All you need to know about ETFs

The abbreviation ETF stands for exchange traded fund. If you purchase an ETF, you're buying a share in a stock market index, such as the SMI, Dow Jones or DAX. ETFs try to replicate an index as closely as possible.

ETFs are securities that are traded like shares on a stock exchange and can therefore be bought or sold at any time during trading hours. Like the index, their price changes constantly during a trading day. If the index rises, the value of the ETF also increases. If the index falls, so does the value of the ETF.

However, there's a big difference between investment funds and ETFs. In contrast to ETFs, traditional investment funds attempt to achieve a higher return than their benchmark by buying and selling securities. This requires fund management companies, which continuously analyse the securities in the fund and reallocate securities where necessary.

Dozens of studies worldwide have proven that many actively managed funds don't manage to outperform their benchmark after the deduction of costs. Moreover, a VZ study shows that many Swiss equity funds are not as actively managed as they claim to be and therefore generate high costs unnecessarily.

By contrast, ETFs merely aim to replicate the underlying index one to one. As a result, they don't require expensive management. This leads to significantly lower fees than with conventional investment funds. ETFs are often also referred to as passive funds or passively managed funds.

Investors should be aware that ETF investments are fully exposed to the value fluctuations of the index. The return on an ETF therefore generally corresponds approximately to the index return minus the fees for the ETF. This means that it's crucial to choose the right index.

Every equity ETF passes on to investors the dividend payments it receives from the shares contained in the ETF. Distributing ETFs pay the dividend into investors' accounts, whereas accumulating ETFs reinvest them automatically.

The first ETFs were offered in Switzerland in the year 2000. Since then, the number of ETFs has shot up year after year. Today, around 1,900 products are listed on SIX Swiss Exchange. While ETFs initially only covered equity indices, other asset classes, such as bonds, commodities and real estate, have been added over time. There are now also many ETFs available that follow sustainable investment approaches and track specific ESG indices.

The success of ETFs has led to products coming onto the market that are more complex and often less transparent and much more expensive. They no longer bear any significant relation to the original idea of replicating an index on a one-to-one basis. For example, investors can use short ETFs to bet on falling markets or leverage ETFs to track a multiple of an index's daily return.

There are also an increasing number of ETFs that aim to outperform their benchmark index. As with active investment funds, however, there's an extremely high risk that active ETFs will fail to match the return on the index, partly due to the cost disadvantage. Because actively managed ETFs have higher fees than traditional ETFs. That's why most active ETFs and investment funds don't outperform the corresponding benchmark in the long term but rather underperform it.

The wide range and increasing complexity make it difficult for investors to choose the right ETF. It's advisable to invest only in products whose mechanisms you understand. Given the increasing availability of index funds for private investors, you should also check whether an ETF or an index fund is the better choice in your specific case. You can find out further down how index funds differ from ETFs.

ETFs are cheap, liquid and transparent, which means they're particularly suitable for long-term wealth accumulation.

Low costs

When you buy and sell an ETF on the stock exchange, you'll be charged standard bank fees in the same way as for shares. There is also a trading spread between the buying price and selling price. However, ETFs have no issue or redemption fees. Such fees can amount to up to 5% of the investment amount in the case of traditional investment funds.

Actively managed funds generally deduct recurring annual management fees of 1% to 2%. The average management fee for ETFs available on the SIX Swiss Exchange is much lower. ETFs on the theme of “developed region equities” have an average management fee of 0.22% (see table below). The cheapest ETF in this category actually has a total expense ratio (TER) of just 0.03%. ETFs tracking emerging market equities or commodities are more expensive, with average management fees of 0.37%.

Low costs are crucial for long-term investment success. For example, if you invest CHF 250,000 in actively managed funds that earn an annual return of 5% and deduct 1.2% for management, you can sell these funds for CHF 363,000 after ten years. If you invest in an ETF with the same return but with fees of only 0.2%, you'll earn around CHF 36,500 more over ten years. Over a 20-year period, ETFs are worth over CHF 110,000 more than active funds.

Very flexible and liquid

ETFs are liquid investment instruments, like shares. They can be bought and sold during exchange trading hours. Market makers guarantee binding bid and ask prices. Every ETF provider needs at least one market maker. Many ETF issuers even work with several market makers to ensure that their ETFs are even more liquid.

Very transparent

ETFs are transparent. Many ETF providers publish the composition of their portfolios on their websites every day. Traditional funds often only do this every six months because the fund managers want to keep the composition of their portfolios secret.

Very secure

Like traditional investment funds, ETFs are also subject to the Federal Act on Collective Investment Schemes (CISA). The CISA stipulates that investors are protected if an issuer of such collective assets becomes insolvent. ETF investors are therefore generally not exposed to counterparty risk. Synthetically replicated ETFs are an exception. They incur counterparty risk to a limited extent.

Well diversified at low costs

ETFs allow investors to diversify appropriately even with small investment amounts. For example, you don't have to buy all 20 securities in the Swiss equity market index SMI individually. Instead, you can use an ETF tracking the SMI to acquire shares in all SMI securities in one single transaction. This leads to significantly lower transaction costs.

Pension funds have long recognised the benefits of ETFs. Retail investors now also hold an ever-increasing proportion of their assets in such funds. However, research by VZ VermögensZentrum shows that banks remain very reluctant to recommend ETFs to their clients. It's not in banks' interests to do so, as they can charge their clients significantly higher fees for actively managed investment funds and structured products.

Many investors assume that all ETFs and index funds track their benchmark index exactly at all times. If this was correct, each fund's return would always correspond precisely to the index return. But that is not always the case. For example, the performance of the SMI differs from an ETF based on the SMI. The difference in returns can generally be explained by the fees for ETFs and index funds. Other possible reasons include the fund's domicile, which has an impact on tax aspects, and the way in which an ETF tracks the index.

There may be differences in returns of several percentage points per year between individual ETFs on a given index. A comparison of three ETFs on the SLI Total Return Index shows that the return on the best ETF in 2025 was 0.96 percentage points higher than that of the worst ETFs. In 2024, the difference was 0.92 percentage points, and in 2022 1 percentage point. The comparison also shows that in most cases the returns on ETFs may be significantly lower than those of the benchmark. ETF 3 missed the benchmark return in 2025 by 1.20 percentage points.

Dividend and interest income is subject to income tax in Switzerland, while invested assets are subject to wealth tax. This also applies to ETFs – regardless of whether the income is distributed or reinvested (accumulated). However, accumulating ETFs, which comprise the majority of ETFs listed in Switzerland, are required to report income separately. The taxable income from ETFs can be found in the Federal Tax Administration's price list ("Course listings").

Withholding taxes are also important for ETF investors. Income from ETFs on Swiss equities, for example, is subject to withholding tax of 35%. These ETFs therefore only pay out 65% of gross income from dividends to investors. Unlike foreign ETFs, ETFs domiciled in Switzerland may reclaim this withholding tax.

So if you're investing in Swiss assets, you should choose an ETF domiciled in Switzerland. This means that the return on foreign ETFs is around 1 percentage point per year less than that of Swiss ETFs, assuming a dividend payout of 3% on Swiss equities.

Many other countries also have a withholding tax on interest and dividends that is comparable to the Swiss withholding tax. It makes sense to favour certain fund domiciles and avoid others, depending on whether there's a tax agreement with that country or not. For example, investing in US equities via an ETF domiciled in Ireland is particularly attractive due to the dual taxation agreements in place.

The Swiss government levies stamp duty on the purchase or sale of an ETF, as with shares and bonds. This is particularly significant for investors who trade a lot. Stamp duty is 0.075% for funds domiciled in Switzerland and 0.15% for funds domiciled outside Switzerland.

More and more index funds are becoming available for private investors who wish to invest passively, in addition to ETFs. In recent years, fund providers have opened up numerous index funds to private investors that were previously reserved for institutional investors.

Both ETFs and index funds aim to replicate an index as accurately as possible. Moreover, there is hardly any difference between ETFs and index funds in terms of management fees. They are much lower for both product types than for active funds.

The main difference between ETFs and index funds lies in their stock exchange listing. ETFs are exchange-traded funds and can therefore be bought and sold at any time during trading hours. By contrast, index funds are not traded on an exchange. As with active investment funds, buying and selling is only possible once a day via the fund provider.

So if you want constant tradability, you're better off with an ETF. But if trading once a day is enough for you, you can also invest in an index fund. The range of ETFs on offer is much larger, but index funds are subject to a lower stamp duty than ETFs, depending on their domicile. And while ETFs can be replicated physically and synthetically, many index funds only allow physical replication of the index. The replication type indicates how a passive fund replicates the corresponding index.

You should take a systematic approach to find the right ETFs.

Step 1: Define your investment strategy

The most important factor for investment success is having the right investment strategy, which should be tailored to your risk capacity and risk appetite. It sets out the long-term allocation of investments across the various asset classes, such as shares, bonds, real estate and commodities.

Nowadays, you can implement an investment strategy with ETFs alone. SIX Swiss Exchange offers a choice of nearly 2,000 ETFs, which invest in a wide range of asset classes, markets and currencies, allowing investors to broadly diversify their assets.

Implementing an investment strategy exclusively with ETFs has various advantages: ETFs are cheap and can be traded daily, and the risk of a significant underperformance compared with the benchmark is virtually eliminated..

Step 2: Select an index

Investors should be aware that ETF investments are fully exposed to the value fluctuations of the index. This means that it's crucial to choose the right index.

To get an idea of an ETF's performance, you should look at the historical returns and price fluctuations of the underlying index. A relatively long time period should be considered, if possible.

It's also helpful to understand the calculation and composition of the index. Many indices weight securities according to their market capitalisation. Investors that opt for ETFs on such indices are incurring a cluster risk that they shouldn't underestimate. In the SMI and SPI, for example, the three heavyweights Nestlé, Novartis and Roche make up around 50% of the index.

Step 3: Check replication quality

Many investors assume that an ETF replicates its benchmark index one to one. This would mean that the ETF return would correspond to the benchmark return. But that is not the case. There can be differences in returns of several percentage points per year between individual ETFs on a given index.

To gauge the replication quality of an ETF, it's worth comparing its return with that of the index. If there's a large difference, it's best to exercise caution. In the case of equity ETFs, you should also check that both the ETF and its index reinvest the dividends or that both refrain from reinvesting the dividends.

Step 4: Select replication type

"Replication type" refers to the way in which an ETF replicates an index. A basic distinction is made between physical replication and synthetic replication. In the case of physical replication, the ETF invests in the securities included in the index.

Synthetic replication works via financial derivatives. It's more complicated and less transparent than physical index replication. Yet certain markets can only be replicated using synthetic replication, especially if the index components are only tradable to a limited extent.

The risks arising from physically replicating ETFs are often considered to be lower. Under certain circumstances, however, synthetic replication can make perfect sense. The appropriate type of replication must therefore be assessed on a case-by-case basis.

Step 5: Compare costs

You can get an idea of the annual costs payable for an ETF by looking at the total expense ratio (TER). In addition to the management fees, it also includes the costs for advertising and distributing the product. A low TER doesn't necessarily lead to a higher return. Partly because the TER does not include all the cost components of an ETF. And partly because the return is also influenced by the type of replication.

Ultimately, it's not possible for investors to gain a definitive overview of the various cost components of ETFs. But that's not absolutely necessary. What matters for investors is the difference between the historical ETF return and the index return. This difference includes all costs.

Step 6: Optimise taxes and trading costs

When selecting an ETF, investors should always consider the fund's domicile. An unfavourably selected fund domicile can have a negative impact on the planned ETF investment from a tax perspective, because withholding taxes may dent the return.

When you buy and sell ETFs, you need to pay standard bank fees, stamp duty and stock exchange fees. Additionally, you should have a closer look at 'the buying and selling prices of ETFs. There's usually a difference between the buying price (bid price) and the selling price (ask price). This difference is known as the spread.

In particular, investors who only want to hold an ETF for a short time should look for a low bid-ask spread. As a rule of thumb, investors should carry out their transactions in the middle of the trading day, as spreads are often larger at the beginning and end of the day. ETFs are traded on SIX Swiss Exchange from Monday to Friday between 9.15 a.m. and 5.15 p.m.

When buying or selling an ETF, it's also important to check that the securities contained in the ETF are being traded at the time of the transaction. For example, if you want to buy US equity market ETFs on the Swiss stock exchange, you should do so when the US stock exchanges are open. Otherwise, you can expect spreads to be larger.

Step 7: Find the right ETF with the ETF Compass

There are around 2,000 ETFs on SIX Swiss Exchange alone. For many investors, it has become difficult to maintain an overview. That's why VZ VermögensZentrum has created the ETF Compass. You can filter by asset class, region, benchmark and VZ rating quickly and free of charge with the ETF Compass in order to find the best ETFs for your needs.

Would you like to grow your assets cost-effectively with ETFs? VZ will provide you with professional support in choosing the right ETFs. It will also select the best ETFs on SIX Swiss Exchange for you. With VZ as your partner, you can be sure that all securities are analysed and valued free of vested interests.

Saving and investing with ETFs
Asset management with index investments