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«Not all ETFs are equally suitable for an investor from Switzerland»

What To Look for When Choosing an ETF

Felix Niederer

You can manage an ETF portfolio very well by yourself. However, a digital asset management service such as True Wealth offers clear advantages.

As an online wealth management company that implements its client portfolios exclusively with ETFs, we hear this question again and again: Why does one need a robo-advisor when you can simply manage the portfolio yourself? Of course, this is possible, but a robo-advisor like True Wealth brings significant advantages.

Finding the Best ETFs

True Wealth focuses on ETFs because these investment instruments allow diversified and cost-efficient investments in almost every liquid asset class. However, not all ETFs are equally suitable for an investor in Switzerland. Anyone who wants to invest in ETFs on their own should take the time to decide which ETFs are best suited to their own portfolio.

ETFs differ in terms of various characteristics. Some of which are discussed below:

Tracking Error: ETFs aim to track the performance of an index (after costs) as closely as possible. They do this by, for example, buying the securities contained in the index with the same weighting. Theoretically, two different ETFs that track the same index should have the same performance. In reality, however, this is often not the case, as can be seen from the respective tracking error. The tracking error measures the deviation between the performance of an ETF and the performance of the underlying index. The lower the tracking error, the more accurately the ETF tracks the index.

Total Expense Ratio (TER): For long-term investments, even small differences in costs can have a decisive impact on returns. ETFs have the advantage of low costs compared to actively managed funds. But there are also significant differences between different ETFs, which is why a closer comparison is worthwhile. To compare the costs, the total expense ratio (TER) is suitable. It describes the costs incurred annually depending on the investment volume. Typically, ETFs from developed and liquid markets have a low total expense ratio. Asset classes that are difficult to track often have higher costs. Cost differences also exist between different providers, even if they track the same index.

Bid-ask spread: The bid-ask spread describes the difference between the price someone is willing to pay for an ETF (bid) and the price someone is willing to sell the ETF for (ask). The difference is often determined by the liquidity of the ETF: The more frequently the ETF is traded, the lower the difference should be. For the investor, an ETF with a low bid-ask spread means that there are fewer implicit costs for him when buying and he can sell the ETF more easily.

When selecting ETFs, one should also pay attention to how an ETF is structured, whether it has favourable tax characteristics and which replication method is used. Also, it should not be forgotten that one has to decide beforehand in which asset classes, regions or sectors one wants to invest in the first place. With a portfolio at True Wealth, you don't have to worry about ETF selection and assessment, as we take care of that for you. When choosing our investment universe, we look at costs, market liquidity, counterparty risk and tracking error to ultimately only offer ETFs in our investment universe that meet high standards.

The Right Asset Allocation

Once you have looked into ETFs and selected a few that meet your requirements, the next step is to think about the asset allocation – i.e. the investment mix – that is how you distribute the available investment amount across different asset classes, markets and securities. The asset allocation should be determined to a large extent by one's own risk tolerance and risk capacity, i.e. how much volatility – that is fluctuations in value – one is willing to accept and how much the invested assets are depended on. This should prevent you from getting out too early in a downward trend and thus missing out on the growth of the market. If, for example, one decides on a defensive, low-risk strategy, a larger part of the sum is invested in bonds.

At True Wealth, we determine your individual risk profile online. You fill out a questionnaire and then receive a portfolio proposal that is tailored to your own risk tolerance. In total, we have defined around forty model portfolio strategies that maximise the expected return for a given risk (volatility). Subsequently, you can adjust the proposal at any time as long as the portfolio remains within your own risk tolerance and has a sufficiently high diversification.

Rebalancing Regularly

The ETFs have now been bought and the investment amount is spread across various asset classes. Can you now sit back and let the market work for you? No, because the portfolio and especially the weighting within the portfolio must be monitored regularly. If, for example, the equity ETFs have performed particularly well, the defensive portfolio can quickly become too risk-heavy, because equity ETFs would suddenly be disproportionately represented in the event of such market movements. In such a case, one would have to act, i.e. sell equity ETFs and buy ETFs of other asset classes until the target allocation is restored.

This so-called rebalancing is done automatically with True Wealth. If an asset class deviates strongly from the target allocation, a rebalancing is carried out. This guarantees that the portfolio never takes on too much or too little risk. It should not be forgotten that transaction fees are incurred with manual rebalancing, but with True Wealth these are already included in the asset management fee.

Time for Other Things

ETFs are particularly suitable for long-term investors who want to keep their costs low in favour of better returns. So why should these investors turn to a robo-advisor and incur additional asset management fees? Firstly, it should be noted here that other costs are incurred with a self-directed portfolio instead of an all-in fee. These include the custody account fees, but also the trading fees (brokerage fees, currency exchange surcharge and minimum transaction fees) for buying and selling as well as rebalancing. Not to be neglected, of course, is the time needed for all of the steps and the ongoing monitoring.

Our asset management fee of 0.25 to 0.50% (incl. VAT) already includes everything: Custody fee, trading fees, deposits and withdrawals, as well as the Swiss tax statement. And the product costs are low. However, the True Wealth portfolio also scores particularly well in terms of time. Investors do not have to compare ETFs or switch funds manually. Once the portfolio has been opened and the investment strategy defined, the investor does not need to do anything else. If they want, they can check the performance at any time or make adjustments to the investment strategy.

Disclaimer: We have taken great care with the content of this article. Nevertheless, we cannot exclude the possibility of errors. The validity of the content is limited to the time of publication.

About the author

Felix Niederer

Founder and CEO of True Wealth. After graduating from the Swiss Federal Institute of Technology (ETH) as a physicist, Felix first spent several years in Swiss industry and then four years with a major reinsurance company in portfolio management and risk modeling.


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