Investing in ETF equity funds with Index Selection Equity

The fund Index-Selection-Equity combines both approaches in one fund. In summary, the fund aims to cost-effectively replicate the performance of a global average equity portfolio with the majority of its portfolio. With the other part, it seeks to generate additional returns compared to such a portfolio, also cost-effectively, in order to achieve overall long-term above-average performance. This is quite a challenge in the current environment.

On the one hand, equity marktes performed very well last year. On the other hand, a trend that started in 2024 in developed equity markets (especially in the USA) has continued and has now reached an extreme: the outperformance of the largest 50 stocks compared to "the rest" of the stock market, particularly smaller and mid-sized equities. Many are now familiar with the term "the magnificent seven": seven equity-market heavyweights responsible for the lion's share of stock index gains in the USA in recent years. This trend is unlikely to continue indefinitely, but it currently presents significant challenges for all active managers.

Two ways to outperform in the current market environment:

1. §  One could overweight these stocks in a fund even more than they are already represented in the indices. However, this is not advisable from a risk diversification and risk management perspective. Moreover, the likelihood is high that this trend will break sooner or later. Today's stock market stars could very well become tomorrow's flops.

2. One could seek promising investment themes that rise as strongly or even more strongly than the current market favourites. This is precisely what the fund management of the Index-Selection-Equity. does. For example, it has invested or is investing in themes such as digitalisation, cloud computing, or artificial intelligence.

The fund management acts very flexibly. If it recognises that certain themes are no longer performing above average, it quickly divests from them. Currently, the share of this thematic portfolio in the fund is around 15% — at the lower end of the possible range of 0 to 50%. If market signals are favourable, the fund management will increase this share again.

Combine strengths with the Index-Selection-Equity

ETFs generally follow a passive management approach. Their portfolio management aims solely to replicate the performance of a benchmark (e.g., an equity index). This does not require analysis and selection processes of individual equities, bonds, or other assets, nor does it require risk management. For passively managed ETFs, the absolute performance of the ETF is usually irrelevant to the fund provider; the primary concern is that it closely tracks the performance of the underlying market/index. Therefore, the costs of ETFs are generally lower than those of actively managed funds.

Actively managed funds, on the other hand, aim to generate added value for investors through active management and risk control—whether in the equity selection or asset allocation. This added value can be financial (e.g., higher returns than a benchmark index or market average, or similar returns with lower volatility) and/or non-financial (e.g., higher ESG quality). Decisions are based on comprehensive analysis of financial and ESG criteria of the respective securities and market segments. Actively managed funds also require continuous monitoring of markets, influencing factors, and the fund portfolio, with intervention by the fund management when necessary.

Here’s how the investment strategy of Index-Selection-Equity works!

A minimum of 50% to a maximum of 100% of the fund volume is invested in regional and country ETFs. The aim is for the performance of this part of the fund portfolio to deviate as little as possible from the MSCI ACWI. Up to a maximum of 50% is also invested in thematic ETFs, depending on the availability of interesting investment themes. The term "theme" is deliberately interpreted broadly so as not to exclude any promising ETFs. For example, this could be countries, sectors, small caps, or growth equities.

Influence on performance through active selection of ETFs

The active inclusion of thematic ETFs in the fund portfolio aims to outperform the benchmark. This would not be possible with a purely passive investment, as passive ETFs normally inevitably underperform the benchmark index because they have management and transaction costs, whereas market indices do not.

According to its investment strategy, the fund Index-Selection-Equity mainly invests in other investment funds. The fund exhibits elevated volatility, meaning that unit prices can move significantly higher or lower in short periods of time, and it is not possible to rule out loss of capital.