ETFs or fixed-income investments: How each fits into your investment portfolio

In brief:

• The "ETF vs fixed income" dilemma is not a question of which is better; both instruments serve different purposes and can successfully complement each other in a single portfolio.

• ETFs offer broad diversification, high liquidity and long-term growth potential, but their value is subject to market fluctuations.

• Fixed-return investments provide a more predictable income structure and a clearer term, but they too involve credit risk, inflation risk and other factors.

• Investors looking for alternatives to ETFs or considering where to invest instead of ETFs often choose not to replace ETFs, but to complement their portfolio with other types of investments.

• How to choose the ideal combination depends on several factors, such as your time horizon, your need for regular income and your reaction to market fluctuations.

Today, private investors have access to a wide range of investments, from stocks and ETFs to bonds, peer-to-peer lending platforms and other alternative instruments. It is therefore no surprise that many people ask the question: ETF or fixed-return investments, which is better to choose?

In reality, this is not a story of a winner and a loser. ETFs and fixed-return investments fulfil different roles for an investor. One is more oriented towards long-term capital growth, the other towards a more predictable cash flow and a more clearly defined return structure.

In a well-balanced portfolio, these instruments often do not compete but rather complement each other. Let us look at how each of them works, what their advantages and risks are, and how to determine which may be more suitable in a given situation.

What are ETFs and why have they become so popular?

An ETF (Exchange Traded Fund) is an investment fund whose units are traded on the stock exchange similarly to shares.

Put simply, by purchasing a single ETF unit, the investor simultaneously gains exposure to dozens, hundreds or even thousands of companies or other assets.

For example:

• An S&P 500 ETF allows you to invest in the 500 largest US companies.

• A global equity ETF provides access to companies in various regions.

• A bond ETF invests in the debt securities of various issuers.

It is precisely this simplicity and diversification that are the main reasons why ETFs have become one of the most popular investment instruments in the world in recent decades.

The main advantages of ETFs

Diversification

Instead of choosing individual companies, the investor gains a broad basket of assets. This helps reduce the risk associated with the failure of a single company.

High liquidity

ETF units can be bought and sold during stock exchange hours, similarly to shares. This means the investor does not have to wait for a specific maturity date to access their money.

Relatively low costs

Many passive ETFs simply track a market index, so their management costs are often lower than those of traditional actively managed funds.

Long-term growth potential

Historically, stock markets have demonstrated positive growth over the long term, which is why ETFs are often used for retirement savings and long-term capital building. However, historical results do not guarantee future returns.

ETF limitations and risks

Although ETFs are an effective instrument, they are not suitable for all goals.

Market volatility

The value of an ETF changes along with the market. If the stock market experiences a correction or crisis, the value of an ETF can decrease by tens of per cent. As a result, an investor who needs the funds within the next few years may end up in a situation where they have to sell investments at a loss due to a market decline.

The result depends on the investment horizon

The longer the investment period, the greater the chance of weathering short-term fluctuations. However, over a shorter term, ETF returns are difficult to predict.

No guaranteed cash flow

Some ETFs pay dividends, others automatically reinvest them, but the investor's income cannot be precisely predicted in advance. It depends on the market situation and the performance of the specific fund.

What are fixed-return investments?

In the understanding of private investors, fixed-return investments in Europe are most often bonds, loan investments or other financial instruments that have a pre-defined return structure.

The main feature of such investments is that the investor knows from the outset:

• The expected interest rate.

• The investment term.

• The potential cash flow structure.

Unlike ETFs, whose value fluctuates daily on the market, the focus here is more often on regular interest income and a more predictable result.

This is precisely why they are often considered as one of the options by investors interested in investments with a predictable return.

Why do investors consider alternatives to ETFs?

Although ETFs can be a very effective instrument over the long term, an investor's priorities and needs can sometimes change.

For example:

• A larger purchase is being planned.

• A more regular cash flow is needed.

• The investor wants to reduce the portfolio's dependence on stock market fluctuations.

• Greater predictability is being sought for a specific part of the portfolio.

In these and similar situations, alternatives to ETFs often come into the investor's view. But here it is important to understand that an alternative does not mean a replacement. It is rather a complement that, working together, helps to achieve the investor's intended financial goals as successfully as possible.

ETF or bonds: Is that the right comparison?

When considering ways to invest spare funds, investors often face the choice of what is better to buy, ETFs or bonds?The answer depends on what the investor primarily wants to achieve.

An ETF would be the more suitable choice if the goal is:

• Long-term capital growth.

• Savings over a 10 to 20 year horizon.

• Broad diversification across global markets.

Bonds are more often chosen if what matters is:

• Regular interest payments.

• A clearly defined repayment term.

• Lower correlation with the stock market.

However, for modern investors the choice is not only between ETFs and bonds. There are also other fixed-return instruments, including asset-backed investments and loan investments.

How can fixed-return investments complement an ETF portfolio?

Another question often asked by potential investors is: where to invest instead of ETFs? However, in many cases a more appropriate question would be: where else to invest alongside ETFs?

Let us assume that an investor is building a long-term portfolio. They can:

• Invest part of the capital in a global equity ETF.

• Direct part to instruments with a more predictable return.

• Keep a small cash reserve for unforeseen circumstances.

This approach makes it possible to combine different sources of risk and return. During periods of market growth, ETFs can provide significant capital growth. Fixed-return instruments in the portfolio, on the other hand, serve as a low-risk alternative to ETFs with a different risk profile, whose function is to help build a more stable cash flow and greater clarity about the expected return.

It is precisely for this reason that many investors do not choose one or the other, but combine both.

Where does TWINO FLEXI fit into this context?

One example for investors looking for investments with a more predictable structure is TWINO FLEXI. FLEXI allows you to invest in loans with flexible access to funds, while seeking to provide a competitive return.

It is not an ETF replacement and is not intended to take over its functions. Rather, it would be suitable as one component of a portfolio for investors who want to:

• Diversify their types of investments.

• Reduce dependence solely on stock markets.

• Build an additional income stream.

If you want to learn more about this solution, take a look at the TWINO FLEXI product page, as well as related articles on:

• Auto invest.

• Investment portfolio diversification.

• Investment risk management.

An honest risk section: fixed-return investments are not without risk either

Sometimes investors mistakenly assume that a fixed return means a guaranteed profit. However, this is not true.

Although the interest rate of an investment may be known in advance, the result is still affected by various risks.

Credit risk

There is a possibility that the borrower or issuer will be unable to fully meet their obligations. That is precisely why it is important to assess the quality of the platform, the issuer or the specific investment.

Term risk

If funds are invested for a fixed period, the investor may face limited opportunities to use them earlier.

Inflation risk

Even if the return is positive, high inflation can reduce the real purchasing power of the investment.

Market risk

Bonds and other fixed-return instruments can also experience value fluctuations, especially during changes in interest rates.

It would therefore be incorrect to consider fixed-return investments to be safer. They are simply exposed to a different set of risks than equity ETFs. The investor may lose part or all of the invested capital.

How to choose the most suitable combination?

When choosing between ETFs and fixed-return investments, it is worth starting with three questions.

What is my investment horizon?

• 10 to 20 years or more: you can afford a larger proportion of ETFs.

• A few years: more investments with a predictable return.

How do I react to market fluctuations?

Here it would be useful to analyse how well you know yourself and your reaction to change. If you honestly admit that a 20 to 30 per cent drop in the value of your investments would be emotionally difficult for you to endure, it might be worth including more of other asset types that are less subject to fluctuations in your portfolio.

Do I need regular income?

If an interest stream or greater predictability is important, fixed-return instruments may help achieve this goal better.

Conclusions

In the debate on the topic of ETF vs fixed income, there is no single correct answer.

ETFs offer broad diversification, high liquidity and long-term growth potential. Fixed-return investments, in turn, can provide a more predictable income structure and a different risk profile.

For most investors, the question is not about which instrument is better. It is far more important to understand how each of them helps to achieve specific financial goals. That is precisely why, in a well-thought-out portfolio, ETFs and fixed-return investments often work not as competitors, but as mutually complementary instruments.

Frequently Asked Questions

What is the main difference between ETFs and fixed-return investments?

The value of an ETF changes according to the market situation, whereas fixed-return investments usually have a pre-defined interest rate and a clearer income structure.

Are ETFs better than bonds?

ETFs and bonds serve different purposes. ETFs are more often used for capital growth, whereas bonds are used for more regular income and a fixed term.

Are fixed-return investments without risk?

No. They are affected by credit risk, inflation risk, term risk and other factors.

Where to invest instead of ETFs?

It depends on the goal. Some investors choose bonds, money market funds or loan investments. It is often more effective to combine these instruments with ETFs rather than replace them entirely.

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This material is for informational purposes and is not individual investment advice.