One of the most popular ways to invest is to purchase so-called Exchange-Traded Funds, or short, ETFs. The concept is simple and quickly explained. It is basically a similar structure to a regular fund, where stocks of companies are being purchased into the fund and then being sold to potential investors as one product. The integrated mechanism is passive, which means that the fund is not being actively managed by any fund manager. Instead, it simply follows the share price of each stock within the fund.
This specific structure is great because it can keep the management fees of the ETF extremely low, while at the same time offering investors a wide diversification across several stocks at the same time. It is also a fact that most ETFs perform similarly or even better than most managed funds with the same investment scope.
I am invested in two ETFs. One is following the German MDAX Index. This ETF is not paying any dividends, but re-investing all profits immediately as they come up back into the ETF.
The other one is focused on European high dividend stocks within the EURO STOXX Index. This ETF is paying out dividends.
ETFs are a great way to DRIP
My previous article was about dividend reinvestment programs or DRIPs. As I mentioned, while it is very common in the US, it is not something European banks would offer to their customers. For my part, I am therefore usually collecting my dividends until I reach a critical sum of approximately 1.000 Euros and would then buy some new stocks/shares with it.
However, for people who just started to invest this may not be an option. If you only receive 10 or 20 Euros in dividends each month, then collecting a thousand Euros seems far off. Small investments of 10-20 Euro or even a hundred Euros may make little sense as the transaction costs for buying the shares will be too high and drag down (meaning it will increase) your average purchasing price per share.
Setting up an ETF-savings plan is a great way to solve this problem. ETF saving plans can be set up starting from as little as 25 Euros per transaction, and you can schedule it to be on a monthly, 2-monthly, quarterly or semi-annual basis. So even if you receive only 10 Euros a month, you can simply set up a savings plan on a quarterly payment basis and you will have effectively a DRIP in place.
If you prefer to set up a DRIP which will increase your dividend flow, then make sure to choose an ETF that is paying out dividends.
Creative thinking with investments
There are many methods and products in the world of finance that we can utilize to effectively set up our investments, to improve our income and ultimately to prepare ourselves for a bright future. Luckily, all we need to do is just a little bit of reading, an online banking account, and as little as 25 Euros to get started.
Investing in ETFs is a great way to diversify your portfolio, to DRIP and to build wealth in the long-run. So why not just start with it today?