What are ETFs? All about Exchange Traded Funds

Exchange Traded Funds (ETFs) have been among the cheapest and most heavily traded investment instruments on financial markets for years. They offer private investors a cost-effective way to invest in a broad range of assets such as stocks, bonds or commodities. Most ETFs track an index, and since 2026 several providers in Switzerland have also listed active ETFs, which depart from that principle.

But what exactly is an ETF? How does it work and what do I need to consider when investing in ETFs? You don’t need to be a stock market expert to invest your money in ETFs. This article covers what you need to know on the subject.

The most important facts in brief

• As simply structured and transparent funds, ETFs are also suitable for beginners.
• Management costs for passive ETFs typically run under 0.2 percent per year, well below actively managed classic funds (source: extraetf.com, as of 2026).
• The SIX Swiss Exchange lists over 2,600 ETFs from more than 30 issuers (as of August 2026, source: SIX Swiss Exchange).
• Since 2026, several major providers have also offered active ETFs, which no longer simply track an index but actively manage it.
• As an exchange-traded security, ETFs can be bought and sold continuously during trading hours.

Video: What are ETFs? (YouTube)

ETF: Definition and explanation

ETF stands for Exchange Traded Fund. It is a fund that usually tracks a securities index as closely as possible (physically or synthetically) and tracks its performance. With these securities, investors have the easy opportunity to invest in numerous asset classes such as bonds, commodities and stocks.

Investors can use ETFs to invest in various country indices, for example from Switzerland, Germany, the USA or Japan. It is also possible to invest in regional indices that track the European or American stock market, for example. In addition, ETFs can be found that follow current investment trends such as sustainability, health or digitalization.

Comparison of classic funds with ETFs

ETFs can generally be traded on the stock exchange as well as over the counter. Since they are often linked to a given index, they are passive forms of investment that merely track the performance of their underlying. To put it another way: If the value of the index increases, the value of the ETF also increases. Today, however, there are also active ETFs that do not simply track an index but are actively managed (more on this further below).

As with a conventional fund, the investment in an ETF also represents segregated (ring-fenced) assets. Therefore, you are not affected by the insolvency of the provider.

However, there is a significant difference between a conventional investment fund and most ETFs. In contrast to ETFs, conventional investment funds try to achieve a higher performance than their reference index. This requires ongoing research and rebalancing of holdings within the fund as needed.

ETFs, on the other hand, usually just try to track the underlying index exactly, eliminating the need for costly management.

Rapid development

After the first ETFs hit the U.S. stock exchanges in 1993, trading in Europe followed in April 2000. Thereafter, the financial instrument developed rapidly. The first ETFs were offered in Switzerland that same year. Today, over 2,600 ETFs from more than 30 issuers are listed on the SIX Swiss Exchange (as of August 2026).

Advantages and disadvantages of exchange traded funds

ETFs offer the following advantages in particular:

• Low total expense ratio: ETFs have much lower costs compared to actively managed funds. You save the initial sales charge, ongoing management fees are lower, and transactions are usually less frequent.
• Flexibility and liquidity: ETFs are liquid investment products that can be bought and sold during stock exchange trading hours - just like stocks.
• Transparency: To see the composition of an ETF, it is usually enough to look at the relevant index.
• Security: As with classic funds, investments in an ETF are segregated (ring-fenced) assets.
• Diversification: As an investor, you do not have to buy every one of the 20 stocks in the Swiss stock index SMI, for example. Rather, with shares in an ETF targeting the SMI, you can gain exposure to all SMI stocks in a single transaction.

Invest in around 1,300 companies simultaneously with one ETF

ETFs make it easy for you to build a diversified portfolio where risk can be minimized by having a very broad market. When you buy an ETF on the global index MSCI World, you get access to around 1,300 companies around the world (as of September 2026, source: MSCI World Index Factsheet). ETFs thus allow investors to spread their capital across a wide range of investment targets, helping to achieve a good balance of opportunities and risks. They also always have a clear idea of what they are investing in: A quick glance at the current structure of the respective index is enough.

ETFs also have some disadvantages that potential investors should be aware of before choosing this form of investment. Among the disadvantages are:

• Lack of investment management: since ETFs are passively managed funds, there is no active intervention from fund managers. This can result in poorer performance results for the ETF compared to other actively managed funds. This can be particularly the case in highly volatile markets.
• No consideration of personal investment objectives: ETFs strictly follow an index. This means that you either invest in this index or not. Individualization of your investment is therefore ruled out for the part of your assets invested in ETFs.
• Limited counterparty risk with synthetic ETFs: With synthetic ETFs, you do not invest directly in the securities contained in the index. Instead, swaps (a contractual exchange of returns with a counterparty) are used to virtually replicate the index. However, this transaction involves counterparty risk, as it is dependent on the counterparties being able to meet the obligations they have entered into.

However, the risks for investors are limited by the European rules that regulate investment funds. Accordingly, the value of a swap may not exceed ten percent of the fund’s assets.

What are active ETFs and how do they differ from passive ETFs?

Active ETFs are funds that, like classic ETFs, are traded on the stock exchange. Unlike passive ETFs, their fund management does not track an index one to one but actively selects and weights holdings, with the aim of achieving a higher return. Whether this succeeds is not guaranteed.

Since 2026, several international fund providers have listed actively managed ETFs on the SIX Swiss Exchange for the first time. This changes little for trading at first: active ETFs can be bought and sold continuously during exchange trading hours, just like passive ETFs.

Costs: higher than passive ETFs, lower than classic funds

Active ETFs cost more than passive ETFs because the fund management must continuously carry out research and adjust positions. The average total expense ratio of active ETFs in Europe is around 0.37 percent, with a range of roughly 0.04 to 0.85 percent (source: extraetf.com, as of 2026). This puts them above passive ETFs, but often below classic actively managed funds, which can also carry an initial sales charge.

Transparency: daily insight into the portfolio

The key difference from classic actively managed funds lies in transparency: many active ETFs publish their portfolio composition daily, as is common for passive ETFs. Classic investment funds, by contrast, usually disclose their holdings only monthly or quarterly. Whether a specific active ETF offers this daily transparency depends on the provider and fund structure and should be checked in the prospectus before investing.

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ETF asset classes at a glance

Among traded ETF volumes, equity ETFs clearly dominate over bond ETFs. Many investors use them to supplement the equity share in their portfolio and broaden their portfolio further. In the case of commodities, the term ETC is used (Exchange Traded Commodity). These are often physically backed by the corresponding precious metals. Among ETCs, gold traditionally has the largest trading volume.

Within these categories, many equity ETFs track broad world indices such as the MSCI World (around 1,300 constituents) or regional indices such as the S&P 500 (500 largest U.S. exchange-traded companies). Bond ETFs often focus on global corporate bond indices or emerging-market government bond indices. These examples describe market structure and are not a recommendation for specific indices or products.

ETF Switzerland: the Swiss like to invest in companies in their home country

In addition to ETFs that track the MSCI World, the Swiss prefer to invest in ETFs that track the SMI and SMIM. The SMI (Swiss Market Index) is the most important stock index in Switzerland and includes the blue chips. The SMIM comprises 30 mid-cap stocks listed on the SIX Swiss Exchange. For Swiss investors, it is worthwhile to purchase ETFs on Swiss indices from a provider with a fund domicile in Switzerland, as these are tax-privileged compared to foreign providers.

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These segments can be invested in with ETFs

If you not only want to diversify broadly, but also prefer certain segments or regions, exchange traded funds offer you a wide selection for this purpose. In the table below you can see a selection of the main selection options.

Fees for ETFs

When you buy ETFs, you initially pay only the bank’s order fees, stamp duties and usually a small spread (difference between the buying and selling price). With actively managed classic funds, on the other hand, an issue surcharge of up to five percent can typically be incurred at this point.

Management costs for passive ETFs typically run under 0.2 percent per year (source: extraetf.com, as of 2026), also significantly lower than those of actively managed funds, where you usually have to expect at least one percent. Active ETFs fall in between at an average of around 0.37 percent (more on this in the active ETFs section above). You can read about the total expense ratio (TER) in the securities prospectus. However, the costs listed there do not include the transaction costs incurred by the fund when trading securities.

In addition to the total costs, there are the custody fees charged by your bank.

Investing with ETFs: Here’s what you should look out for

Below are some key points to look out for when deciding to invest in an ETF:

• Consider your own financial knowledge: For investors who have little in-depth knowledge in a particular area, it is often better to opt for broader indexes. These diversify your portfolio across many sectors and regions and help reduce risk. You should also make sure that the composition of the ETF fits the strategy you are trying to achieve. Some ETFs invest in small companies or emerging markets, while others follow a broader approach.
• Check if total expense ratio is within normal range: Generally, management costs for passive ETFs run under 0.2 percent per year. Active ETFs are usually higher due to active management (more on this in the active ETFs section above).
• ETF Volume: Fund volume is an indicator to determine whether an ETF is established in the market or not. A volume of around 100 million Swiss francs or more is often considered, in practice, the threshold for an economically viable ETF.
• ETF savings plans: Savings plans are not offered for all ETFs. However, they allow investors to easily make regular deposits in order to accumulate assets. Your return depends on market performance and may also turn out lower than with a conventional interest account, and the value of the assets may fluctuate in the meantime.
• Sustainability: In addition to actively managed funds, ETFs always allow you to invest according to ESG criteria.

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Investing in Exchange Traded Funds - Step by Step

Now that you have learned about the essential basics, your investment in ETFs can be implemented in just a few steps:

First step: Determine your investment strategy

After you have looked at the possible segments, decide on the investment strategy you want. So, for example, choose whether you want to invest in the stock market. Do you prefer global diversification or stocks of Swiss companies? Should certain sectors such as technology dominate or do you see higher opportunities in topics such as robotics?

The SIX Swiss Exchange offers over 2,600 ETFs that invest in various asset classes, markets and currencies, allowing you to implement your preferred investment strategy.

Second step: Choose an index

To get a feel for the performance of an ETF, it is best to look at the returns achieved by the index behind it. In doing so, you should look at as long a time period as possible.

Furthermore, an understanding of how the index is calculated and its composition is important. Often, stocks are weighted by their market value. If you buy an ETF on such an index, you must not lose sight of the associated cluster risk. For example, the three large corporations Nestlé, Novartis and Roche traditionally make up a substantial share of the SMI.

Third step: Select provider for ETF savings plan or one-off investment

Once you have decided on an investment strategy and a specific index, look for an ETF on the market that tracks this index. Also keep in mind that not all ETFs offer savings plans if you decide to invest regularly with a savings plan.

Fourth step: Compare tracking quality

For ETFs on a specific index, compare the return with the return of the index, as there can be differences of several percentage points. For the comparison to be realistic, the ETF and index must either both reinvest any income, such as dividends, or both distribute it (performance index vs. price index).

Fifth step: Compare total annual costs

The annual costs incurred by an ETF are indicated by the total expense ratio (TER). This ratio includes management fees as well as costs for advertising and distributing the ETF. You can find the TER in the ETF’s monthly report.

Sixth step: Consider taxes and transaction costs

When choosing an ETF, investors should always consider where the fund is domiciled. A poor fund domicile can result in a reduced return from a tax perspective, as withholding taxes can reduce returns.

There are fees associated with buying as well as selling an ETF, which are especially significant if you do a lot of buying and selling. If you intend to trade your ETFs more frequently, you should therefore pay attention to low spread costs (difference between buying and selling price).

Frequently asked questions (FAQ)

Which ETF categories are most heavily traded on the exchange?

Measured by trading volume, equity ETFs dominate, followed by bond ETFs. For commodities, the term ETC (Exchange Traded Commodity) is used; these are usually physically backed by the relevant precious metal, and among ETCs, gold traditionally has the largest volume. These figures describe market structure, not a recommendation for specific products.

What fees should I expect with ETFs?

Apart from the usual custody fees charged by your bank, there are only minor transaction costs when trading (small spread, the difference between buying and selling price). Management costs for passive ETFs typically run under 0.2 percent of fund assets per year, usually higher for active ETFs.

How are ETFs treated for tax purposes?

Income from ETFs (exchange traded funds), whether passively or actively managed, is taxed as income, and the assets invested in ETFs are subject to wealth tax. For income tax purposes, it makes no difference whether the ETF distributes or reinvests income. However, accumulating ETFs must report the accrued income separately, which is usually done for ETFs listed on the Swiss stock exchange. You can see which income from ETFs is taxed in the Swiss Federal Tax Administration’s official list of quoted securities (Kursliste).

What is meant by accumulating and what does distributing mean?

Distributing means that income is paid directly to the investor. Accumulating, on the other hand, means that income from a fund is not distributed to investors but reinvested in the fund.

What does direct or indirect replication mean?

A physical ETF (direct replication) replicates an index by actually buying the securities of the index it tracks and holding them in the fund. A synthetic ETF (indirect replication) uses various financial products (e.g. swaps) instead of actually purchased shares to replicate the performance of the index. This introduces an additional counterparty, usually the issuer’s parent bank, with whom a “swap” is agreed.

What is the difference between ETFs and index funds?

The fundamental difference between these product types is that ETFs are traded on the stock exchange and can therefore be bought and sold on a continuous basis. With index funds, on the other hand, buying and selling only takes place once a day via the fund provider.

What sets active ETFs apart from passive ETFs?

Passive ETFs track an index one to one. With active ETFs, a fund management team actively selects and weights holdings, deliberately deviating from the index with the aim of achieving a higher return. This comes at a higher cost than passive ETFs. Since 2026, several active ETFs have also been listed on the SIX Swiss Exchange.