What is an ETF? Explained simply
An ETF is the easiest way to invest in hundreds of companies with a single purchase. Here's how it works and what to watch for in Switzerland.
What is an ETF?
ETF stands for "Exchange Traded Fund". An ETF tracks an index, for example the Swiss Market Index or the American S&P 500, and is traded on the stock exchange just like a single share. With one purchase, you own a small stake in every company in that index.
How does an ETF work?
A fund provider buys the shares or bonds contained in a given index, in exactly the weighting they appear in the index. This collection is split into units that you can buy and sell on the exchange, just like a stock. If the index rises, the price of your ETF unit rises too, and vice versa. You don't need to pick individual stocks yourself, the ETF does that automatically and adjusts whenever the index changes.
Some ETFs pay out the dividends of the companies they hold directly to you (distributing), others reinvest them automatically (accumulating). Both have pros and cons, explained in more detail on the ETFs and taxes overview.
Why do investors buy ETFs?
| Benefit | Explanation |
|---|---|
| Diversification | Many securities in a single product |
| Cost | Often relatively low ongoing fees |
| Simplicity | One purchase can cover many companies |
| Tradability | Tradable on the exchange every trading day |
What risks do ETFs carry?
- Market risk: If the whole market or sector the index tracks falls, your ETF falls with it.
- Concentration risk: Narrow ETFs on a single sector or country can swing more than a broad world index.
- Currency risk: For ETFs holding foreign-currency assets, a strong franc reduces your return in francs even if the index rises.
- Tracking difference: An ETF rarely replicates its index with perfect precision; the gap is usually small but can add up over years.
- Liquidity risk: Very small or niche ETFs can be harder to sell in large amounts without a price discount.
ETF or individual stock?
A single stock concentrates on one company, an ETF automatically spreads across many. What that means for risk and opportunity is explained on the page What are stocks?
ETF taxes in Switzerland
How to declare ETFs on your Swiss tax return, including for accumulating ETFs, is explained step by step on the page ETF tax return.
Which broker is right for you?
For ETF savings plans it's worth comparing custody fees, savings plan terms, and the tax statement. The broker comparison puts the common providers side by side.
How could an ETF portfolio grow?
Enter your ETF savings plan in the Depotly financial cockpit and see how your wealth could develop over the coming years.
Keep an eye on your wealth Enter your ETFs in the financial cockpit and see how your portfolio could develop.Further reading: ETFs and taxes in Switzerland, ETFs in the tax return and Broker comparison.