7 ETF strategies and only 3 that really work

You're squatting in front of your computer. With each successive line you read, another question mark joins the others already hanging over your head. Your search for an ETF strategy that is successful and that you feel comfortable with has been in vain.

Here comes your redemption. Your question marks dissolve, your mind becomes clearer and you can make decisions. Because I'm listing the most popular ETF strategies for you. You'll find an ETF strategy that fits you and your lifestyle.

Hopefully.

If not, email me your phone number. I'll give you a call. I'll turn your floating question marks into glowing "aha" moments.

Buy and Hold with ETF

Buy and Hold is the simplest ETF strategy. Because it is simple, it is also very popular.

Here's how it works:

  1. Choose an ETF.

  2. Make a one-time payment or pay in every month (ETF savings plan strategy).

  3. Wait and see (long term / min. 30 years)

  4. Great that it's easy. Is it also profitable?

It depends.

If, you hit the right timing for a single payment, this is a very profitable strategy. With the ETF Savings Plan strategy, the start date is not so crucial, because your investments are subject to the Cost Average Effect.

What does this mean?

You buy ETF shares every month for e.g. 250 ā‚¬. This way you achieve an averaged entry price of all investments, which makes timing less important.

In summary.

The risks and rewards of a one-time investment depend very much on when you enter.

It is not only easy, but also cost effective:

  • One-time transaction costs (one-time payment)

  • Transaction costs with each purchase (ETF savings plan strategy)

  • Ongoing costs of most ETFs are between 0.07 and 0.3% per year

  • Only the direct purchase of individual shares is cheaper, because there are no ongoing costs.

The transparency is also worth mentioning.

You can view all individual positions of the ETF on the provider's website.

Tip:

When selecting an ETF, make sure that it physically tracks or replicate the index. A synthetic mapping can be very risky in a crash, because certificates are used to map the value and not directly the shares of the companies.

Pros:

Cons:

Simple and can be implemented by anyone without much time investment.

You had to choose the right ETF.

Long-term positive performance.

You have to know/meet the right time to enter the market.

Low transaction costs for one-time investment.

Patience and perseverance are necessary.

Lower risk than trading with shares or CFDs.

Only a few savings plans without transaction fees.

70/30 Portfolio as ETF strategy

The 70/30 ETF portfolio is the second best known ETF strategy. The idea is to invest in the equity companies of the "entire world". This includes the MSCI World ETF (70%) and the MSCI Emerging Markets ETF (30%).

With the MSCI World, you're investing in developed markets, and with the MSCI World Emerging Markets, you're investing in emerging markets. The combination can cover about 85% of the global equity market.

Does that really make sense?

No.

The "whole world" is not the portfolio with the best appreciation, or the lowest risk. There is no higher security by spreading the capital over many countries.

You want to compare the performance of all major indices?

Then have a look at the interactive chart. At the top you can enter your starting capital and the starting year.

You will see that the MSCI World has a similar performance as the S&P 500 index.

Does that surprise you?

It did to me. The reason is that as of October 2022, more than 70% of the MSCI World is made up of U.S. companies. Unlike as recently in March 2010: There the share of US companies was 42%.

The performance of the MSCI Emerging Markets is almost horizontal and significantly worse than all.

Timing the market vs. Buy and hold

The MSCI World contains approximately 1,600 shares and the MSCI World Emerging Markets approximately 1,400 shares. In addition, the country breakdown and weighting of the companies are constantly adjusted.

Is that manageable?

For me, no.

There are many companies. Restructuring is also taking place. I've long since lost track of it all. The bottom line is that it's enormously opaque.

Is there anything positive left?

Yes.

It costs almost nothing:

  • Current costs of most ETFs are between 0.07 and 0.3% per year

  • Transaction fees when switching (buying or selling) the individual positions are incurred

  • Only the direct purchase of individual shares is cheaper, because there are no ongoing costs.

The same costs await you with a buy and hold strategy, which promises more, at least when you start right.

Pros:

Cons:

Simple and can be implemented by anyone without much time investment.

There are clearly better strategies for the same effort.

Long-term positive performance.

Diversification does not yield better performance than S&P 500 Index ETF.

Low transaction costs for one-time investment.

No lower return of capital in crises than S&P 500 Index ETF.

Lack of transparency due to a total of approx. 3000 stocks in the ETFs.

ETF core satellite portfolio

The core satellite approach is based on a core investment (approx. 75%) and smaller investment (approx. 25%). Often there are 4 or more smaller investments (satellites). This is to diversify and increase the return.

In most cases a MSCI World ETF is recommended as core satellite. The main investment is thus in 70% US companies and the other 30% in other industrialized countries.

Is this an above-average strategy?

No.

Over the past years and decades, this has not been one of the best investments.

You can probably guess why that was.

The MSCI World is in play. That means lots of stocks (1,600) and constant adjustments in the breakdown of countries and weighting of companies. It's an index giant that's hard to figure out.

And the small investments?

Right. Those come on top. These can also be ETFs with several hundred stocks. So it becomes more unmanageable and opaque.

But it costs very little:

Current costs of most ETFs are between 0.07 and 0.3% per year.

Transaction fees when switching (buying or selling) individual positions are incurred.

Only the direct purchase of individual shares is cheaper, because there are no ongoing costs.

Pros:

Cons:

Positive performance over the long term

More complex, because in addition to the main investment, the 4 smaller investments must also be determined and bought or sold at the right time.

Low transaction costs for one-time investment

The goal of the satellites is to achieve a better increase in value than the main investment. This is ambitious.

Transparency is given depending on the choice of financial products

Higher time investment necessary.

Does your investment decision follow a strategy or rather your emotions?

Trend following strategy

The idea of a trend following strategy is to identify a trend early and then invest. As soon as the trend ends, the investment is reallocated or held in cash. This way you achieve a better performance than the benchmark market - provided you recognize the trend.

Hold cash or be invested?

You answer this question with a trend analysis.

The advantage is that you lose less money. At the same time, you are at a disadvantage if you hold your cash even though the market is rising. Then there is no profit.

You think this is complicated?

It isn't.

You can make it very simple for yourself.

One of the simplest methods is to use a moving average, such as the Simple Moving Average (SMA). If the price rises above the SMA 200 line, there is a rising trend. If the price falls below it, the trend changes to falling.

So nice, so good.

Not quite.

For optimal success I recommend further steps:

  1. Fundamental analysis of the market (COT data, sentiment, volume, divergences).

  2. Timing indicators (momentum, trend analysis, seasonality, advanced decline line).

  3. Clear and simple rules for entry.

  4. Clear and simple rules for the exit.

By following these steps you will recognize an upcoming crash earlier and secure more capital. Likewise, you enter a rising trend earlier and leave less performance behind.

With a robust and well thought out trend following strategy, you will outperform the overall market significantly over a few years. Your financial goals will come closer much faster.

You don't believe that?

It works. Thanks to the compound interest effect. It works wonders. šŸ˜Š

You are interested?

Stock market indicators are often multi-level systems to identify the trend. They take the analysis work off your hands and help you decide whether to hold your cash or invest.

Again, the costs are minimal:

ongoing charges of most ETFs: between 0.07 and 0.3% per year

Transaction fees when switching (buying or selling) individual positions

Only buy and hold strategy or direct purchase of individual stocks is cheaper.

Transparency depends on the ETF purchased. I recommend an index ETF on the S&P 500 (500 stocks) or the Nasdaq 100 (100 stocks). Both are reasonably manageable for me.

Pros:

Cons:

Easy and without much time expenditure for everyone to implement with a stock market traffic light.

More time consuming than buy and hold strategy.

Significantly lower return on capital than the benchmark index.

Somewhat more complex strategy.

Significantly better performance than the benchmark index.

Implementation of trading signals or independent development and implementation of entry and exit rules necessary.

Low transaction costs.

Transparency is given.

Actively managed funds in the ETF portfolio

In an actively managed fund, the fund manager decides when to invest in which asset classes and how much cash to hold. The investor chooses his risk profile depending on the investment strategy.

This way of investing is an alternative to a passive ETF strategy or an ETF strategy where you implement the orders yourself. It was the most widely used type of investment next to stocks before ETFs existed.

Does it do anything for you?

Studies show that there are few actively managed funds that consistently outperform the benchmark market. So it's more of a grab bag than a safe bank.

And for a grab bag, the costs are high:

  • Management fees.

  • Issue surcharges (usually 5%).

  • Ongoing costs (around 1.5 - 2.5 %).

So the fund manager has to work out some costs to beat the performance of the benchmark market.

Things also look less rosy in terms of transparency. Most fund managers don't let you look directly into their cards about what exactly is currently held in the fund. You'd best bring a lot of trust.

On many websites you can compare several selected funds in the chart. Be sure to check out the comparison to the S&P 500 Index or NASDAQ 100 Index from the USA.

Pros:

Cons:

Individual risk profile can be selected (however, this is subjective).

High fee structure, usually at the expense of performance.

Active action by the fund manager can ideally lead to better performance than the benchmark market.

Fund managers can make mistakes that cost performance.

If prices fall, fund managers may be able to mitigate losses by rebalancing.

Lack of transparency.

No expense, as fund managers manage securities.

Questionable whether an actively managed fund beats the benchmark market.

Wikifolio - the low-cost, actively managed ETF portfolio

You find the idea of an actively managed fund attractive, but don't want to pay such high management fees, front-end loads and ongoing costs?

I can understand that.

Here's the alternative: a Wikifolio investment.

There are now many well-educated private investors - I am also one of them šŸ˜‰ - who actively manage their portfolio and are thus better than the comparison market.

Sound good to you?

Then go on.

With a successful Wikifolio you have an actively managed portfolio at minimal cost. The best you have yourself, nothing else to worry about. And even better: The chance of a higher performance than the benchmark index (S&P 500 or Nasdaq) is definitely given.

A basic requirement for your satisfaction is that you trust your Wikifolio manager. Because he controls your money with his trading.

And the costs?

Compared to actively managed funds, the costs are transparent and low:

- 0.95% management fee per year

- A performance fee between 5% and 30% (selectable by the wikifolio manager), which only applies to profits.

If there is no profit, the Wikifolio manager earns nothing. That means you are in the same boat as the Wikifolio Manager! šŸ˜Š

Tip:

At the online broker JustTrade* you can trade all Wikifolios for 0 ā‚¬ order costs (free of charge).

Under each wikifolio you can see all individual positions. This gives you the possibility of maximum transparency. However, as with actively managed funds, you have to trust the wikifolio manager to make the right decisions at the right time.

Pros:

Cons:

No effort, as Wikifolio managers take over the management of securities.

Slightly higher costs than if you manage everything yourself.

Smaller capital decline than the benchmark index possible.

Wikifolio managers can make mistakes that cost performance.

Significantly better performance than the benchmark index possible.

Low management costs.

Transparency is given.

Strategies with specially issued strategy ETFs

There are also investment strategies that are directly integrated into an ETF. This is then no longer an index ETF, but a strategy ETF. Here, the investment strategy is automatically mapped within an ETF. Examples can be found in the test report (https://www.test.de/Faktor-ETF-6-Anlagestrategien-die-Sie-kennen-sollten-5880721-0/) of Stiftung Warentest. The following strategies are presented there:

  • Value Strategy

  • Small Caps

  • Momentum Strategy

  • Dividend Strategy

  • Low Volatility Strategy

  • Quality Strategy

Where is the performance highest?

According to the test report, the Momentum strategy has the best performance. However, this strategy is also the one with the highest risk, since Momentum stocks also drop significantly more in a crash than the MSCI World. In the Corona Crash, Momentum stocks lost almost -50% of their capital, while the MSCI World lost -34%.

Also popular with investors is the dividend strategy. However, I can't recommend a dividend ETF here because all the strategies are too static.

How high is the risk?

In terms of risk, all strategies have one thing in common: they have a similar capital decline as the benchmark index (MSCI World). Thus, none of the strategies protects your money from a crash.

All strategies are based on a calculation model that has been optimized for the past. It does not necessarily mean that this model will work in the future.

In addition, there are higher costs than with index ETFs:

- Ongoing costs between 0.3% to 0.5% per year (compare to ongoing costs for index ETFs of less than 0.1% per year).

How transparent is the whole thing?

It isn't.

For me it is not comprehensible according to which concrete data the stocks are exchanged and in which stocks are currently invested. As with any active strategy, you need trust in the manager or the ETF company.

After all, the long term performance looks like beating the MSCI World as a benchmark even in the future.

Summary

You sit with your back straight in front of your screen. Your eyes are open and clear. Because you now know which ETF strategies are available for your investment. You are able to assess which strategy suits you.

To sum up.

You value transparency, then choose simple and manageable ETFs, as well as a transparent strategy: buy and hold or trend following strategy.

You value low risk and would rather not be invested in the stock market in a crash? Then check out the inloopo ETF strategy with free stock market indicator or my Wikifolio.

You want to invest in the whole world, then check out the 70/30 strategy.

You're strolling through the streets. Whistling happily. Carefree. Buying something here and there. In the afternoon you drive to the beach and hold your feet, into the cold clear sea. No, it's not Sunday. You retired early and spend a few weeks in a warm country. Because in Germany your feet are freezing, even with thick wool socks and winter boots.

How did you manage that?

You took precautions. With a successful ETF strategy.

What is the best ETF strategy?

Difficult to say. But for me only buy and hold, trend following strategy and possibly a strategy ETF belong to the most profitable. If you put a lot of effort and time into the Core Sattelite strategy yourself, it can also be more successful than average.

What do you do next?

Study your favorite ETF strategy more intensively. Then open a brokerage account and get started. Be sure to consider whether the right time to invest is crucial for your strategy.

You are still unsure?

Then start and invest only a small amount of money to gain confidence. Or send me your phone number by e-mail. I will call you.

Word of honor.

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