The way to the optimal portfolio: How to find the right ETFs for your investment strategy

Anyone who is thinking of investing their money in a meaningful way in the long term often faces the challenge of finding the right financial products. The variety of available ETFs is enormous, and the names and the variety of products can initially be overwhelming. But with a little basic knowledge and the right approach, you can quickly find out which ETFs are bestmatch your own goals. This article is intended to help you understand the most important aspects of choosing an ETF and identify the right products for your portfolio. It is important to know the basics, to recognize the differences between the products and to make a well-founded decision in order to optimally build up and secure your assets.

Your first step: Develop the vision for your portfolio

Before you invest in concrete financial products, you should first get a clear idea of what your personal portfolio could look like. This means you are concerned about which asset classes, industries or regions you prefer and which strategy you want to pursue. This first consideration is the cornerstone for all further decisions. ifIf you have your dream world in mind, you can specifically search for the right ETFs that reflect exactly this world. It is comparable to planning a holiday trip: as soon as the travel destination is determined, you are looking for the best way to get there and the right accommodation. For your portfolio, this means that you have to choose the right ETFs that implement your strategy, i.e. theRepresent indexes that reflect your investment goals.

The variety of ETFs: Multiple products for the same index

An important point in product selection is the large number of available ETFs on the same index. For each known index, there is not just one, but sometimes up to twenty different ETFs. For example, if you want to invest in an ETF on the MSCI World, you (as of the end of 2021) have the choice between 17 different products. This variety can at first glanceBe confusing, because the names of the ETFs often sound complicated and technical. Many of these names are still very similar to the names developed for institutional investors years ago and are hardly understandable to private investors. It is understandable that you are wondering whether the “SPDR MSCI ACWI UCITS ETF EUR Hedged Acc” or the “Vanguard FTSE All-World High Dividend YieldUCITS ETF” is more suitable. Or whether you prefer the “Xtrackers MSCI world UCITS ETF 1C” should choose. This uncertainty is normal, but don’t worry, the names of the ETFs are by no means as difficult to decipher as it seems at first glance. With the knowledge of the most important abbreviations, you can see the differences and make a well-founded decision.

Understand the main components of an ETF name

The beginning of every ETF name is usually the name of the provider. In our example, this is “Xtrackers”, a subsidiary of Deutsche Bank, which is one of the largest ETF providers in Europe. Similarly large players on the market are the “iShares” brand, which belongs to the asset manager BlackRock. Other well-known providers are UBS, Vanguard, Amundi or Lyxor, which you can choose fromof a suitable ETF. The provider is named after the underlying index. In our example, this is the “MSCI Emerging Markets”, i.e. the index that depicts the emerging markets. If the abbreviation ESG is found in the name, it is clear that it is a sustainable ETF investing according to ecological, social and ethical standards. The abbreviation “UCITS”Indicates that the Fund meets certain security and investor protection standards set out in European directives. These standards regulate that the fund may not invest more than 20 percent of its capital in individual stocks and must have a minimum spread of assets. The UCITS seal also guarantees that your invested capital is a special fund.is kept so that it is protected in the event of insolvency of the fund provider. The abbreviation “ETF” is simply the indication that it is a stock market-traded product that reproduces an index.

Recognize features and special characteristics of an ETF in the name

In the last part of the name, other properties of the fund are often given. In our example, the ETF ends with the abbreviation “1c”. This abbreviation means that the ETF is accumulating, i.e. the dividends generated are automatically reinvested in the fund. This means that no dividends are paid to the investor, but the profits remain in the fund tobuy new shares. As a result, your investment will grow over time because the dividends remain in the fund and will ensure further growth. Such details are important when choosing, but most of the time the products only differ in small points. It is particularly important that you replicate the same index as precisely as possible and have similar properties.

How to find the right ETF: Tips for choosing

The good news is that when choosing an ETF, you can hardly make a wrong decision. Because products that depict the same index are very similar in their structure and objective. They all pursue the goal of replicating the respective index as precisely as possible. To find the right ETF, you can access various online comparison portalsfall back. Platforms such as JustETF or Extraetf offer you the opportunity to clearly filter all ETFs approved in Germany. You can set criteria that are important to you, such as the type of replication, currency, cost or distribution method. The factsheet provides you with detailed insights into the composition of the fund, into whichShares, countries or industries he invests and how high the running costs are. It is similar to the ingredient list on a food packaging. Here you will find everything you need to know to make an informed decision. You will encounter terms that seem complicated at first glance, but with a little basic knowledge you can quickly understand them. for themEvaluation of an ETF is primarily the fund volume an important key figure. It includes the total of all assets contained in the Fund, i.e. the capital of all investors together, including price gains and losses. A large fund volume is usually a positive sign because it suggests broad acceptance and higher liquidity. In addition, a high volumeOften to the fact that the provider has lower administrative costs and can offer you the product cheaper. For a global ETF, I recommend a minimum size of 100 million euros to ensure liquidity for trading.

Important key figures: Pay attention to the date of the fund edition and the costs

Another criterion for the selection is the date of the fund edition. As a rule, you should choose products that are at least three years old, as they have already proven themselves and you can rely on a certain stability. In addition, running costs play a crucial role. The so-called Total Expense Ratio, TER for short, includes all annual fees foradministration, marketing and licensing. It is given as a percentage and directly affects your return. For ETFs on the MSCI World, the TER is usually around 0.2 percent. With an investment of 10,000 euros, the annual costs would be around 20 euros. The TER is automatically deducted from the fund assets, so you don’t have to worry about anything else. a lowValue is always advantageous because it protects your return and keeps the costs within limits.

Deviations: Why ETFs sometimes develop differently than the index

Despite the high accuracy with which ETFs reproduce the underlying index, there are always small differences. This difference is called the tracking difference. It is caused by various factors, such as ongoing administrative costs, tax optimization or delays in mapping. In most cases, the ETF develops only slightly differently than theIndex, sometimes even better, which can be explained by tax benefits or additional profits from the fund provider. The tracking difference is an interesting key figure, but is not published regularly by most providers. For the assessment of an ETF, the TER is the simpler and more reliable metric. It is important to know that the tracking difference is ais historical size and does not provide a guarantee for the future accuracy of index replication.

Dividends: Distributing or Accumulating – What is the Best Choice?

A crucial issue in choosing is what happens to the dividends the fund generates. In the case of a distributing ETF, the dividends are regularly paid to investors. These funds will end up in your account and you can use them or save them as you wish. With an accumulating ETF, the dividends remain in the fund and are automatically reinvested.This means your investment will grow as a result of the profits you have reinvested, and your share of the fund will increase. The choice between these two variants depends on your personal strategy. Accumulating ETFs are particularly suitable for long-term investors who want to increase their capital steadily, while distributing ETFs are more suitable for investors who regularly make incomewant to obtain their investments. The decision is therefore a question of your individual goals and life situation. In the names of the ETFs you will often find information about the type of distribution. Shortcuts like “ACC” or “C” indicate an accumulating fund, while abbreviations such as “dist” or “dis” refer to a distributing variant. ETFs also differ in terms ofthe replication method. In physical replication, the fund buys the actual stocks included in the index. In synthetic replication, derivatives are used to reproduce the index. This method is sometimes cheaper, but can harbor additional risks because an interim instance is involved that could become bankrupt in the worst case. For private investorsPhysical replication is usually the safer choice, while synthetic ETFs are more suitable for experienced investors.

Currency, identification numbers and benchmarks for your investment

The currency in which the ETF is managed does not matter as you always invest in your home currency. This means, regardless of whether the price is in US dollars, euros or Swiss francs, your profit is always converted into euros when you pay out. The identification numbers such as the German WKN or the international ISIN are also important. They help you find the right productclearly identify and avoid confusion. The benchmark, i.e. the benchmark index, and the fund’s most important top positions are also listed in the fact sheet. This information gives you a good overview of which companies your money is invested in and how high the weighting of individual stocks is. If you have decided on an ETF,You can use the WKN or ISIN to make sure that you choose the right product and find it again later. You have created the most important basics to build your portfolio in a targeted manner and to invest successfully in the long term.