Exotic funds: how investors implement their ETF strategy

Exotic funds
This is how investors implement their ETF strategy

Too complex, too time-consuming, too uncertain – there are many reasons why people avoid investing in the stock market. With these five steps, everyone gets to ETFs.

Simple, cheap, transparent: this is what index funds listed on the stock exchange want to be. A recipe that is well received by investors.

“For the private investor, ETFs have the appeal of being able to invest their assets extensively at a reasonable cost without taking on the risk of individual values,” says Nicolas Pilz, CEO of the Societas Vermögensverwaltung in Düsseldorf. The funds, which track an equity index, invest their funds in various companies spread across many sectors and countries.

The offers are different

As demand increases, so does supply. To stand out from the crowd, providers are increasingly launching special funds dedicated to individual sectors or topics. For example, there are now commodity ETFs, cryptocurrency ETFs, climate ETFs, and rare earth ETFs.

“Today, investing in just one national index is often not enough,” says Frank Wieser, managing director of PMP Vermögensmanagement. Some topics are global and interrelated. That’s why specialty ETFs can definitely be an enrichment for the deposit, according to Stiftung Warentest. According to the product testers, up to 30% can be invested in exotic ETFs, provided the rest of the assets are invested in broad market indices such as the MSCI World or the FTSE All Country.

Which strategy works when?

But what to choose? The selection is now quite large. Each focus carries different risks. “The more specific the selection, the more speculative it ultimately becomes,” says Andreas Görler, asset manager at Pruschke & Kalm. “Here you have to ask yourself the fundamental question: do I want to invest or speculate?”

Two examples: Many investors are hoping for less fluctuations in value and better returns from stocks with high dividends. It only works partially. While matching ETFs fluctuate less because companies often come from defensive sectors, they don’t necessarily shine when it comes to returns.

And the so-called momentum strategy – the assumption that stocks that have done exceptionally well will do so in the future too – only works in good stock market phases. If there is a sharp drop in prices, it can backfire. According to the Stiftung Warentest, this approach is therefore more suitable for short-term speculation. So, if investors decide on a certain strategy, they need to think about it before buying it.

Check various ETF criteria

This also applies to the various ETFs themselves: “For example, with a thematic ETF you can bet on an aging population,” says Frank Wieser. However, this is done in very different ways: sometimes drugs to prevent aging are at the fore, sometimes infrastructure projects such as nursing homes. “With the same argument, the performance can be very different.”

Some criteria are worth looking at beforehand. “The fund’s volume should be large enough to make the ETF attractive for the company over the long term and not risk liquidation,” says B&K Vermögensverwaltung’s Rainer Göritz. “The ETF should be reasonably diversified and contain at least 25-30 stocks. Their composition should be reviewed regularly.”

And while it may sound boring: equity investments are usually successful if they are broadly diversified and long-term. “Don’t try to beat the market,” says Niels Nauhauser of the Baden-Württemberg Consumer Center. Even professionals rarely manage to do this.

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