Why ETFs Are So Efficient
August 26, 2026
6 min read
- An ETF tracks an index instead of trying to beat it. That makes it cheap, transparent and practically unbeatable for savings plans.
- The cost difference is the most reliable return there is: 0.45% instead of 1.45% all-in means roughly CHF 97,000 more at CHF 500 a month over 30 years.
- The biggest advantage is usually overlooked: automatic dividend reinvestment — historically worth roughly 2.4% of return a year.
The strength of an ETF is not in what it does. It is in what it refrains from doing.
ETFs have become the standard tool for long-term wealth building. But why exactly? The usual answers are "cheap" and "diversified". Both are true and both fall short. What is more interesting is which of these properties actually make the difference in the daily life of a savings plan.
01What an ETF is, in plain terms
An ETF — exchange traded fund — is a fund traded on an exchange. It replicates an index, for example a broad world equity index, by holding its constituents at the same weights. If the index rises one percent, the ETF rises roughly one percent too, less its costs.
The decisive difference from a traditional actively managed fund: nobody is selecting. No analyst team valuing companies, no management decision about over- or underweighting a stock. The ETF follows a rule. That rule-bound nature is the source of almost all its advantages.
02Costs: the only part of your return you know
Because there is no research to fund and very little trading to do, the total expense ratio of a broad index ETF sits in the range of a few hundredths of a percent. Actively managed equity funds typically cost a multiple of that.
What that means across an investing lifetime, modelled at CHF 500 a month over 30 years with a 7% gross return:
Roughly CHF 97,000 of difference between 0.45% and 1.45% — same market, same contributions. That is not a better investment decision. It is the same return, billed differently.
Why this weighs so heavily: you do not know the market return in advance. You do know the costs. They are the only component of your result that you fix with certainty on the day you decide — and they apply every single year, whether markets rise or fall.
The full breakdown of every cost type, including the ones no factsheet shows, is in The True Cost of Investing.
03Diversification without effort
A single broad world ETF gives you proportional ownership in over 1,480 companies across 23 developed markets and every sector. Achieving the same spread otherwise would mean buying, monitoring and rebalancing hundreds of individual positions.
The benefit is concrete: when a single company fails — which happens regularly — you lose a fraction of a percent. No holding can dominate your result, positively or negatively. It sounds boring, and that is exactly the point.
One objection is fair: a market-cap-weighted world index is today heavily shaped by a small number of very large companies. Diversification by count does not automatically mean diversification by risk. If you want to reduce that concentration deliberately, the options are in Core-Satellite Strategy Explained.
04The point almost everyone misses: dividends
Over long horizons, a substantial share of equity returns comes not from rising prices but from reinvested dividends. Data from J.P. Morgan and FactSet on the MSCI World from 1970 to 2025 shows a gap of roughly 2.4% a year between the index with and without dividend reinvestment.
At CHF 500 a month over 30 years that means roughly CHF 610,000 with dividends reinvested versus roughly CHF 387,000 without. Over CHF 220,000 of difference — purely because distributions are automatically reinvested instead of sitting in an account and eventually being spent.
Practical consequence: accumulating ETFs reinvest income automatically. With distributing versions you have to do it yourself — and in everyday life that often does not happen. For long-term wealth building, the accumulating version is usually the more pragmatic choice. It changes nothing for Swiss tax: income is taxable either way.
05Divisibility: why savings plans would be hard without ETFs
An unremarkable but practically important property. If your plan is to invest CHF 87.50, that amount must be fully investable — even when one unit costs CHF 340. Fund units can be held in fractions, so no remainder is left sitting uninvested.
With individual shares this is not straightforward. Trying to put CHF 200 a month into five stocks means fighting minimum lot sizes, leftover cash and transaction costs that weigh heavily in percentage terms on small amounts.
06How to tell a good ETF from a mediocre one
If the TER on broad indices is only a few hundredths of a percent anyway, what still separates two products tracking the same index? Four things.
Tracking difference. It measures how far the fund's actual return deviates from the index return, which makes it more informative than the TER. It contains the expense ratio but also trading costs, withholding taxes and securities lending income. Two ETFs with identical TERs can differ noticeably here.
Replication method. Physical means the fund actually buys the index constituents. Synthetic means it reproduces the index through a swap with a counterparty. For broad, liquid indices, full physical replication is the most transparent option.
Fund size. Very small funds get closed or merged more often. That is not a loss risk, but it forces a switch at a moment you did not choose.
Fund domicile. The item with the largest invisible effect on US-heavy indices. Why, in Irish ETFs: 15% Instead of 30%.
06Where the limits are
Three honest caveats, so the picture stays complete.
An ETF does not protect against losses. If the market falls 40%, the ETF falls roughly 40%. Diversification reduces company-specific risk, not market risk.
By definition you receive only the market return. After costs you will always sit slightly below it. Wanting more means accepting concentration and therefore additional risk.
Not every ETF is broad. Alongside world indices there are sector, thematic and leveraged products that have little to do with the original idea. "ETF" describes the wrapper, not the contents.
07Frequently asked questions
What does TER mean?
Total expense ratio, a fund's annual running cost. It is deducted continuously from fund assets, so it never appears as a separate charge. It excludes trading costs, foreign exchange spreads and taxes.
What is the difference between an ETF and an index fund?
Both track an index. An ETF trades continuously on an exchange; a traditional index fund is priced once daily at net asset value. For long-term savings plans the difference is minor.
Accumulating or distributing — which is better?
For wealth building, usually accumulating, because income is reinvested automatically and nothing is left sitting in cash. Choose distributing if you want regular payouts. In Switzerland the income is taxable either way.
How many ETFs does a portfolio need?
Usually one. A broad world index already covers thousands of companies. Additional building blocks such as a Swiss or emerging markets allocation make sense when weighted deliberately — not simply to increase the count.
Are ETFs safe?
Fund assets are segregated and protected if the fund company becomes insolvent. Market risk, however, remains entirely intact: price declines, including severe ones, are a normal part of equity investing.
What is tracking difference and why does it matter more than the TER?
Tracking difference measures how far a fund's actual return deviates from the index return. It includes the TER but also trading costs, withholding taxes and securities lending income. Two ETFs with identical TERs can therefore perform differently.
What is the difference between MSCI World, FTSE All-World and MSCI ACWI?
The MSCI World covers developed markets. The MSCI ACWI and FTSE All-World also include emerging markets, and the FTSE All-World holds a broader set of companies. Historical return differences have been smaller than the naming debate suggests.
What do physical and synthetic replication mean?
Physical means the fund actually buys the index constituents. Synthetic means it reproduces the index through a swap with a counterparty. Full physical replication is the most transparent version and the norm for broad indices.
08Keep reading
Overview
From mechanics to tax returns: everything about investing regularly.
One instrument, over 1,480 companies
The arvy ETF Savings Plan invests weekly in a broad world index — a 0.39% management fee plus 0.06% TER, 0.45% all-in.
This article was written by Thierry Borgeat, co-founder of arvy, and reviewed by Patrick Rissi, CFA, and Florian Jauch, CFA.
Disclaimer: arvy AG is a manager of collective assets authorised by the Swiss Financial Market Supervisory Authority FINMA under Art. 24 of the Collective Investment Schemes Act (CISA). This article is for information purposes only and constitutes neither investment advice nor tax or legal advice, nor an offer or solicitation to buy or sell financial instruments. The calculations shown are model calculations based on the stated assumptions and are not forecasts; they assume a constant return compounded monthly at the stated nominal annual rate. Past performance is not a reliable indicator of future results. Equity investments are subject to price fluctuations; losses up to the total loss of the capital invested are possible. Tax consequences differ by canton and by individual situation — please clarify yours with a professional.
