Everything you should know about ETFs

ETFs are the tools that help us achieve financial freedom. It can be said that ETFs are the ultimate weapon for non-professional investors. But what is an ETF? Where to buy an ETF? How many types of ETFs are there? … are things that many investors, both professional and non-professional, are very interested in.

This article will introduce everything about ETFs, things you should know to be able to implement effective investment activities in the stock market.

1. Forms of investment in the stock market

There are many investment methods in the stock market, which are mainly divided into two main methods: self-investment and having others invest .

In the self-investment method, we have the following specific strategies: dividend investing strategy, growth investing strategy and value investing strategy.

Almost all of the strategies listed above are very complex, requiring us to have a lot of analytical knowledge in many different factors. Even professionals, they graduated from the top business schools in the world, they work in the financial field every day, they can still make wrong decisions as usual, let alone novices like us.

So the question here is for beginners like us, when we do not yet understand the analysis techniques, do not have much information and experience in the fields currently on the market, how can we make investment decisions on our own?

This question has led us to a completely different investment direction, tentatively called the strategy of asking others to invest for us . It sounds funny, because of your own money, you ask others to invest. But both in theory and in practice, it has been proven that this is one of the most effective strategies among the investment strategies currently available on the market.

In the method of asking others to invest, we have two main strategies, which are active investing strategy and passive investing strategy.

1.1. Active Investing Strategy

Suppose you have some capital, but you do not have the knowledge or time to invest. As for me, I am a professional investor, winning wherever I go. Because I see the successful results of my investments and in addition, I also spend a lot of time researching information from here and there, analyzing companies and markets, so I see that my investments are quite certain.

From my perspective, I see the needs of many of you, so I decided to set up a fund for you to send money to me to invest, then I will take this money to invest (of course I will commit to only using it for investment and not for food or drink).

I will use the fund, combined with my knowledge and experience to allocate this fund into reasonable investments, decide which stocks to buy, which stocks to sell. I have to calculate how much % I will divide for Growth investing, how much % for Value investing and how much % for Dividend investing.

The ultimate goal is that I will do everything I can to bring you a higher return than the market. That is also the ultimate goal of these funds, which is to try to beat the market and achieve the return that the fund expects .

The two most common types of actively managed funds are Mutual Funds and Hedge Funds .

1.2. Passive Investing Strategy

1.2.1. Index Fund

Similar to the active investment strategy, I also collect money from many people, establish a fund and then invest it, but in this case, I follow a passive investment strategy .

We have learned about how to group companies and the concept of indexes . In Vietnam, we have popular indexes such as VN 30, VN 50, VN 100. In the US, there is S&P 500 and in Australia, there is ASX 200.

For active investment strategy, people will try to be selective, buy and sell at different times with different types of stocks to seek profit, the purpose is to achieve a growth rate higher than the market growth rate.

As for the passive investment strategy, I will try to follow the growth rate of a certain index as closely as possible, with the ultimate goal of having a growth rate closest to the market growth rate (ie instead of trying to beat the market like the active investment strategy, I will try to follow the market as closely as possible).

So how can they invest to follow the Index? That is, I will buy all the companies in that index, and if any company falls out of that index, I will sell all the stocks of that company and buy stocks of the new company that enters the index.

For example, with the VN 30 index, I will buy shares of all 30 companies, and if the 30th company falls out of the VN 30 list for some reason, I will sell all shares of this company, and at the same time buy shares of the new company that just entered the VN 30 to replace the company that just fell out.

And the fund used for index investment strategy , with this passive investment form is called Index Fund .

However, to be eligible to participate in this Index Fund  , you must have a few minimum requirements:

• There is a minimum investment limit : that is, the funds will have requirements for the minimum investment level that you must have to participate in the fund, and often this investment level is quite high.
• There is a minimum investment period: entering the fund will be quite simple, but leaving the fund will be very complicated, requiring a lot of procedures and paperwork. This is also understandable, for example, you give me money to invest, only one month, the investment has not shown results, you turn around and ask me to return the money, it will be very difficult for me, right?

Information about an Index Fund is publicly available on the website of the company that manages the Index Fund, in this case Vanguard, and the Index Fund tracks the S&P 500 indices, and the minimum investment to enter the fund is $3,000, which is quite a large number.

1.2.2. Exchange Traded Fund (ETF)

If you want to participate in an Index Fund, you must have a minimum capital, and exiting the fund is also quite complicated. For small individual investors, or new investors, there is not much capital to participate in an Index Fund.

From the characteristics / requirements of the Index Fund as above, people have created another type of fund, which is the exchange-traded fund (ETF) . In essence, ETF is almost identical to Index Fund, the only basic difference is that ETF is like a stock code.

That is, with Index Fund, you have to register an account with the company that manages those Index Funds and transfer money to the company so that the company can transfer it to the Index Fund for you. As for ETF, it is listed directly on the stock market, you just need to open a securities account and participate in buying and selling these ETF codes on the stock market.

We can easily imagine that when we bring Index Fund to IPO, Index Fund will be listed on the stock market with the stock code ETF. Creating ETF will be suitable for small investors who want to invest with small capital and with simple procedures, because buying ETF on the stock market will be easier than making a profile to participate in Index Fund.

The difference between Index Fund and ETF is briefly described as follows:

Compare Vanguard Index Funds and ETFs that track S&P 500 indices

Like Index Fund, when you buy an ETF that tracks the VN 30 index on the stock market, it also means that you own shares of all 30 companies with the largest capitalization value on the stock market. And the nature of ETFs as well as Index Funds has been proven that in the long term, the growth rate of ETFs will always increase, leading to an increase in the profit margin .

2. Structure of an ETF

2.1. Benchmark Index and Stock Basket

Benchmark Index is the index used as a reference for ETFs. The securities in the Benchmark Index basket act as raw materials for ETFs to build their stock portfolios.

Benchmark Index can be an index available on the market created by the stock exchange itself (for example VN30 Index by HOSE) or established by index building companies (for example FTSE Vietnam Index by FTSE Russell).

Typically, ETFs invest in the proportion and composition of stocks that make up the Benchmark Index. The fund’s portfolio will closely follow the return rate of the Benchmark Index. This portfolio is called a Stock Basket, which is the minimum investment an investor can put into an ETF.

It can be said that Benchmark Index is one of the first criteria that helps investors approach the fund’s investment methods and strategies, from which investors can compare and choose ETFs that suit their personality.

2.2. Review Dates

As the market moves, some stocks will perform well and become important stocks, while others will deteriorate. To reflect these changes, the Benchmark Index will re-evaluate the constituent stocks according to its set of criteria. This re-evaluation period can be once a quarter or once every six months.

When the Benchmark Index has a new list of stocks after the portfolio rotation, the ETFs must also buy and sell to restructure the list of stocks to closely follow the Benchmark Index.

Some notable timelines for the portfolio turnaround:

• Data cut-off date: is the date when the Benchmark Index closes the data of the stocks and uses this data to calculate and add or remove the component stocks. For example, for the Benchmark Index which is structured once a quarter, this will be the last trading day of the quarter.
• Index release date: is the date on which the Benchmark Index management organization announces the constituent stocks and their weightings in the index. The index release date is usually within the week following the data cut-off date.
• Portfolio turnaround time: this is the time from the date of portfolio announcement to the effective date. At this time, ETFs will have to trade to bring the stock structure back to the new structure that has just been announced. This period usually lasts one to two weeks.
• Effective Date: is the date the new Benchmark Index is officially used. This is the day the ETFs trade immediately after the portfolio rotation period.

During the period 2011 – 2014, the liquidity and scale of the Vietnamese stock market were still quite low compared to the present time, each time the portfolio of foreign ETFs was rotated, it strongly affected the market and investors’ emotions. Currently, the influence of foreign ETFs is no longer as strong as before when domestic funds gradually played an important role (the first domestic ETF was born in 2014 – ETF VFMVN30).

2.3. ETF certificate trading

There are two ways for investors to trade fund certificates: buy directly at the fund (primary market) or buy indirectly through the exchange (secondary market).

Foreign ETF certificates are currently listed and traded abroad. This helps foreign investors who want to invest in the Vietnamese stock market to easily access them through buying and selling fund certificates from the exchange in the host country.

Another approach is for investors to buy or sell directly to the fund. However, if buying and selling directly to the fund, the minimum requirement for each transaction is one lot of fund certificates (equivalent to a portfolio of underlying securities).

3. ETFs in the Vietnamese market and criteria for choosing ETFs

If we only have Vietnamese nationality, we cannot buy securities in foreign markets, so in this section I will introduce some ETFs in the Vietnamese market for your reference. Here are some criteria for choosing ETFs in Vietnam:

ETFs and management fees (%) of funds issued by fund management companies in Vietnam

3.1. Criterion 1: Size and reputation of the fund management company

There are currently 4 fund management companies with ETFs listed on the stock market:

• Dragon Capital
• Vina Capital
• SSIAM
• Mirae Asset

3.1.1. Dragon Capital Vietnam Fund Management Joint Stock Company (DCVFM)

DCVFM was established based on comprehensive cooperation between two leading financial institutions in Vietnam, Dragon Capital and Vietnam Investment Fund Management Joint Stock Company. Preliminary information about DCVFM is as follows:

• Total assets: Nearly 943 billion (According to financial report of the 4th quarter of 2021 )
• Established in 1994, it has been accompanying and developing with the Vietnamese economy for more than 26 years. This is also one of the fund management companies with the longest history of operation in the Vietnamese capital market.
• Investment segments: DCVFM is offering customers a variety of investment products, from open-end funds (DCIP Fund, DCDS Fund, DCBC Fund), ETF funds (VFMVN30 ETF Fund, VFMVN DIAMOND ETF Fund), Pension funds, periodic investment programs and portfolio management services.

3.1.2. VinaCapital Fund Management Company (VCFM)

VCFM is a 100% owned member of VinaCapital Group, one of the largest investment and asset management groups in Vietnam. Preliminary information about VCFM is as follows:

• Total assets: More than 264 billion (According to financial report of the 4th quarter of 2021 )
• Year of establishment: 2012
• Investment segments: VCFM is providing portfolio management and consulting services, potential open-end fund investment products to serve different investment needs of customers. Some open-end funds such as: VEOF, VFF, VIBF, ETF VinaCapital VN100.

3.1.3. SSI Fund Management Company Limited (SSIAM)

SSIAM is a one-member limited liability company 100% owned by SSI Securities Corporation, one of the leading securities companies in Vietnam, providing fund management and portfolio management services to individual and institutional clients to preserve and increase the value of their assets. Preliminary information about SSIAM is as follows:

• Total assets: Nearly 220 billion (According to financial report of the 4th quarter of 2021 )
• Year of establishment: 2007
• Investment segments: SSIAM provides diversified fund management and portfolio management services
  to domestic and foreign individual and institutional investors. The company currently has 3 ETFs listed on the market: SSIAM VN30, SSIAM VNFIN LEAD and SSIAM VNX50 ETF

3.1.4. Mirae Asset Fund Management Company Limited (Vietnam)

Mirae Asset Fund Management (Vietnam) Co., Ltd. is 100% owned by Mirae Asset Global Investment Co., Ltd., a pioneer in the Korean financial services industry. Preliminary information about Mirae Asset VN is as follows:

• Total assets: More than 76 billion (According to financial report of the 4th quarter of 2021 )
• Year of establishment: 2018
• Investment segments: Securities investment fund management, securities investment portfolio management and securities investment consulting. The company currently has open-end funds MAGEF, MAFF and ETF MAFM VN30

So, according to the above brief information, I will arrange the scale and reputation of fund management companies in the following order:

Dragon Capital > VinaCapital > SSIAM > Mirae Asset .

3.2. Criterion 2: liquidity

Liquidity is the ability to buy, sell, and trade a fund.

It is easy to see that Dragon Capital’s 2 ETFs have very impressive liquidity, with an average of about 1 million CCQs traded per day. Looking at the transaction statistics on the websites of these companies, I rank them in the following order:

VFMVN30 > VFMVN DIAMOND > SSIAM VNFIN LEAD > MAFM VN30 > VinaCapital VN100 > SSIAM VNX50 ETF > SSIAM VN30

3.3. Criterion 3: Diversification

To ensure safety, we should choose funds that follow the indexes as closely as possible. In this spirit, we arrange them in the following order:

VinaCapital VN100 > SSIAM VNX50 ETF > VFMVN30, SSIAM VN30, MAFM VN30 > VFMVN DIAMOND > SSIAM VNFIN LEAD

3.4. Criterion 4: ability to adhere to indicators (performance)

In general, ETFs track quite closely to the index that each fund needs to track (specifically, you can go to each fund’s website to see more charts, but in general, they are similar, not much different). In my personal ranking, it is as follows:

VFMVN30, SSIAM VN30, MAFM VN30, VFMVN DIAMOND > VinaCapital VN100 > SSIAM VNX50 ETF > SSIAM VNFIN LEAD

3.5. Criterion 5: Management fee

All 7 ETFs have quite low management fees (around 0.6 – 0.8% is suitable) but I also include them here for easy comparison:

SSIAM VN30 (0.55%) > MAFM VN30 (0.6%) > VFMVN30, SSIAM VNFIN LEAD, SSIAM VNX50 ETF (0.65%) > VinaCapital VN100 (0.67%) > VFMVN DIAMOND (0.8%)

3.6. Summary

So, I have briefly reviewed some criteria for choosing ETFs. Personally, I am investing in the 3 ETFs below. You can refer to the websites of the companies managing these funds to understand better.

ETFs I’m investing in (boxed in red)

4. Some foreign ETFs related to the Vietnamese market

The statistics and values below are all taken as of 12/15/2021.

4.1. FTSE Vietnam Swap UCITS ETF 1C

This is the first ETF in the Vietnamese market issued by DWS and using the Benchmark Index of FTSE Russell. This ETF only invests in stocks in the Vietnamese market and is listed in many places around the world.

Benchmark Index criteria: tracks the performance of stocks traded on HOSE, accounting for 90% of market capitalization and satisfying foreign ownership and liquidity criteria in the parent index FTSE Vietnam All-Share Index.

4.2. VanEck Vietnam ETF

This is an ETF issued by Van Eck and uses the MVIS Vietnam Index index set built by MV Index Solutions. The fund’s characteristic is that it not only invests in companies in the Vietnamese market but also includes foreign companies related to the Vietnamese market.

Benchmark Index criteria: track the performance of companies with the largest capitalization and liquidity in the Vietnamese market and foreign companies with revenue or assets accounting for at least 50% in the Vietnamese market.

Portfolio review period: quarterly.

4.3. iShares MSCI Frontier and Select EM ETF

Old name: iShares MSCI Frontier 100 ETF, old index: MSCI Frontier Markets 100 Index. From March 1, 2021, the name was changed to iShares MSCI Frontier and Select EM ETF and used the new index MSCI Frontier and Emerging Markets Select Index.

This is an EFT fund issued by iShares and uses the MSCI Frontier and Emerging Markets Select Index developed by MSCI. This fund invests in stocks of frontier markets and emerging markets. Vietnamese stocks account for a large proportion of the fund’s portfolio.

Benchmark Index criteria: represents the performance of 200 securities from selected countries in the MSCI Emerging and Frontier Markets Index parent index, specifically 150 securities from emerging markets and 50 securities from frontier markets that satisfy the criteria of capitalization, liquidity, foreign ownership, and free transferability, etc.

Portfolio review period: quarterly.

4.4. Premia MSCI Vietnam ETF

This is a Hong Kong ETF investing in the Vietnamese market, using the Benchmark Index built by MSCI.

Benchmark Index criteria: measures the performance of stocks in the large and mid-cap group with 21 securities accounting for 85% of Vietnam’s market capitalization.

Portfolio review period: quarterly.

4.5. Fubon FTSE Vietnam ETF

This is the latest foreign ETF from Taiwan investing in the Vietnamese market, this fund also uses the Benchmark Index built by FTSE Russell.

Benchmark Index criteria: measures the performance of the 30 largest capitalized companies on the HOSE exchange that meet the criteria in the parent index FTSE Frontier Vietnam Index.

Portfolio review period: quarterly.

4.6. KIM KINDEX Vietnam VN30 ETF

This is a Korean ETF managed by Korea Investment Management, using the Benchmark Index VN30 Index built by HOSE.

Benchmark Index criteria: measures the performance of the 30 largest stocks that meet the conditions of capitalization, liquidity, free transfer, … listed on the HOSE.

Periodical list: semi-annual.

4.7. Average annual growth of foreign ETFs

Above is a brief introduction to foreign ETFs in the Vietnamese market. Hopefully, this article will help you get an overview of how foreign ETFs work. This article is only a summary, so there are many limitations and errors. We look forward to your discussion and comments.

5. Where to buy ETFs?

As explained above, an ETF is basically just a stock, so you can buy ETFs on the stock exchange.

The stock market operates with many different rules. When we buy a stock, it means we own a part of that company. Therefore, buying and selling these stocks will involve many different legal procedures and documents.

If left to individuals to do it themselves, this transaction would become extremely complicated, so Securities Companies will help individuals complete all these procedures, to simplify the buying, selling and owning of your stocks as much as possible.

Securities companies (SCs) will have the following main forms:

• One is independent securities companies (in Vietnam, there are VNDIRECT Securities Joint Stock Company, SSI Securities Joint Stock Company, …). These companies operate independently and their products will focus on the stock market. When you buy securities on the Stock Exchange through these companies, you will be certified to own those securities. The advantage of this type of company is that they only focus on the securities sector, so their buying and selling applications are generally quite smooth and easy to access for beginners, their consultants are also numerous, professional and quite enthusiastic. But the disadvantage is that you have to link your bank account to the securities company’s account, so depositing and withdrawing money will depend on the technology platform of the linked bank. Securities companies only charge fees for managing and maintaining their accounts, but they do not charge fees for depositing and withdrawing money into the account. The cost and speed of depositing and withdrawing money between bank accounts and securities accounts will depend on the bank.
• Second, companies belonging to an organization or group. For example, securities companies belonging to banks or a certain group. In essence, securities companies are also a product of that group (for example, in addition to credit products, ATM cards, insurance services, etc., Techcombank also has another product, Techcom Securities JSC (TCBS – Techcom Securities JSC), or VPS is a securities company of VP Bank, VCBS is a securities company of Vietcombank, etc.). And because securities companies are only a product of banks, their investment is also limited, securities trading applications are quite complicated, not smooth and difficult to access for beginners. However, the disadvantages of independent securities companies become the advantages of this type of securities companies, especially securities companies belonging to banks. Because they are managed by the same bank, when you use the securities accounts of these companies, the speed of depositing and withdrawing money between the securities account and the bank account is usually very fast, and of course the deposit and withdrawal fees are almost free. In addition, another advantage is that because the Securities Companies belong to the bank, their reporting methods will be relatively similar to the bank. They will send statements on your securities trading situation, the types of securities you own, market fluctuations, etc. for your convenience in monitoring. In addition, the safety level of Securities Companies belonging to the bank will also be higher than that of independent Securities Companies.
• Third are Fintech companies (such as Anfin, Fmarket, Tikop, Infina, Finhay). Their products are applications (apps) used to buy and sell securities. These company’s applications allow you to buy and sell securities with very small values. For example, Vingroup shares cost 100,000 ^VND  /share and they do not allow retail sales, you have to buy a whole share. These companies will buy back and you can use these applications to buy a part of that share, for example, you only need 10,000 ^VND to buy 0.1 Vingroup share, and these companies will gather 10 people like you to buy 1 Vingroup share. Of course, they will send you a notice or some kind of certificate to prove that you own 0.1 Vingroup shares, but on the Stock Market, these Fintech companies will be the owner of 1 Vingroup share, not you, that is obvious to everyone (because you have little money, you cannot buy a whole share). These Fintech companies are developing very quickly in the current technology era and this form of buying and selling a part of shares is often focused on small investors (such as students or those who are just starting to learn about stocks and do not want to put too much money into this investment channel). However, because the owner of the shares is not you, this form of investment also has many potential risks.

Based on the information provided, you probably understand that in order to trade stocks, you must go through a securities company and cannot trade on your own. So which securities company should you choose? There are three factors to consider:

5.1. Reputation and safety

This is the most important factor, because after all, this is where you put your assets and savings, so you must put this factor first. Of the three groups I just mentioned above, the banking group will be the safest because:

• An independent securities company is still just a company, which means it can still go bankrupt as usual, and when they go bankrupt, where your assets will go will depend on the compensation policy of each company. You should consult carefully before deciding to open an account and put your assets in.
• A bank-affiliated securities company is a product of a bank. For large banks, especially the BIG4 group, it is very difficult for them to go bankrupt (the rate at which a bank can go bankrupt is certainly much lower than that of an independent securities company). Suppose a bank-affiliated securities company goes bankrupt, the bank still has enough capacity to pay you. And especially, banks have been around for a long time, while the oldest independent securities companies have only been around since 1999.
• Fintech companies have only recently been established, so the level of safety cannot be immediately assessed. One thing to note is that Fintech companies are all startups, so the risks they are taking are quite large, you must consider carefully when investing here.

The priority will be: Banks > Independent Brokers > Fintech Companies.

5.2. Transaction fees

Of course, the transaction fee will be as cheap as possible. In terms of this criterion, the banking group is currently slightly better because the advantage of this group is that it can deposit and withdraw money quickly and is almost free of deposit and withdrawal fees.

But later on, independent securities companies and Fintech groups are also gradually optimizing this. So regarding this transaction fee criterion, you should just choose the company with the lowest fee to consider.

Link to Google Sheet comparison table for you to download the file and edit it as you like: download the file here .

Priority: same, Banks = Independent Brokers = Fintech Companies.

5.3. Customer experience and care

Regarding this criterion, I highly appreciate Fintech companies. They are newly established so they are very up to date with the trend, their app designs are also very smooth, very beautiful and their customer care team is also very young. Due to the advantage of human resources, they also take care of their customers very quickly and their customer care style also makes customers very excited.

For independent companies, because they only focus on securities, they are also gradually optimizing customer experience and care. Although their app is currently not as good as the Fintech group, in the future they will definitely catch up with the Fintech group in this aspect.

As for the banking group, in this criterion, they are a bit inferior to the two groups above. Because the securities sector is only a part of their many, many products, it is understandable that they are a bit “weak” in customer experience and care compared to the two groups above.

There have been many complaints about banking group trading apps as they are too confusing (because they add many other products, put in information that they think customers will need), not user-friendly and often freeze during hot market times.

Priority: Fintech companies > Independent brokers > Banks.

6. Practical example of the statement “in the long run, the return rate of Index Fund / ETF will be higher than Mutual Fund / Hedge Fund”

In 2008, Warren Buffett (a billionaire currently worth an estimated $80.1 billion – according to Forbes) issued a challenge to hedge funds, arguing that investing in an index fund over the long term would help investors earn greater profits than investing according to hedge funds’ plans.

Protégé Partners LLC is the only company that accepted Warren Buffett’s challenge, through a $1 million contract, to prove the investing legend’s thesis wrong.

And in this bet, Mr. Buffett chose the S&P 500 index (an index based on the common stocks of the 500 companies with the largest market capitalization listed on the NYSE or NASDAQ of the US). Meanwhile, Protégé Partners bet the opposite of him, choosing 5 unnamed hedge funds.

While Protégé Partners LLC uses the main investment method of active investing (continuously buying and selling stocks to gain short-term profits), Warren Buffett will use his classic method: applying the passive investment method (buy and hold for a long time).

Although the deadline for this contest was December 31, 2017, around October of that year, Ted Seides, co-founder of Protégé Partners LLC, publicly admitted defeat on Bloomberg: “Buffett won. Whether it was in terms of numbers or the objective of the challenge, we lost,” Ted Seides shared.

As a result, over 10 years, Warren Buffett’s S&P 500 investment grew 125.8% while his investment in five hedge funds of Protégé Partners LLC grew only about 36.3% on average.

Figure 5 : Details of the bet between Warren Buffett and Protégé Partners LLC

The confrontation between Warren Buffett and Protégé Partners LLC was not peaceful, and Warren Buffett’s victory was only a final victory, not an overwhelming one.

Specifically, not long after the challenge began (January 1, 2008), the financial market fell sharply (this was also the year that the world’s largest financial crisis occurred), hedge funds demonstrated their superiority: effective risk hedging. While Buffett’s index fund lost 37% of its value, at that time Protégé Partners LLC only lost 23.9% of its value.

However, Warren Buffett then beat Protégé Partners LLC consecutively from 2009 to 2014, when the market recovered and showed signs of warming. Entering 2015, Buffett once again fell behind his rival, for the second time since 2008, when he only achieved a growth rate of 1.4% compared to Protégé Partners LLC’s 1.7%. However, in 2016, Buffett achieved a growth rate of 11.9%, 0.9% higher than Protégé Partners LLC (according to Investopedia.com).

“By the end of 2016, Warren Buffett’s index fund investments had grown an average of 7.1% per year, dwarfing Protégé Partners LLC’s 2.2% per year. And at this point in 2017, it would be very unlikely that another recession would occur for Protégé Partners LLC to hope to reverse the trend,” David Floyd, a financial expert, commented on Investopedia.com.

In general, the Passive Investing strategy is a safe and effective strategy, bringing us the best investment rate. The key point of this strategy is the keyword long-term , and long-term here must be from 15 years, 20 years, 30 years or more. This is not only the writer’s personal belief but also the advice of most masters and investment legends in the world.

A typical example is Mr. Warren Buffett, he is a master in the school of stock picking , which means choosing potential stocks to invest in, a form of Active Investing, and the number of people with this ability in the world is extremely rare.

Although he is known as a legend in the Active Investing school, he always repeats that for the majority of non-professional investors, the Passive Investing strategy is still the most effective strategy.

Another person is Mr. Ray Dalio, he is the founder of the largest Hedge Fund in the world, he also advises investors, whether professional or amateur, to allocate their investment portfolios into ETFs to ensure their profits.

A person who created and runs the largest and most successful Active Investing fund in the world also recommends us to invest in ETFs, so there is no reason why we should not put our trust in this Passive Investing strategy.

7. Is there compound interest when buying ETFs?

Does buying ETFs get compound interest? How is compound interest calculated on ETFs? Does ETFs apply compound interest? … These are very common questions in communities and forums about stock investment.

7.1. Point of view 1: Buying ETFs does not give compound interest

From this perspective, we cannot apply compound interest to ETF investment in Vietnam, regardless of whether the ETF pays dividends in shares or in cash (so that we can use it to buy more ETFs) for the following two reasons:

7.1.1. First reason

As we know, ETFs track the indexes of a series of companies, and each year, the companies in the portfolio will pay dividends to the fund. And on the principle of compound interest, ETFs will take this profit to continue investing to continue generating more profit.

But each year, on average, the companies in the portfolio will pay about 1% of the total price of the securities in the fund as dividends. Compared to the fund’s management fee, the remaining dividends are not much (almost zero), and the ETFs will take that dividend to pay for the fund’s operating costs. The remaining few will continue to reinvest, so they will not pay us any dividends (in short, as soon as the money comes in, the fund will collect it to pay for the fund management, which means that we personally will lose the ability to compound interest because there is no accumulation factor).

Note: management fee is calculated on net asset value, for example in the case of ETFVN30 it will be 0.65%/NAV/year

Thus, compound interest in the case of buying ETFs can only be applied to funds with low to extremely low management fees, for example Vanguard funds. Currently, Vanguard’s ETF management fee (with S&P500 index) is around 0.03%, which is much lower, so the difference as mentioned above is likely to create compound interest.

Figure 6: Analysis of some types of fund management fees. @Hieu.tv

That is also the reason why fund management fee is the first criterion we must consider when starting to choose a fund.

Compound interest is quite powerful, but compound loss is equally powerful. If the average management fee is around 0.6%, then after 30 years, this number is also quite terrifying (because as mentioned above, the management fee is calculated on NAV, so it will be a pretty big number).

7.1.2. Second reason

Since the possibility of paying dividends is extremely low, in this case we consider the ETF not paying dividends to us at all, so we can say that the profit of ETFs will be calculated by the value of the ETF at the time you sell it.

For example, if you buy E1VFVN30, you buy 100 shares every month, continuously for 30 years, then by the last month of the 30th year you will have 100 × 12 × 30 = 36,000 ETF shares.

• Case 1: Suppose E1VFVN30 pays dividends in shares or cash and you use that money to continue buying E1VFVN30 shares, then by the last month of the 30th year, you will have more than 36,000 E1VFVN30 shares.
• Case 2: Suppose E1VFVN30 does not pay dividends, you still only have 36,000 E1VFVN30 shares.

In short, there is no compound interest here, the value you have is only the value of the stocks you are holding. And thanks to the two factors of the market always increasing in the long term and the strategy of buying at an average price, in 30 years, if you sell all the E1VFVN30 stocks, you will make a profit (no matter how much you bought them for, in the long term, you will definitely make a profit, except for the case of being born in the dark period, then it is too bad, you have to accept it), and the rate of return that people have proven to fluctuate from 10 to 15%.

That’s why there are times when the market crashes, ETFs take a nosedive and take a long time to recover, and ETFs are just like regular stocks. So the cost averaging strategy was created to overcome this risk.

In short, investing in ETFs in Vietnam will hardly apply compound interest. In other words, investing in ETFs in Vietnam is like saving money in a bank with higher interest rates and more absolute safety (because it is not affected by inflation).

Therefore, people who specialize in investing in ETFs often advise that when you want to sell, divide it up. For example, if you want to sell all your ETFs and retire at age 50, then at age 41, sell 1/5, at age 42, sell another 1/5, and at age 50, sell the rest.

That is also the reason why long-term investors in Vietnam often invest in real estate and rarely invest in ETFs, because ETF profits are not as terrible as we think, it is just safer than land.

7.2. Second point of view: Buying ETFs still gets compound interest

ETF returns would not be called compound interest, but more accurately compound growth, and the formulas for calculating these two concepts are completely different.

Compound interest is the interest amount determined based on the interest amount of previous periods added to the principal to serve as the basis for calculating interest for the following periods. The formula for calculating compound interest is as follows:

Figure 7: Formula for calculating compound interest.

Compound Growth is a concept used to refer to growth that is accumulated over a long period of time, like the increase of a sum of money that receives compound interest. The formula for calculating compound growth is as follows:

Figure 8: Formula for calculating compound growth.

Compound interest is also divided into two types: positive compound interest and negative compound interest (commonly known as compound loss). Some opinions say that “every investment has compound interest” , in fact, it must be understood that every investment has compound growth, and in a long story, every investment has positive compound interest and negative compound interest, if the positive compound interest is greater than the negative compound interest, then that is compound growth.

There are also some opinions that “simple interest or compound interest depends on the perspective” , this is not entirely true, because in theory (in the mathematical direction), simple interest is simple interest and compound interest is compound interest because each type has its own calculation formula. But after all, in economics, saying “simple interest or compound interest” depends on the perspective is also partly true.

Because the economy moves continuously and the results of calculations are consecutive, depending on the perspective, we will determine whether the result is simple interest or compound interest.

ETFs in Vietnam have years of positive compound interest, and also years of negative compound interest, but with the long-term market factor always growing, in the long term (for example 30 years), we can say that ETFs have compound growth.

8. Summary

At this point, I hope you have enough basic knowledge about investment activities in general, investment activities in the stock market and ETFs in particular. With that basic knowledge, I believe that you have enough confidence to start taking your own investment steps.

Wishing you luck, success and prosperity!

Thank you for reading my sharing, hopefully it has brought more or less useful value to you.

- Sky -