If you want to plan for retirement early or save towards a big financial goal, you should take a closer look at an ETF savings plan. In this article, we’ll explain how an ETF savings plan works, which alternatives are available, and which option best suits you.
At Inyova, we don’t offer a classic ETF savings plan, but instead, a cool way to invest in the stock market and generate positive impact at the same time. More on this later.
What is an ETF savings plan?
An ETF (Exchange Traded Fund) is a fund that is traded on a stock market. An ETF savings plan allows investors to plan for the future in small steps. Similar to a bank’s savings plan, a specific amount is paid into the ETF on a monthly, quarterly, or annual basis. Simply put, an ETF savings plan is a savings plan that feeds into an ETF investment.
This savings plan is suitable for funding your retirement, saving a certain amount over a specified period of time, or as a long-term investment. But take care when choosing your savings plan – not all ETF savings plans provide flexibility to set the savings rate and other factors that work for you.
How does an ETF savings plan work?
An ETF is usually designed to track the performance of a particular stock index. Instead of investing in a particular stock, you invest your money in a fund that contains a variety of different stocks.
Investing in ETFs has several advantages and disadvantages; you can invest passively, but you won’t have a direct say in the collection of stocks in the fund. We go into more detail about these advantages and disadvantages later in the article.
An ETF savings plan in just a few steps
Setting up an ETF savings plan is extremely simple. With some providers, it involves just a few clicks. Many investment platforms include ETF recommendations listing the current best ETF savings plans. You can specify when you want to start saving and how much you want to deposit monthly or quarterly.
It’s worth taking a close look at the fine print. There are often hidden additional terms and conditions to your savings plan, such as hidden fees or minimum investment periods.
If you agree to all the conditions, all you have to do is decide which ETF fund you want to invest in – and there is a huge selection. Some include hundreds of global companies and others, such as the SMI fund, are limited to country-specific companies.
For a well-diversified portfolio, it’s important that companies from different industries, regions, and of different sizes are represented. An interesting concept for diversifying a portfolio is the “efficient frontier” theory.
Advantages– why is an ETF savings plan a smart idea?
ETF savings plans are financial investments that usually only reach their full potential over an extended period of time, and historically, they offer more attractive returns than a savings account. However, some factors must be considered. There are also plenty of smart alternatives to ETFs, like impact investing.
Invest in multiple companies
An ETF savings plan typically involves investing in a wide range of companies. The idea behind this is that the price fluctuations of the individual shares are cushioned by the other companies included in the fund. That’s why it’s important to diversify, making sure your plan includes a wide range of companies.
However, depending on the ETF you choose, this kind of diversity is not always possible so investing in an ETF does not always mean low volatility. Even when well diversified, price fluctuations happen – and are normal. But over a long investment period, this volatility usually evens out.
Low fees
ETFs typically have lower fees. Having said that, the advertised fees of an ETF rarely include all services. Before deciding on a plan, you should be aware of the hidden costs that can be added to transactions and other processes.
Flexible conditions
Another advantage of ETF savings plans is the flexibility. Savings deposits can usually be adjusted during their term, and it’s even possible to pause the payment.
However, some providers charge extra to adjust the savings rate, so any amendment will incur a fee. Some ETFs are also more difficult to sell than others. Make sure to allow enough time when you want to liquidate the savings plan.
Disadvantages of an ETF savings plan
Although there are many benefits, there are also some disadvantages that can make other financial products more appealing. Negative aspects of ETF savings plans include:
Counterparty risk in swap-based ETFs
If a swap agreement is made with the ETF savings agreement, it creates counterparty risk, which must be carefully reviewed, especially if the bank involved goes bankrupt. The risk of swap-based ETFs is therefore higher than that of regular ETFs and investors could be faced with high losses – or even total losses.
Hidden fees
In some cases, transaction and service fees are difficult to understand, which can lead to excessive costs being incurred. And, not all fees are immediately visible on the ETF’s overview page – they’re often hidden in the fine print.
Greenwashing
For those who value investing in sustainable businesses, the lack of transparency can become a stumbling block.
Even in “sustainable” ETFs, fast food chains or CO2 sinners are able to hide. When investing in an ETF, you also waive your right to vote as a shareholder.
A sustainable alternative to the ETF savings plan: impact investing!
Impact investing is an excellent way to grow your wealth in the long term while creating verifiable impact in the world. With impact investing, you invest in companies solving big global challenges. With Inyova, your personal equity portfolio contributes to a more sustainable future – without compromising your returns. You choose the investment topics that matter to you – from renewable energies to plant-based champions, gender equality, transport of the future, and more. You invest according to your personal interests.
The reason why impact investing is so important: personal commitment alone isn’t enough to drive large-scale changes that are needed to solve issues like CO2 emissions and equality. It’s the companies that create solutions and can therefore make the biggest impact. Through impact investing, you invest in these change-making companies.
How does impact investing work?
Before you start investing your money, you get to select the topics that are most important to you. This answers the question of which companies to invest in.
Your personal investment strategy is then created, which includes a selection of sustainable companies in your interest areas. This investment portfolio will be diversified according to the criteria of the “efficient frontier” theory and is risk-optimised, so that risk and return are tailored to your needs. This means that company shares from a number of different sectors and countries are included.
With Inyova, you directly own each stock in your portfolio – this means that your name is registered, and it belongs to you, even if Inyova should no longer exist. You can also exercise your voting rights as a shareholder, which is something you can’t do with an ETF. With an ETF, you don’t invest directly in the companies, but rather in the fund, so your money is pooled with that of the other investors. That’s why, when you invest in an ETF, you’re no longer allowed to vote at shareholder meetings.
In conclusion
If you want to make lasting changes with your investment, you should take a closer look at impact investing. As an alternative to ETFs, impact investment is gaining in popularity. The combination of responsible investment and attractive long-term returns is becoming more and more appealing as social and environmental awareness increases.
All companies included in Inyova portfolios are champions in at least one impact area. These companies are making strides in the energy efficiency of production processes, environmental sustainability, removing toxins and pesticides, or focusing on fair pay and decent working conditions. It’s up to you to decide which area you want to invest your money in.
Does impact investing sound interesting to you?
Find out more about it here and create your free investment strategy.
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