ETFs – what you need to know to Invest with confidence.

The term ETF stands forExchange-Traded Fund, a type of investment fund traded on stock exchanges.

Contents:
 Who Should Invest in ETFs
 ETFs in Global Markets
 Types of ETFs
 The Risks of Investing in Passive Funds
 Taxation of Gains from Passive Funds

These types of funds are passively managed. Their goal is not to beat the market,
but to track and replicate the performance of an underlying instrument as closely as
possible, such as stock indices, bond indices, commodities, currencies, or other
assets
Unlike traditional actively managed mutual funds, ETFs are listed on stock
exchanges and can be bought and sold like stocks. Investing in these funds involves
purchasing shares through an investment account.

Who Should Invest in ETFs

Investing in ETFs is a great option for people who are just beginning their investment
journey. One of the main advantages of this type of investment is broad
diversification — meaning the risk is spread across many different assets.
For example, if you want to invest in the Polish stock market, you don’t need to
choose a specific company. Instead, you can invest in an index.
If you’re interested in large-cap companies listed on the Warsaw Stock Exchange,
you can choose an ETF that tracks the WIG20 index. Medium-sized companies are
represented in the mWIG40 index, and smaller ones in the sWIG80 index. So, if you
want to invest in mid- or small-cap companies from the domestic market, look for
ETFs that follow these indexes.
By purchasing one ETF that tracks the mWIG40 index, you essentially gain exposure
to the same 40 stocks that make up the index. Similarly, by purchasing one unit of a
fund tracking the sWIG80 index, you open a position that includes 80 companies in
the index.
Currently, there are 11 ETF funds available on the Warsaw Stock Exchange. In
addition to the domestic indices mentioned, investors also have access to funds that
track foreign indices, such as the U.S. S&P 500 or the German DAX.
Investing in ETFs on the WSE (Warsaw stock exchange, GPW giełda papierów
wartościowych) can be beneficial for both beginners and more experienced

investors. It is an ideal financial instrument for those who want to invest passively. By
using a simple strategy like „systematically buy and hold,” even with small capital
and a long-term investment horizon, you can achieve satisfactory returns.
Current quotations of the ETFs available on the WSE can be found here: WSE Main
Market – ETF/ETC/ETN.
One of the key advantages of passive investing is the low entry threshold, meaning
you don’t need significant capital to get started. Additionally, it’s worth noting that you
can invest in ETFs on the WSE through pension programs like IKE/IKZE. These
programs help with tax optimization, which can have a significant positive impact on
long-term investment returns.

ETFs in Global Markets

If an investor is interested in a specific type of asset, such as precious metals or raw
materials, and finds that the ETFs offered by the Warsaw Stock Exchange are
insufficient, they can explore foreign markets. Different markets may provide a wider
range of investment opportunities. For example, there are over 2,000 ETFs available
on the U.S. stock exchange and more than 2,500 on European exchanges.
When investing in ETFs on foreign markets, it’s important to remember that they are
listed in different currencies, depending on the market. Additionally, exchange rate
risk should be considered, as the Polish złoty is often subject to significant volatility.
Before making an investment decision, it’s a good idea to familiarize yourself with the
offerings available through various brokers. Choose the one that best suits your
needs and investment goals.

Types of ETFs

There are different types of ETFs, which vary in how they construct their portfolios.
Some closely replicate an index by buying companies in the same proportions as
they are included in the index—this is known as physical index replication.
Others use all or some of the companies from the index when constructing their
portfolio, but in different proportions—this is called synthetic index replication.
It’s also worth noting that there are two approaches to dividend distribution in ETFs.
These are:
Distributing ETFs: These ETFs directly pay out dividend profits.
Accumulating ETFs: In these ETFs, dividend profits are not paid out directly but are
instead reinvested into the fund.

The Risks of Investing in Passive Funds

Choosing the right type of ETF depends on each investor’s individual needs and
investment goals. Before making an investment decision, it’s important to thoroughly
analyse the available options and select those that align with your needs and risk
profile.
As with any investment, investing in ETFs carries the risk of losing part of your
capital. It’s also important to remember that the value of fund units can fluctuate
based on market conditions, and there is no guarantee of profit.
One way to reduce the risk of loss is by diversifying your investment portfolio.
Investing in different ETFs that focus on various assets can help minimize risk.
It’s also important to remember that investing in ETFs comes with costs, such as
transaction commissions and management fees. These costs can impact potential
profits, so they should be considered when making an investment decision.
The commission for buying and selling ETF units is charged by the broker where you
hold your investment account. It varies based on the transaction amount and the
terms of your agreement with the broker.
Another cost is the management fee charged by the ETF fund. It is relatively low
compared to actively managed funds, usually ranging from 0.05% to 0.8%,
depending on the market where the instrument is listed and the type of asset it
tracks.
The lower the management fee, the higher the potential return for the investor.
A common mistake when investing in ETFs is overlooking the spread — the
difference between the buy and sell prices of the fund. While not a direct cost, it’s
important to remember that the smaller the spread, the better it is for the investor.

Taxation of Gains from Passive Funds

It’s also important to remember that at the end of the year, after generating profits
from investing in ETFs, you must settle your taxes with the Tax Office, just like with
other forms of capital income.
In Poland, capital gains are taxed at a 19% income tax rate.
To sum up, the costs of investing in ETFs are much lower than those associated with
actively managed funds. This is because ETFs are passively managed, meaning
their goal is to replicate an index rather than actively manage a portfolio to achieve
higher returns. As a result, the management costs of passive funds are lower. As

history has shown, the performance of passive funds is often as good as, or even
better than, that of actively managed funds.
These funds can be a great complement to an investment portfolio when combined
with stocks selected by the investor.

Basic information about stocks can be found here: link

If you want to start investing in ETFs, it’s important to remember that all investments
carry risk. There’s no guarantee of profit, and you could experience losses. However,
ETFs are designed for long-term investing, which increases the likelihood of making
a profit. It’s also worth noting that capital on financial markets tends to flow from
impatient investors to patient ones.
We encourage you to visit our website regularly and expand your knowledge.