How to Invest in ETFs With €1,000
This article will explain: All there is to know about investing in ETFs, what they are and why investors are using them, the different types of ETFs available to you - ETF stocks, ETF CFDs, ETF funds, Index ETFs, Tech ETFs, the S&P 500 Index ETF and more, as well as providing information on how to identify the best-performing ETFs, and finally, how you can start investing in ETFs today, starting with just 1,000 EUR!
You've probably heard the phrase 'you need to invest for the future'. Whether it's family or friends, or wealth gurus like Warren Buffett or Tony Robbins, learning to invest is high on the list. However, like most people, you may be disenchanted with the current savings rate available at your local bank.
Maybe you've considered investing in the stock market to try and find the next Amazon. After all, if you had made a $1,000 investment when Amazon first started publicly trading in May 1997, then in September 2018 that would have grown to around $1,362,000.
However, finding the next Amazon and investing in it at the right time is not the easiest thing to do. But is there a solution that can help investors to try and gain access to better returns than the bank?, without spending all their time trying to find the right company to invest in? Yes there is - they're called ETFs, or Exchange Traded Funds. But first let's take a quick look at what is possible when starting to invest with 1,000 EUR:
Investing Basics: The Bank vs. The Stock Market
When you are aiming to invest for the future, it can be helpful to look at the possible returns across different investing scenarios. In this case, we'll look at investing in a savings account versus investing in the stock market.
- Bank's interest rate with singular investment: Imagine you put 1,000 EUR into a simple savings account, which paid an interest rate of 3% per year. If you left the money in the bank for 40 years, how much would you have? Well, that pot would have grown to EUR 3,262.04 - hardly life changing for most people. Let's see if we can try to increase the overall return in the second scenario:
Surce: The Calculator Site: A 1,000 EUR investment, with 3% interest per year for 40 years - Please Note: Past performance does not indicate future results, nor is it a reliable indicator of future performance.
- Bank's interest rate with regular investments: Now, imagine if you also managed to save an extra 100 EUR a month. With the same initial 1,000 EUR, and the same 3% interest rate, in 40 years that same bank account would now hold 95,207.23 EUR. Now that account balance graph is starting to look a bit better! But can we go further?
Source: The Calculator Site: A 1,000 EUR initial investment with 100 EUR saved per month, with 3% interest per year for 40 years - Please Note: Past performance does not indicate future results, nor is it a reliable indicator of future performance.
Stock market returns with regular investments: We already know that regular investing trumps singular investment, as shown by the returns of scenario one and two. Now let's say we turned to the stock market to try and increase the yearly percentage gain.
The S&P 500 index, which tracks the largest 500 companies listed on the New York Stock Exchange, has made an annualised return of approximately 10% a year between 1928 to 2017. An initial 1,000 EUR investment, with regular 100 EUR monthly investments, at a 10% interest rate, in 40 years would now hold 604,720.00 EUR.
Source: The Calculator Site: Scenario 2 with annualised stock market returns at 10% per year
Of course, this is just a hypothetical example, and returns will vary as past performance is not indicative of future performance. However, it is pretty clear as to why billionaire investors like Warren Buffett invest in the stock market. So how can one get started in investing into the stock market? There are a few ways, but one could take on billionaire investor Warren Buffett's advice as a good starting point:
Warren Buffett and the S&P 500 Index ETF
Warren Buffett, dubbed the 'Oracle of Omaha' is one of the best investors of all time. At his 2004 company shareholder meeting, Berkshire Hathaway, the billionaire investor was asked by one investor whether he should buy Berkshire Hathaway stock, invest in an index ETF, or hire a manager to do it. Here was part of Buffett's answer: "Just pick a broad index like the S&P 500.
Don't put your money in all at once; do it over a period of time. Vanguard. Reliable, low cost." Well, from the different returns within scenario one and two that we looked at before, that makes a lot of sense. But what does he mean by Vanguard and the S&P 500? He is referring to a very popular ETF called the 'Vanguard S&P 500 ETF'. And what is an ETF? Let's take a look:
What Are ETFs and Why Are They Popular?
An ETF stands for an 'Exchange Traded Fund' and was first created in 1990 in Canada. The concept of ETFs is simple - it's all about pooled investing. Essentially, ETFs are investment funds that aim to track the performance of a specific index. For example, the Vanguard S&P 500 UCITS ETF aims to track the performance of the S&P 500 Index, which is a basket of 500 of the largest US stocks.
However, many investors use ETFs for the benefits of diversification, as well as to access new markets. For example, you may have recently heard a lot about the growth of AI (Artificial Intelligence). However, you may not be comfortable in finding the right company to invest in, or trade on, as it is still a very new area. In this instance, an investor could turn to the Global X Robotics & Artificial Intelligence ETF.
This particular ETF seeks to invest in companies that stand to benefit from the adoption of robotics and artificial intelligence. Therefore, this can provide the investor with access to a growing market, without searching for just one individual company. The ETF market has grown considerably, and in 2017, was worth $3.4 trillion. So how can you actually start to invest in ETFs? You could use Invest.MT5!
Why Invest in ETFs with Invest.MT5?
Admiral Markets offers different account types covering investing and trading. Invest.MT5 allows you to invest into stocks and ETFs from fifteen of the largest stock exchanges in the world. You also have access to:
- Free real-time market data
- Complementary premium quality market updates
- Extensive market coverage
- Low transaction commissions and no account maintenance fee
- Dividend payouts
- State of the art trading platforms
Accounts are available to all clients who accept the general terms and conditions, with a minimum funding requirement of just 500 EUR. So now you know how to start investing, let's take a look at how to identify the best ETFs to invest in:
Picking the Best ETFs to Trade
While many investors will be happy with the 10% annualised return available with the S&P 500 index, some will prefer to diversify their portfolio, to find other markets that could increase their overall return. Some investors may also like to invest into something they know more about, such as technology stocks.
The Nasdaq 100 Index, which tracks the top 100 tech stocks on the Nasdaq exchange, achieved an annual return of 28.24% in 2017 alone. This is why more and more investors are learning how to invest in ETFs, and are searching for the best performing ETFs to invest in. After all, finding a suitable Nasdaq ETF, or a Nasdaq Index ETF, can make a big difference.
So how could you have invested in this particular index?
There are many ETFs that track the performance of the Nasdaq 100 index. For example, there is the First Trust NASDAQ-100 Technology Index Fund ETF (QTEC). This gives the investor exposure to a broad range of technology stocks like Facebook, Apple, Amazon, Netflix, and Google, in the form of ETFs. However, there are other areas and sectors for professional traders to consider.
The Different Types of ETFs
There are a variety of ETF funds and ETF stocks that you can trade, such as:
- Country specific ETFs - you can access stock markets from around the world you may have otherwise found difficult to access. For example, if you think that Taiwan's stock market is going to move higher, you could trade the iShares MSCI Taiwan ETF.
- Sector specific ETFs - if you have the viewpoint that the UK property sector may struggle you could trade the iShares UK Property UCITS ETF. And because it is a CFD, you can trade short, as well as long.
- Commodity specific ETFs - through ETF CFDs such as the SPDR S&P Metals & Mining ETF, you can gain exposure to the global metals and mining market, rather than attempting to find the right metal to trade, or the right mining company to invest in.
- Index specific ETFs - as we've discussed already, you could trade the S&P 500 Index ETF through the Vanguard S&P 500 ETF.
There are many more types of ETFs to choose from that cover bonds, currencies, new growth markets like biotech, artificial intelligence, and so on. However, one area that has always fascinated investors is in finding the best technology stocks, and technology ETFs to trade. After all, we all use technology in our daily lives, and companies are always breaking new ground with their innovations. So, let's have a look at the tech ETF sector in a bit more detail:
Understanding the Tech ETF Sector
Within the $24.6 trillion market cap of the S&P 500 Index, more than 25% of it is apportioned to technology stocks. This makes it the biggest group within the overall index. Traditionally, investors have stuck to the broader market indices like the S&P 500.
However, with changing markets and new products becoming available to investors and traders alike, traders can take advantage of movements within these niches. Let's take a look at some examples:
- If you invested $10,000 into the Vanguard 500 Index (which tracks the S&P 500) on 28 February 1997, 20 years later the value of the investment would have grown to $42,650.
- If you invested $10,000 into Apple on 02 January 1981, then that would have grown to $ 78,427,757.43 by 08 November 2019, providing an annual return of 25.94%.
- If you made a $1,000 investment when Amazon first started publicly trading on 16 May 1997, then by 08 November 2019 that would have grown to around $ 907,113.65, providing an annual return of 35.36%.
You can see why investors and traders alike are keen to find the best technology stocks and best technology ETFs to trade with. Of course, trying to find the next FANG stocks may take years, if not a lifetime (FANG stocks is a term coined by CNBC's Jim Cramer as an acronym for Facebook, Apple, Amazon, Netflix and Google).
However, while you can't trade a FANG ETF, or Facebook ETF, an Amazon ETF or a Google ETF, there are some options for those looking for exposure in a technology ETF. Let's take a look at some options available to invest in with Admiral Markets on the MetaTrader 5 (MT5) trading platform:
Investing in the Best Technology ETFs
There is a huge variety to choose from when trying to select the best technology ETF. Here are just a few to get you started:
Technology Select SPDR Fund ETF (#XLK)
This broad based technology ETF is one of the most popular ways to trade on the tech sector. It has seventy five stocks within it, including the heavyweights of the industry, such as Apple, Microsoft, and Facebook. However, with over 19 percent of the portfolio weighted towards Microsoft and over 17 percent of the portfolio weighted towards Apple, it may struggle when Microsoft's and/or Apple's stocks struggles. Here is a chart of how it has performed in recent years:
Source: Admiral Markets MetaTrader 5 MT5 - #XLK, Weekly - Data range: from 02 October 2016 to 13 November 2019 - Performed on 13 November 2019 at 1:49 PM GMT - Please Note: Past performance does not indicate future results, nor is it a reliable indicator of future performance.
This tech ETF actually spent much of 2015, and half of 2016 in a trading range, starting to take on bullish momentum in the second half of 2016 (ranges are a market condition in which prices are contained in between two price levels). In the chart above, you can see that its price has largely maintained the uptrend, with a downturn between August 2018 and November 2018.
The two lines featured on the chart above are moving average indicators.
They help to determine whether the market is trending or not. Essentially, they calculate a user defined amount of previous closing prices, to then find the 'average' price of that series. This is then plotted on a chart, such as the one above. The blue line is the 20 period simple moving average, and the red line is the 50 period simple moving average. In essence, these lines have plotted the average price over the past twenty and fifty bars.
However, what is most interesting to traders is that during the trending period when the moving averages are moving up in a smooth fashion, this indicates a strong trend that is going higher. During the sharper drop in Q4/2018, the cross of the blue line below the red one can be considered a first warning sign of the overall trend to end or at least that the trend is losing momentum.
This is just one type of useful trading indicator available on the MetaTrader 5 platform.
iShares PHLX Semiconductor ETF (#SOXX)
Source: Admiral Markets MetaTrader 5 MT5 - #SOXX, Weekly - Data range: from 26 February 2017 to 25 October 2018 - Performed on 25 October 2018 at 5:01 PM BST - Please Note: Past performance does not indicate future results, nor is it a reliable indicator of future performance.
Whilst the previous tech ETF covered a broad range of technology stocks, this ETF is much more specific. As the 'semiconductor' part of the title suggests, this ETF focuses on the hardware of all the other software and internet stocks. The ETF contains some of the biggest hardware companies in the sector such as Nvidia Corp and Intel Corp, among others.
Through the use of support and resistance levels, traders can determine that this particular ETF formed a symmetrical triangle formation across 2017 and 2018. This is a consolidation pattern which suggests neither buyers or sellers want to control this market, and that a breakout is imminent. In this particular instance, the market broke to the downside.
Are There Any Risks With ETFs?
There are always risks associated with investing. However, there are some specific risks associated with ETFs that are important to know.
- Market risk: ETFs are designed to follow a basket of securities, an index, a commodity asset, or even a derivatives contract (like oil futures for example). Therefore, you make profits in the good times, but also take a hit when it falls. As you can't change the structure of the ETF, when you are trading you have no choice but to follow the performance of what the ETF is doing, whether it is good or bad - that is, until you decide to close out of the investment.
- Too much choice: As ETFs keep on growing, so does the choice of what to invest in. For example, investing into a biotech ETF may sound simple. However, the difference between the best performing biotech ETF, and the worst performing biotech ETF, was more than 18% within a few years. This is because one ETF holds a company that is looking to cure cancer, and another ETF holds companies that provide the tools for the life sciences industry.
Index ETFs, such as the S&P 500 index ETF, are the most common forms of investment within the ETF industry. That's because they provide the highest liquidity, and is likely to be the best place to start when first investing.
Investing with just 1,000 EUR can make a meaningful difference in the long term. You have seen how gains could be accelerated by adding extra funds on a monthly basis, providing that your annual rate of return remains positive. Of course, the key to everything in terms of investing, is the rate of return. This is why many investors participate in the stock market - to try and get a better rate of return compared with what is offered in a normal bank savings account.
Investing in ETFs allows more diversification into different sectors and markets. For example you could find the best technology ETF, or you could go more specialised and find an ETF that focuses specifically on hardware, or cybersecurity. Invest.MT5 allows you to invest into stocks and ETFs from fifteen of the largest stock exchanges in the world. By using the MT5 platform, investors can access charts and indicators that are used for the technical analysis of different kinds of ETFs.
Admiral Markets' investing account enables traders access to extensive market coverage, FREE real-time market data, low transaction commissions, no account maintenance fees, and many more benefits. To open your Invest.MT5 account, click on the banner below!
About Admiral Markets
Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.