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WTF is an ETF?
Decoding the Exchange Traded Fund
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On today’s newsletter:
What is an ETF?
Why should you choose one?
How to buy one
Disclaimer: Not investment advice. Make your own decisions!
Welcome to Part 1 of a three-post series I will be writing on what an ETF is, how to choose specific ETFs that fit your needs, and how to maintain come tax time/rebalancing. Let’s get started!
About 2 ½ years ago I started investing on my own. Before that, I had spent the 2 previous years saving and amassing money in the bank, watching the market from the sidelines. I didn’t know where to start. The market was scary.
Yes, I knew that if you played the long game, you’re more than likely to gain a positive return. Cool. I’ll play the long game then, I thought. But what investment to choose? Stocks? Bonds? CDs? Savings Account? Money Market? Bitcoin? What are all these? I’m getting analysis paralysis over here man!
Enter the ETF. The Grandaddy of them all. Like a Mutual Fund, but better. Like a stock, but it holds multiple stocks. Stock-ception. It’s the goat investing vehicle. Hence why I ended up choosing only ETFs in my own personal portfolio. Let me explain why.
What is an ETF?
An ETF stands for Exchange Traded Fund. A deepdive into the nomenclature tells us that this is a fund that is traded on exchanges, like stocks. In fact, ETFs are very similar to stocks. The prices change throughout the day. You can buy and sell them when the market is open. They are generally very liquid (easily turn into cash).
However, ETFs contain assets. Multiple. Meaning you could have an ETF that contains any multitude of companies and their shares, provided they are publicly traded. You could have an ETF that tracks bonds, Oil prices, wheat, and gold. Hell, there are ones that even track water! You can even buy a leveraged ETF (ex. if S&P 500 goes up 3%, you gain 6%) and inverse ETFs. Even inverse leveraged ETFs. I think I have analysis paralysis again…
ETFs can be passively or actively managed. Active meaning there is a human portfolio manager making the investment decisions for the fund, and passive meaning it’s trying to track an index, like SPX (S&P 500).
You could buy an S&P 500 ETF. (This was, in fact, the very first ETF!). Or if you are feeling devious, you could also buy an Inverse Jim Cramer ETF. (Jim Cramer is a CNBC host that makes stock picks, and you can now buy an ETF that will do the opposite of what he says). The ETF world knows no bounds, clearly.
Why Invest in One?
Why? Why not? You can bet against Jim Cramer! And if you need more reasons.. Wait, you want more reasons? According to Reuters and Statista, there was $9.91 trillion invested in ETFs in 2021, compared to $1.35 in 2011. A trend here to stay.
Alright here’s some more:
Low Expense Ratios (cost to maintain the fund)
Diversification is insanely easy (since multiple stocks can be in one)
Easy to track specific sectors (corners of the market)
Passively managed
Depending on your broker, you can invest with as little as $1.
Disadvantages:
Can’t dollar cost average, automatically.
This is where you invest a predetermined amount over a period of time. Mutual funds allow this, but ETFs and brokerages don’t. I mean I see it as an advantage because I get to stay on top of it every month but that’s just me.
Where to find them
Brokerages. Not Banks. Brokerages are institutions where they “broker” the buying and selling of securities to you. Think Vanguard, Charles Schwab, Fidelity, and if you’re a pleb, Robinhood. (Seriously, if you’re on Robinhood and not a self-proclaimed investing degenerate, best get switching. Go check r/WallStBets to see what I mean).
All these ETFs have ticker symbols, like stocks. The ticker symbol for AT&T is T. The ticker for the S&P 500 ETF by SPDR for example is SPY. You would go to the platform, enter in the ticker, and your brokerage will let you select the amount of shares you’d like or the amount of dollars to buy. ..And that’s it. Done. You are the proud owner of an ETF. Woohoo!
Next week, I’ll take a look into choosing a specific set of ETFs that fit your needs. See you then!
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Stay Frosty My Friends,
Andrew
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