. When many investors pool their money into a single investment pot, this is referred to as a fund. The fund collects the money and then invests it in a predetermined investment.

ETFs can therefore invest in various asset classes, such as bonds, commodities or shares
Investing in shares via ETFs is particularly popular, as this can help to reduce certain risks that are higher when investing in individual shares

This raises the question of exactly how the shares in which an ETF invests are selected. It is important to understand the difference between active and passive funds. An active fund is managed by a fund manager. The fund manager aims to achieve an above-average return and thus outperform the market’s average return.

To this end, he selects appropriate assets which, in his view, can help to generate particularly high returns. In reality, however, it is very rare for fund managers to be able to achieve excess returns over extended periods. Active funds also come with higher fees, as the management team has to be paid.

ETFs are a type of passive fund. They do not require a fund manager. Instead, these securities track so-called indices. One example is the S&P 500, which comprises the 500 largest US companies. If an investor decides to invest in an ETF tracking the S&P 500, they can invest their money in the 500 largest companies in the US with just a single security!

Advantages of ETFs

Let’s first take a look at the reasons why investing in ETFs might be worthwhile for you. One of the biggest advantages of ETFs is the attractive potential for returns. If you want to grow your money, this could be the right choice for you: with this asset class, you can achieve an average annual return of 8 per cent.

Historically speaking, shares have been amongst the highest-yielding investments. The high returns on ETFs also have implications in terms of inflation. With conventional investments, investors can scarcely achieve any returns.

Inflation refers to a rising price level
Money that does not generate a sufficient return can thus become increasingly devalued
Inflation can only be offset by investments that generate high returns

ETFs combine the advantage of high returns with greater security. But where does this greater security come from? When an investor puts their entire portfolio into a single share or just a few shares, this entails significant risks.

If a company’s performance is worse than expected, or if it even has to file for insolvency, this may result in a total loss of the investment or significant losses. This risk can be significantly reduced through diversification. This point should play a crucial role in your search for ETFs.

The idea behind this is easy to understand:

If, instead, an investor invests in a large number of different shares, losses incurred by certain companies can be offset by profits made by other companies
The risks are spread across a large number of companies, which increases the security of the portfolio

Furthermore, security is enhanced by the classification of ETFs as special investment funds. This means that banks and brokers are required to keep investors’ money separate from their own assets. In the event of insolvency, investors’ money is therefore protected.

Good to know:

Diversification isn’t just about the number of companies. The same problem can arise if you invest solely in a particular sector and difficulties arise there. Investing exclusively in a single country can also be risky. Country-specific problems, such as environmental or economic crises, may arise, which could then affect all shares from that country.

We have already established that ETFs are a type of passive fund. As no fund manager is required, investors pay lower fees compared to active funds. These securities are therefore a comparatively low-cost asset class. Comparing ETF savings plans can help you find the securities with the most favourable terms.

How risky are ETFs?

Investors should also consider the potential risks before making any investment. Price fluctuations are one example. All securities traded on the stock exchange are characterised by fluctuating prices. These fluctuations can be particularly severe, especially during economic crises. One way to mitigate this risk is to adopt a long-term investment horizon.

Another risk lies in so-called thematic ETFs:

These are ETFs that specialise in specific sectors
They usually invest in a single sector and are therefore significantly less diversified
Furthermore, due to this specialisation, they typically include far fewer companies, which makes the investment riskier

There may also be a currency risk. If you buy an ETF that is traded in a currency other than your local currency, you may be subject to unfavourable exchange rates when buying or selling. This can have a negative impact on your future returns. You can also mitigate this risk by adopting a long-term investment horizon.

Potential risks lie in the method of replication. Replication refers to how an ETF tracks its index. A basic distinction is made between physical and synthetic replication. Physical replication means that the securities included in the index are actually purchased.

Good to know:

Synthetic replication is slightly more complicated and works like a kind of swap transaction with a counterparty. This can give rise to counterparty risk if the counterparty is unable to fulfil its obligations.

Investing in ETFs – Bear these investment basics in mind

Below, we’ll look at a few tips that can help you get off to a successful start with investing. This will enable you to mitigate potential risks and avoid mistakes.

1. Set a target and develop a strategy

This step may sound trivial at first glance, but it is essential. Only when you know exactly what your goal is can you work out how much money you’ll need to achieve it.

Do you want to provide for your family financially?
Do you want to save for your pension so that you can enjoy a carefree life in your later years?
Or do you want to invest money that you don’t currently need wisely in order to increase your returns?

These questions are a key part of developing your own strategy. Once you know your goal, you can take this into account when choosing your investment horizon and selecting your investments. You’ll also need these answers to work out how much money you need to invest in order to achieve your goal within your desired timeframe.

By the way, you should plan not only how you’ll start investing, but also when you’ll stop. Do you want to withdraw your entire investment in ETFs in one go in the future, or would you prefer to do so gradually?

2. How high is my risk tolerance?

Investors have different personalities, which influence their individual investment strategies. Someone with a high risk appetite is more likely to opt for high-yield, high-risk investments. Other people are risk-averse and find it harder to cope with significant price fluctuations.

You should be aware of your own risk tolerance so that you can develop your strategy. This will enable you to decide what proportion of your portfolio to allocate to income-generating investments, such as ETFs. Find the right balance between your safety and return components.

Age is another factor to consider here: younger investors can ‘afford’ to make mistakes and lose money whilst learning. Older investors, on the other hand, should have a greater safety net.

3. Invest now or wait a little longer?

One of the most important tips when it comes to investing is to start early. This allows you to make the most of the power of compound interest. The power of compound interest refers to the fact that, over time, an investment can generate returns at an increasingly faster rate and grow more rapidly.

This results in exponential growth, as the returns you earn are reinvested and these, in turn, work towards building your wealth. The earlier you start investing, the more you can benefit from this effect. So the initial question is easy to answer: now is the right time to invest!

4. Pay off debts

Before you start investing, you should pay off any existing debts. These often come with high interest rates, so it would be advisable to pay them off first. This does not apply, for example, to debts such as a mortgage. Such payments are spread over long periods. In this case, you would lose too much time if you waited until the debts were paid off.

5. Get your finances in order and maximise potential savings

Whilst you’re already looking into your finances, you could use this opportunity to review your spending. You might find some expenses you could cut out, such as subscriptions you no longer need. You could use this money to increase the amount you save into your ETF and, in this way, grow your wealth more quickly.

6. Build up some savings

Unfortunately, unforeseen expenses can crop up from time to time. Examples might include a broken washing machine or an unexpected car repair. In such cases, a nest egg – which you should set aside in advance – can be a great help. This should generally amount to two to three months’ salary and be held in an investment class that is readily accessible.

A emergency fund can also help you get through any periods of unemployment
Before you invest in an ETF, you should build up some form of financial safety net
This way, you can avoid having to sell your ETF units during difficult periods
Otherwise, you might be forced to sell at unfavourable prices and incur losses
That is why setting aside a financial safety net is highly recommended

7. Length of the investment horizon

ETFs are a long-term investment. A long investment horizon can help mitigate certain risks. Currency risks or price risks can be offset. Furthermore, you can make better use of the power of compound interest and increase your returns if you plan your investment for the long term.

If you only want to invest your money for short periods, ETFs are not suitable. In this case, you should opt for a fixed-term deposit account, for example, if you only want to invest your money for a year. Investing in ETFs would be too risky in this situation, as you might be forced to sell at unfavourable prices and incur losses.

Furthermore, you should only invest money in ETFs that you definitely won’t need over the next few years. If you stick to a long-term investment horizon and broad diversification, ETFs may well be the best risk-free investment.

8. Only invest in asset classes that you understand

Are ETFs suitable for beginners? That’s one of the key advantages of this type of investment. They’re easy to understand and don’t require much effort. Once you’ve taken the time to learn about them properly, you can invest your money or set up a savings plan that runs automatically.

However, not every investment is suitable for beginners. As a general rule, you should only invest in asset classes that you understand. Only once you have researched them thoroughly can you prepare for potential risks and avoid common pitfalls. The better you understand the investment, the more successful your start will be!

9. Compare costs

Although ETFs are a low-cost asset class, you should still compare the associated costs. These securities have what is known as the TER, or Total Expense Ratio. Fees should be as low as possible so that your returns are not eroded. You should also pay attention to the terms and conditions set by your broker or bank.

For example, securities account management should be free of charge. If your current bank does not offer free securities account management, it might well be worth switching. Switching is particularly worthwhile if you are planning a long-term investment horizon.

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Conclusion: Investing in an ETF and building wealth

ETFs are funds that track an index. They aim to replicate this index as closely as possible. These securities invest, for example, in shares, commodities or bonds, and offer a whole range of attractive benefits.

These include the potential for high returns, which make it possible to combat inflation. Furthermore, the security offered by this asset class is comparatively high, thanks to the scope for diversification and the structure of the sub-funds. Due to their passive nature, ETFs are also a cost-effective asset class.

Prospective investors should also consider the risks involved. As these securities are traded on the stock exchange, price fluctuations are to be expected. Furthermore, counterparty risk may arise in connection with synthetic replication, or currency risk may be involved.

We’ve also outlined a few basics to help you avoid typical beginner’s mistakes when it comes to investing. For example, be clear about exactly what your goals are so that you can develop a suitable strategy. Work out how risk-averse you are, so that your investment suits you and your priorities. Build up a nest egg before you start investing to give yourself some financial security.

Good luck with building your wealth! You might be interested in topics such as “Scalable Capital vs Trade Republic”, “ETF savings plan comparison” or “dividend ETFs”. Find out more here.

FAQ – Frequently asked questions

How do ETFs work?

This is a fund. Many investors contribute money to such a fund collectively. This money is used to invest in a specific asset class, such as bonds, commodities or shares. ETFs are index-tracking and aim to replicate the relevant index as closely as possible. They are therefore passive funds. A fund manager is not required, as the composition is already fixed. This type of security offers advantages such as attractive potential returns, low fees and a high degree of diversification.

What are the risks associated with ETFs?

These funds are traded on the stock exchange, which means investors must expect price fluctuations. Furthermore, currency risks may arise when funds denominated in other currencies are purchased. Synthetic replication may give rise to counterparty risk. In addition, thematic ETFs are risky as they are not sufficiently diversified and therefore entail higher risks.

Can beginners invest in an ETF?

ETFs are suitable for beginners. They are easy to understand and do not require much time or effort. Once an investor has familiarised themselves with them in detail, they can invest their money. Everything else will then be managed automatically. It is also possible to invest smaller sums. This is why ETFs are an attractive choice for beginners too.

What do I need to bear in mind if I want to invest in an ETF?

Anyone wishing to start investing should first familiarise themselves with the key basics. These include, for example, setting a goal, assessing your own risk tolerance, paying off debts or building up a nest egg. Furthermore, you should bear in mind that ETFs are a long-term asset class.

Investing in ETFs – Building your wealth by 2026