The Standard & Poor’s 500
Also known as S&P500 is a stock market index, which is composed of the 500 largest U.S. companies listed on the New York Stock Exchange (NYSE) and NASDAQ, is composed of companies in all sectors: industrial, health, real estate, technology, etc..
The average annual return, including dividends, since the creation of this index in 1926 has been approximately 9.8%, when we talk about the average it is because in some years it has fallen more than 30% but in others it has risen 70%, but in the long term it has always given profits. This index is used as a comparison for other investment products.
Investment Funds
Mutual funds start almost 100 years ago, a mutual fund is an organization/institution that takes money from many small savers and uses it to invest in the stock market. In the past this allowed “small” savers to have access to the stock market, I put small in quotation marks because the minimum amounts to enter investment funds were not so low.
The funds have a group of expert investors behind them who actively manage the fund, that is, they buy and sell securities (stocks, government bonds, etc.) to generate a profit, as the fund invests in many different stocks or bonds the risk decreases because they are not putting all their eggs in one basket, the fund charges a commission for this activity, in short you give your money to the fund and they work it for you.
I have not invested in funds for two main reasons:
- Fund fees will be charged whether the fund wins or loses and can be up to 4% in some cases.
- The stock market is to some extent random, it is very difficult to have consistent gains over the long term.
Monkeys vs. fund managers
In 1973 Professor Burton Malkiel wanted to test whether the stock choices made by experts were random or not. What would happen if you put a blindfolded monkey to throw darts at a sheet with company names and at the end you made a portfolio with those randomly chosen stocks?
You would think that the expert portfolio would have to outperform the randomly selected one, right? Well no, in the end it turned out that the randomly selected portfolio far outperformed the funds and even the S&P500 itself. Looking at this result it makes sense to just copy the companies that hold the S&P500 in a mutual fund instead of trying to pick the winning stocks.
At the end of this post I leave you the article where this experiment is explained in case you are interested in knowing more and a book by Burton Malkiel where he talks more about this.
What is an ETF?
In simple terms an ETF is an instrument similar to a mutual fund, but there is no one actively buying and selling securities, these funds are considered passively managed. As there are no people actively managing the fund the fees charged can be much lower, generally below 0.5%. They are also created by mutual fund management companies, among the best known of which are Vanguard and Blackrock. An ETF, like a mutual fund, holds many stocks of different companies inside.
There are ETFs of all colors and flavors, one of the most famous is the one that has inside the S&P500 index, there are others that have inside the largest companies in Europe, or the largest in Germany, Holland, there are also ETFs that invest in specific sectors such as health, real estate, semiconductors, clean energy, video games, etc..
In addition to low commissions, ETFs are products that can be easily bought and sold during stock market trading hours.
Where do I buy an ETF?
To buy ETFs we need an intermediary brokerage house or broker, in the Netherlands there are several alternatives ranging from traditional banks to fully online brokers. I mainly use two brokers to buy ETFs. Degiro and Trade Republic
DEGIRO, a broker that charges very low commissions, offers access to the stock market since 2013 for the individual investor, is supervised by the Dutch authority for financial markets (AFM) under the supervision of De Nederlandsche Bank (DNB). It does not charge account management and has a selection of 200 ETFs that can be purchased commission-free once a month. You can access it on computer and mobile devices.
Trade Republic is a German broker that also operates in the Netherlands with equally low commissions. They are regulated and supervised by the Deutsche Bundesbank and the BaFin (German Federal Financial Supervisory Authority). Trade Republic works with banks such as Citibank and Deutsche Bank to securely store their clients’ money. In addition to low commissions, Trade Republic pays you interest on the money in your account that is not invested.
If you want to learn more about Trade Republic or open an account you can click on the banner below, this helps the blog and future articles.
Another alternative I used in the past was BUX 0, a Dutch broker, also regulated by the Dutch Financial Markets Authority (AFM) and recently acquired by ABN AMRO, which only has a mobile application. The number of stocks and ETFs available is much smaller than in DEGIRO and Trade Republic. The commissions for buying and selling ETFs are also low but they charge a monthly service fee of 2.99, if the portfolio is small this broker is expensive.
If you want to know more about the subject you can check the following links:
This is the article that talks about monkeys and investment fund managers https://www.cass.city.ac.uk/faculties-and-research/research/cass-knowledge/2013/april/monkeys-vs-fund-managers-an-evaluation-of-alternative-equity-indices
This is the article where the performance of the S&P500 index is shown: https: //money.usnews.com/investing/investing-101/articles/2018-10-02/why-investors-love-the-s-p-500
And here is the book written by Burton Malkiel about passive investing and how funds in the long term do not beat the market: Spanish version, English version English version
