*This article was originally written for our Swiss market, it may contain Swiss references.
First up, what are exchange-traded funds?
Generally speaking, exchange-traded funds (ETFs) are index funds, meaning they track an index such as the SMI, or the S&P500. A common misconception is that ETFs really include all the stocks in that index. This is not always the case – sometimes it’s just a selection picked by the person managing that fund; and sometimes the manager will create Synthetic Replication, buying ‘warrants’ and ‘equity swaps’ instead of the shares themselves.
What makes an ETF different to a conventional fund is that it’s traded on the stock market. That means you can sell it at any time. A conventional fund is bought and sold privately, e.g. by your bank. Such a fund cannot be bought and sold at any time and most often the provider will charge a fee both when you invest in the fund and when you want your money back.
What’s the advantage of ETF investing?
Simply put: investing ‘passively’. Instead of paying for an expensive fund manager who attempts to optimise your investment (a strategy that often backfires), an ETF contains many different investments within a particular index. As a result, it mirrors the performance of the overall market – with no runaway profits, but no runaway losses either.
At Yova, we do something similar. We built portfolio theory into our algorithm, so that you receive an investment portfolio that’s both personalised to you and diversified according to investment best practice. We do this because well-diversified portfolios have proven to be a reliable vehicle for growing your wealth long-term.
What is the downside of an ETF?
This comes down to personal opinion. We believe it’s important for people to decide, or at least be aware of, what companies they are investing in. We think investors should have real ownership in those companies. An ETF misses these points. It is a bundled financial product, packaged up and sold as its own commodity. As an ETF investor, you own shares in a complex financial product. You don’t own shares of the companies within it.
At Yova, we take a different approach. You tell us your interests and personal values, and we find the companies that best align with your preferences and risk profile. Our financial experts take care of the technical details and implement your fully customised investment strategy – one that aligns to your values (Join our waitlist here to be among the first to try Yova when it launches in Germany.).
This gives you, the investor, as much (or as little) control as you would like. Let’s say you excitedly invest in a rising tech company, then later discover they shared the private information of 87 million users. If you no longer want to be invested in that company, we can take it out of your portfolio.
The same goes for the reverse situation – say you previously avoided a particular company because you didn’t like how it held 90 percent of its profits in low-tax countries. If they later clean up their act, you may decide you want to invest in that company. For us, that’s no problem. You hold the power to make these decisions, and we’re here to make the implementation painless.
Direct investment vs indirect investment
When you invest through Yova, you become a shareholder in each company you invest in. You are making a direct investment. You hold the shares in an account in your name. You receive dividends.
The financial world has moved away from this model of direct investment. Yova wants to bring it back. We want to promote shareholder engagement, and help our customers feel empowered as investors and as citizens in the world.
As we mentioned, when you own an ETF, you own shares in a financial product, but not shares in the underlying companies. These extra layers can also expose you to counterparty risk (more about this in the next section).
Why technology is changing the game
Once upon a time, structured funds were a great way to streamline the otherwise complex process of buying a well-diversified portfolio of stocks. But over the years, the finance industry has become more self-serving. Fast forward to recent times, and the ‘cost synergies’ that were once achieved have morphed into ‘cost monsters’ that eat into customers’ profits.
Luckily, modern technology and digitalisation make it possible to set everything up without buying into a fund.
Of course, some finance expertise goes a long way – it pays to have a professional ensure your portfolio is properly diversified and optimised for the level of risk that you’re able to take on. And yes, it’s great to have a provider take care of the cumbersome technical details involved in executing your transactions. But you can have the benefit of these services without a pre-packaged product.
Here’s an illustration of the process of investing in companies through Yova. No entities stand between you and your investment. With Yova, you purchase shares directly, and you can sell these shares at any time.
Do direct investments perform better than ETFs?
We wish we could guarantee investment gains, but we can’t. No asset manager can; no ETF provider can. What we can do is diversify each customer’s portfolio so that it is designed to move with the stock market. That way, if the stock market as a whole goes up, the value of your portfolio should increase. On the same note, if the stock market crashes, the value of your portfolio is likely to fall, too. In that case, you may decide to hang onto your stocks until the market bounces back.
At Yova, we’re really serious about risk optimization. Using an approach based around ‘Modern Portfolio Theory’, we diversify your investments to match your tolerance of (and appetite for) risk. You can read more about this Nobel Prize winning approach here.
By nature, most ETFs are also diversified. But remember those complex things called ‘warrants’, ‘equity swaps’ and ‘synthetic replication’? For an ETF investor, these create risk. Because with every layer of complexity, there’s an opportunity for things to go wrong. Even if it’s a low risk compared to other financial products, we feel these layers are unnecessary – and that there is a better way.
Summary: ETF vs Yova investment
|Yova||Point of difference|
|Personalisation||At Yova, your investment strategy is custom-designed to help you reach your financial goals and to reflect your personal values. An ETF’s holdings are packaged by the fund manager to accommodate a wide range of profiles.|
|Direct investment||Our customers own shares directly to become registered shareholders in those companies. ETFs add layers to that equation.|
|Transparency||Our clients know exactly how their money is invested. All the details of your portfolio are on our secure online dashboard and can be accessed at any time.|
Interested in trying us out?
The first step is to get your personalised impact investing strategy – it’s free and non-binding. Using our easy online tool, you pick investment themes based on your personal values and interests. We show you exactly what stocks we recommend you invest in. You can also adjust your financial goals and risk preferences. With every adjustment you make, our algorithm makes sure your portfolio is financially sound.
Join our waitlist here to be among the first to try Yova when it launches in Germany.
By investing, you not only support a company’s success, you become part of that success… growing your savings and having a positive impact on the world at the same time.