Exotic funds: How investors implement their own ETF strategy

Exotic funds
This is how investors implement their own ETF strategy

Too complex, too time-consuming, too uncertain: there are many reasons why people shy away from investing in the stock market. With these five steps, everyone comes to ETFs.

Simple, cheap, transparent – that’s what exchange-traded index funds actually want to be. A recipe that is well received by investors.

“For the private investor, ETFs have the charm that you can invest your assets widely at reasonable costs without taking on a risk of individual values,” says Nicolas Pilz, Managing Director of Societas Vermögensverwaltung in Düsseldorf. The funds, which replicate a stock index, invest their funds in various companies spread across many sectors and countries.

Offers are diverse

As the demand increases, so does the supply. In order 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, crypto ETFs, climate ETFs and rare earth ETFs.

“Today, investing in just one country index is often not enough,” says Frank Wieser, Managing Director of PMP Vermögensmanagement. Certain topics are global and interconnected. That’s why special ETFs can definitely be an enrichment for the depot, according to Stiftung Warentest. According to the product testers, up to 30 percent can be invested in exotic ETFs – as long as 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 hope for less fluctuations in value and better returns from stocks with high dividends. That only works partially. Although corresponding ETFs fluctuate less because the companies often come from defensive sectors, they do not necessarily shine in terms of returns.

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

Check various criteria of the ETF

This also applies to the various ETFs themselves. “For example, you can bet on the ‘ageing population’ with a theme ETF,” says Frank Wieser. However, this is implemented in very different ways: sometimes drugs to combat aging are in the foreground, sometimes infrastructure projects such as old people’s homes. “With the same topic, the performance can be very different.”

It is worth looking at certain criteria in advance. “The fund volume should be large enough that the ETF is also interesting for society in the long term and does not run the risk of being liquidated,” says Rainer Göritz from B&K Vermögensverwaltung. “The ETF should be reasonably diversified and contain at least 25 to 30 stocks. Their composition should be reviewed regularly.”

And even if it may sound boring: Equity investments are usually successful if they are widely diversified and long-term. “Don’t try to beat the market,” says Niels Nauhauser from the consumer center in Baden-Württemberg. Even professionals rarely manage to do this.