What Are The BEST ETFs To Invest In?

Key Takeaways

Selecting the right ETFs can prevent significant losses and maximize gains, highlighting the importance of informed investing.
Opt for well-diversified, EU-domiciled ETFs eligible for monthly savings to ensure stable, long-term investment returns.
Avoid hyped, young, and leveraged ETFs due to their high risk and potential for underperformance and complications.
Following clear criteria for selecting ETFs increases the likelihood of investment success and financial stability.

Introduction

There is one ETF that gained 845% over the last year and another that lost over 47%. In just one year, some investors lost half of their hard-earned money while others got rich. The funny thing is, the -47% situation could have been easily prevented.

As a financial adviser, we can’t predict future stock market returns. However, we can avoid a 47% loss within a year by following clear criteria to distinguish good ETFs from bad ones. In this article, we’ll discuss these criteria to help you find the best ETFs to invest in.

ETFs to Choose

Fund Domicile in the EU

Before selecting your ETFs, the most crucial filter is to pick one domiciled in the EU. This doesn’t mean you should only invest in the EU and avoid the US or other markets. It means you should buy ETFs specifically designed for investors living in the EU. These ETFs have an International Securities Identification Number (ISIN) or a German Wertpapierkennnummer (WKN).

Avoid ETFs with just a ticker symbol, as they are for US investors. Investing in US ETFs as an EU resident can create a significant tax headache, complicating your finances unnecessarily. Always choose EU-domiciled ETFs like MSCI World or S&P 500 for simplicity and compliance.

Distributing or Accumulating ETFs

A common question is whether to buy an accumulating ETF that reinvests profits or a distributing ETF that pays out profits. Two years ago, the answer might have differed, but now with the preliminary investment tax (‘Vorabpauschale’ in German), it makes little difference.

The tax compares your ETF’s value on January 1st and December 31st, taxing any increase. This tax applies regardless of whether the profits are paid out or reinvested. To avoid this tax, consider putting your ETFs in pensions instead of investment accounts. For long-term investors, pensions can be more tax-efficient than using a broker app on your smartphone.

ETFs That Track a Well-Diversified Index

Choosing between accumulating and distributing ETFs makes little difference, so let’s narrow our filters further. One crucial criterion is selecting well-diversified ETFs. For example, the German DAX 40 index is top-heavy, with the top 10 companies making up 62% of the index (in August 2024). This concentration is risky.

Instead, choose ETFs with broader diversification. Don’t limit your investments to a single economy. Consider global diversification, either through a single well-diversified ETF or a portfolio of different ETFs. This strategy spreads risk and can lead to more stable returns.

Eligible for Monthly Savings Rate

Another critical criterion is selecting ETFs eligible for monthly savings rates, allowing you to dollar-cost average. Dollar-cost averaging means investing the same amount monthly, regardless of market conditions. When the market is down, you buy relatively cheap; when it’s up, you buy relatively expensive.

This strategy avoids trying to time the market, which is notoriously difficult. Dollar-cost averaging reduces stress and can lead to better long-term investment outcomes. This approach helps smooth out market volatility and is a more disciplined way to invest regularly.

ETFs to Avoid

Hyped ETFs With No Real Long-Term Outlook

With over 10,000 ETFs available and 280 new ones launched annually, many new ETFs are just hype. Examples include Bitcoin ETFs and AI ETFs. While some innovation is good, most new ETFs are unnecessary.

Avoid hyped ETFs that attract money based on current trends. These ETFs often lack a solid long-term outlook and can be risky investments. Instead, focus on established ETFs with a proven track record and a stable investment strategy. By avoiding hype-driven ETFs, you reduce the risk of volatile and unpredictable investments.

Leveraged ETFs

Leveraged ETFs promise higher returns by multiplying the performance of an index. For example, a 3x leveraged ETF aims to triple the returns of the underlying index. While this sounds appealing, leveraged ETFs can underperform over the long term due to daily rebalancing.

For example, a 14% annual return on the DAX might translate to a 30% return on a 3x leveraged ETF, not 42%. Over three years, the DAX might gain 15%, but the leveraged ETF could only gain 4%. The daily rebalancing erodes returns, especially in volatile markets. Avoid leveraged ETFs and use real estate for leveraged investments instead.

Young ETFs With Low Total Invested Amount (<100 Million €)

Avoid young ETFs with low fund volumes, typically under 100 million euros. These ETFs often lack a track record and can be risky. If an ETF lacks investor demand, the fund company might close it, causing inconvenience. You won’t lose your money, but you will need to find a new ETF.

Established ETFs with higher fund volumes offer more stability and reliability. A low-volume ETF can mean extra work if it gets delisted, requiring you to reinvest your money elsewhere. Focus on ETFs with a substantial amount of invested capital for better long-term stability.

Conclusion

There are clear criteria that separate good ETFs from bad ones. Following these criteria won’t guarantee profits or make you a billionaire, as no one can predict the stock market’s future.

However, setting a solid structure increases your chances of success in investing. We discussed the importance of choosing EU-domiciled ETFs, understanding the difference between accumulating and distributing ETFs, selecting well-diversified ETFs, and avoiding hyped or leveraged ETFs.

By adhering to these guidelines, you can make more informed investment decisions and improve your chances of achieving financial stability and growth. For personalized advice, book a free meeting with us.