WTF is an ETF?

Okay. so you want to invest, but don’t know what companies to pick! There are so many…

You have the big tech stocks, like Amazon, Facebook, Netflix, Alphabet, Apple, MicrosoftYou have these great Chinese companies, like Alibaba, JD.COM, Baidu, Tencent

You have consumer brands like Walmart, Disney, Costco,

You have the long-standing American companies, like Coca-Cola, JP Morgan, Bank of America, GM Motors, Boeing, Visa

But let’s not forget diversifying into commodities, like oil companies, gold & silver, energy stocks…

How are you suppose to narrow down your investments to just a few? The recommended portfolio size for new investors is around ~10 stocks, but also, how are you supposed to even have enough MONEY to invest in so many great companies without spreading yourself too thin? After all, putting just $50 into 10 companies don’t feel too great…

That’s where ETF’s come in.

What the F is an ETF?

Let’s use a food analogy: trail mix. You know how you can now create your own trail mix in grocery stores? You grab a bag, and you get to put a few almonds, peanuts, maybe coconut shavings, and raisins, or whatever you want in your trail mix.

That trail mix with MANY different nuts & foods, that’s like an ETF fund. A diverse batch of stocks & companies. You get a little bit of everything, packaged all nicely together in a little baggie. This way, even if the peanuts were a little bit bad, you have the cashews and raisins and almonds that can make up for the taste.

Whereas, if you were to just stocks from 1 company, that’s like buying an entire bag of JUST peanuts. You’d have to really like peanuts to put all your money in them. And hopefully, those peanuts weren’t contaminated with salmonella.

Exchange-Traded Funds, or ETF’s, are an easy and low-cost way to diversify your portfolio because they are “funds” so that means they essentially consist of a BASKET of stocks that are generally related to a specific industry/category.

So, for example, you have a “China ETF” (CXSE) which, if you were to buy, consists of hundreds of Chinese companies, like tech giants Alibaba, Tencent, and Baidu.

One of the most purchased ETF is the incredibly popular “SPY” ETF which tracks the S&P 500 index fund, (the 500 largest/best companies in America. Includes companies like Amazon, Twitter, Apple, Microsoft, General Motors, JP Morgan).  This means when you invest in SPY, you are essentially investing in 500 reputable American companies by buying ONE “stock”. By investing in SPY, you don’t have to pick between Amazon and Apple, you can have them both (albeit, a very small portion)! Here is the full list of the 500 companies that you’d be investing in when you buy “SPY.”

There are ETF’s that fit any category. You want E-commerce? Tech industry? Retail? India stocks? Global stocks? There is probably one out there. And, the great thing about ETF’s is that they can be traded like stocks, as in, just as you can buy 1 single share of Apple stock, you can buy 1 single ETF “stock.” And, because the SPY ETF is traded like a single “stock”, it’s a lot easier to keep track of your investments.

I own Amazon, Apple, Twitter, General Motors, JP Morgan, Netflix, CVS… or wait, do I?
Versus:
I own “SPY” stock…

Some things to note:

  • Pros of ETF’s: 
    • By buying 1 ETF, you are immediately diversifying your portfolio and receiving exposure to hundreds of companies. (Trail mix!)
    • Easy to use, and you don’t have to do all the work researching companies to invest in. (Other managers do it for you!) Though, you do have to research the ETF and the team behind it.
    • ETF’s will update by themselves, so you don’t need to worry about managing new trends or getting rid of bad companies.
  • Cons of ETF’s:
    • Because ETF’s consist of many companies, even if your ETF has Amazon as one of the stocks, and Amazon does incredibly well, you won’t nearly gain as much because of the dilution.
    • Kinda boring? Both a pro and a con, really.
    • Expense ratio! ETF’s are sold by fund managers. That is, a team or group of people have to pick the specific companies that fit into the basket of the ETF you are buying. These people need to be paid, and so they usually take a management fee. This can range from 0.04% to upwards of 0.50%

ETF’s to look out for:

  • Tracks the S&P 500: [SPY] [VOO] [IVV]
  • Tracks NASDAQ (Tech companies): [QQQ]
  • Tracks Dow Jones: [DJIA]
  • China ETF: [CXSE] [CHIM]
  • India ETF: [INDY]

Other DTF Articles:

WTF Explanation Series:

If you have more questions, please feel free to reach out. I will gladly help you with any concerns, and we can hop on a call/chat if you want.

Email me: downtofinanceDTF@gmail.com

Follow me on social media! Instagram: @DowntoFinance


Disclaimer:

I am not a professional financial advisor or planner as much as I’d like to be. All thoughts on the DTF Website are strictly my opinions unless otherwise stated. I understand there may be errors in my writing. My articles are not meant to be offered as professional advice, as I am currently learning a lot about finance myself. Please always do your own research and due diligence when it comes to financial decisions. Money is very important! I may own some stocks discussed in this article.

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