ETFs: all the stocks, none of the stress
Stefan Balaban, Maxi Ullrich, Claire Pegel and Jack Liu (Left to right)
What if you could invest in hundreds of companies with a single click? That’s the power of an ETF. In this article, we’ll break down what Exchange-Traded Funds are, how they work, and what key advantages they offer compared to other investing methods.
ETFs are everywhere, but what are they? Think of it this way: buying a single stock is like picking an apple. If that apple goes bad, you’re left with nothing. An ETF, on the other hand, is like a fruit basket that is filled with apples, oranges, bananas and so on. If one fruit goes bad, you still have plenty of others to enjoy. This built-in variety makes ETFs a popular way to spread risk while staying invested in the market.
For many people, investing can feel overwhelming. There are endless choices, confusing terms, and the fear of making the wrong move. That’s why ETFs, or Exchange-Traded Funds, have exploded in popularity in recent years. They’re affordable, simple to trade, and provide investors with an easy path to diversification.
Getting started with ETFs
To start buying ETFs, the first step is deciding which broker or app you want to use. A broker is just the middleman who lets you buy and sell investments. These days, there are plenty to choose from. Some popular platforms in Europe include Trade Republic, Trading 212, Degiroand many more.
Once you’ve picked one, you just need to set up an account. Don’t worry, it’s usually as easy as signing up for Netflix. The real fun begins with choosing the ETF. Look at things like what index it tracks and the fees. Good starter ETFs often track big indices such as the MSCI World 500 or S&P 500; these give you the possibility to invest in hundreds of companies with just one click.
When it comes to investing, you don’t need to invest all your money at once. You can start small with only a few euros. A popular method is to invest a fixed amount regularly, which helps smooth out market ups and downs. Even small, consistent investments can grow significantly over time.
And finally, once you’ve bought your ETF, relax, no need to panic-check the price every five minutes. ETFs are meant for the long game, so think of it as planting a tree and letting it grow.
Why ETFs appeal to the young generation
There are a couple of reasons why ETFs are popular with younger investors. First, they are cheap and easy to start with. Even a few euros can already buy you a slice of hundreds of companies.
They also make building a balanced portfolio simple. One ETF can cover dozens of industries, so you don’t have to spend hours picking individual stocks. Perfect if you’re not a finance nerd (yet).
Plus, the ETF world is highly competitive. There are ETFs for almost everything: indexes like the S&P 500, but also niche ones from clean energy to gaming. That makes it easier for young people to invest in stocks and values they actually care about.
ETFs trade on the stock market just as easily as regular stocks - around the clock, not just at the end of the trading day. Want to buy? A couple of clicks. Want to sell? Same thing. No lock-in periods, no tricky rules - just flexibility.
The most significant advantage of ETFs is diversification: spreading your money across many companies instead of betting on just one. Since an ETF holds a mix of different stocks, some will do well while others might not, and the good performers usually balance out the weaker ones. Over time, this tends to give you more stable growth with lower risk. That’s why ETFs are especially attractive to beginners who want a simple way to invest without worrying too much about picking individual winners.
Here’s the deal: Over the long run of 10 years or more, passive ETFs that track big indexes like the S&P 500 (the 500 leading U.S. companies) tend to beat most actively managed portfolios. So instead of spending nights buried in stock charts and research reports, ETFs let you “set it and forget it.” Perfect if you’re new to investing or simply don’t want a second job managing your portfolio.
ETFs won’t make you rich overnight
Here’s where the dreamers need a reality check: ETFs aren’t magic money machines. Yes, they’re safer, but that safety comes at a cost: you will not beat the market. Take Nvidia for example; after ChatGPT launched in late 2022, demand for its GPUs exploded, and the stock price went up 10x since then. If you owned only Nvidia, you’d be celebrating. But if Nvidia were just a tiny slice of your S&P 500 ETF, those gains would be watered down by other slower stocks in the basket. So, if you’re an experienced investor who wants to chase explosive growth, ETFs might feel a little boring.
You are also unlikely to become a millionaire overnight. ETFs are like taking the tram instead of riding a roller coaster. Smooth, steady, and considered safe. But if you enjoy the adrenaline rush of quick trades, you might find them limiting. Remember the GameStop bubble in 2021? The stock skyrocketed 30x in a month, then crashed right back down. If you timed it perfectly, you made a fortune. If you didn’t… well, ouch. ETFs don’t give you that kind of high-risk, high-reward action. They’re built for the long game, not quick flips.
ETFs are not as diversified as you think
ETFs can feel like a big buffet: 500 different dishes, endless choices, something for everyone. Take the S&P 500 ETF, for example. It packs in 500 companies, which sounds like a recipe for maximum diversification. But here’s the twist: all 500 dishes come from the same kitchen, the U.S.
So, if something big and bad happens in the U.S. economy, like a financial crisis, a political shock, or even a major natural disaster, the whole kitchen shuts down. All your 500 “different” stocks? Down together. It’s a bit like putting all your eggs in one basket - if the basket falls, well… omelette time. It’s worth noting that this large concentration in a single country is also present in many other ETFs marketed as more international. For instance, over 70% of the MSCI World consists of U.S. stocks. So that’s why Leo, a Luxembourgish student, advises: “To minimise risk, you need to invest in different ETFs”.
Another thing to know about ETFs is that you don’t get to choose what’s inside the basket. Imagine that your S&P 500 ETF includes a company you don’t believe in. Maybe you think it’s overpriced and want to cash out, or perhaps you dislike its environmental or social practices—tough luck. You can’t just pluck it out of the ETF like picking out a tomato from your kebab. Your options? Find another ETF that better matches your values or build your own portfolio from scratch.
Another important distinction for investors to understand is between physical and synthetic ETFs. Physical ETFs directly hold the stocks or bonds that make up the index, giving you actual ownership of the underlying assets. Synthetic ETFs, by contrast, do not buy the shares themselves. Instead, they replicate the index using financial contracts called swaps. A swap is simply an agreement where the bank promises to deliver the return of the index in exchange for a fee or another return stream. This structure can lower costs and improve tracking accuracy, but it also introduces counterparty risk. If the bank behind the swap runs into trouble, the ETF could be affected. It is helpful to know that synthetic ETFs are often used when direct ownership is expensive or complicated, such as for emerging markets or niche commodities.
ETFs in the Grand Duchy
Luxembourg may be small, but it plays a significant role in the world of ETFs. It is the second-largest home for ETFs in Europe, just behind Ireland, and it has recently made some crucial changes to become even more attractive for fund creators. At the end of 2024, Luxembourg removed a tax that had previously made some ETFs more expensive. Now they’re cheaper to run, and new ones can be launched more easily. On top of that, the rules got lighter too, since managers don’t have to show exactly what’s inside their ETF every single day anymore. With these changes, Luxembourg is setting itself up as an even more attractive place for ETFs to grow, and that could mean more options for young investors in the future.
Returning to ETFs beating actively managed portfolios. Since 1975, the S&P 500 has delivered average returns of 10% per year, an impressive consistency when compounded over half a century. On the other hand, hedge funds promise risk management and complex strategies, yet studies show that their average returns come closer to 5-6%. Research by Barber and Odean shows that the more trades are made, the higher the chance that the portfolio will underperform the market, which stems, for instance, from poor decision-making, such as selling winning stocks too early or holding on to losers for too long, as well as the higher fees, which decrease profits. So, if professionals with armies of analysts and advanced technology can’t reliably outperform the market, what chance does the average investor have?
The active-management paradox
The paradox is evident: active strategies are marketed by hedge funds as more profitable, but the data doesn’t back it up, according to S&P’s SPIVA scorecards. Over a 15-year horizon, more than 90% of actively managed U.S. Equity funds fail to beat the benchmark. Of course, active management isn’t without purpose; hedge funds aim to reduce volatility and protect capital in downturns. But the dream of consistent outperformance is elusive. Warren Buffett illustrates it most famously with his million-dollar bet that an S&P 500 index fund would beat a basket of hedge funds over 10 years. The results were astonishing; the index returned 125%, while the hedge funds were only able to return 36%.
The lesson is simple: chasing significant returns may work for some professionals, but for most investors, the surest path to wealth is betting on the market itself and relying on compounded interest to grow their net worth.
In general, ETFs make investing simple, affordable, and accessible. Instead of paying high fees for complex strategies that often underperform, you can invest in the whole market with just one click. For most people, especially beginners, that might be the smartest move. Just imagine: if professional fund managers only beat the market in the rarest cases, how likely is it that regular people like you and me can sustainably outperform it over the long run? The real power comes from starting early, staying consistent, and letting compounding quietly grow your wealth.
Written by Stefan Balaban, Maxi Ullrich, Claire Pegel and Jack Liu
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