Physical, synthetic, distributing or reinvesting?
Index funds follow different ways of replicating a stock index. However, the distinction is not only between the construction methods, but also how the company profits are handled. This means that before making a distinction in favour of an ETF, it is advisable to look into the different options.
If the securities in the index are replicated, we are talking about the physically replicating ETF. This is particularly popular because it follows a model that is both comprehensible and transparent. The investor knows which securities have just been invested in and can see from the index how they are then performing.
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Of course, there is also the possibility that not all shares are actually purchased, but only an optimised selection is bought – in this case one speaks of optimised sampling.
Here, the ETF provider does not buy the shares individually, but has the performance guaranteed by the bank. In return, the ETF provider gives the investor a basket of shares. A swap that can ultimately be particularly favourable and promising for both sides.
Distributing ETFsIf the company makes a profit, then there is a distribution to the shareholder – this is called a dividend. If there are shares in the fund, the dividends are put into the fund first.
The fund can then transfer the distributions to the investors in bundles – this leads to a reduction in value in the fund. However, the investor can use the dividends to invest in other products, for example, or use the money for private projects (holidays, new furniture and the like).
However, the dividends do not have to be paid out to the investors, but can actually be credited to the fund assets. This is called an accumulating ETF – i.e. the profits are reinvested.
This is particularly interesting for investors who have an investment horizon of several years. Because ultimately you profit from the positive performance. This means that a similar effect occurs here, reminiscent of the compound interest effect.
Complicated letter sequences or easy-to-understand abbreviations?
For beginners, the ETF names can seem relatively complicated, but the letter sequences do make sense when you take a closer look. The name of the ETF is made up of the abbreviation of the respective stock index that is being tracked, as well as the name of the fund company that launches the ETF.
At this point, reference can be made to the “iShares MSCI ACWI”: This is an ETF sold by iShares, the Blackrock subsidiary.
The abbreviation MSCI stands for “Morgan Stanley Capital International”, a company that publishes various stock indices as a financial services provider.
For example, the “All Country World Index”: ACWI.