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You may have heard people in the investing world talk about ETFs. But if you’re new to investing, you may not know what the heck an ETF is.
In this brief article, you’ll learn what is an ETF, whether or not they are good investments, the different kinds of ETFs and more.
Let’s say you go to the store for some beer. Well, which beer should you buy? I mean, they all look good. But you’re not sure which ones you’d like and which ones you’d think taste like piss. And you don’t have enough money (or room in the fridge) to buy a case of each. So what should you do?
Well, the store’s got you covered. They sell a sampler case. It’s where they put one bottle of every beer they sell in the store together in one convenient case. This would kinda be like an ETF of beer. Which brings us back to investing…
ETF stands for Exchange Traded Fund. It’s a kind of investment that’s made up of a collection, or basket, of securities. These securities can be stocks, bonds or commodities (ie. gold or oil).
One of the most popular ETFs is the SPDR S&P 500 ETF. This ETF contains shares of all the companies whose stocks are in the S&P 500 index.
So if you buy a share of that ETF, it’s like owning a little bit of each company in that index. And the returns of your investment will mirror those of the S&P 500.
If the S&P goes up, your investment should go up. If it goes down, your investment should decrease in value.
An index fund is a mutual fund that tracks an index, like the S&P 500. Which makes index funds and ETFs very similar.
The main difference between them is that ETFs can be bought or sold at any time during the day when the stock markets are open. Mutual funds, on the other hand, only trade once per day after the markets close.
As mentioned already, ETFs can contain a number of different types of securities. In our beer example, you don’t have to buy a case of every type of beer in the store. You could buy a case of just the Pale Lagers or just the Stouts or just the Brown Ales.
Same goes for ETFs. Some types of ETFs include:
There’s a lot to like about investing in ETFs. First, they generally have very low expenses (unless you invest in an actively managed ETF – which we would NOT recommend for newbies).
Second, they offer good diversification since you’re generally investing in a large bucket of stocks or bonds when you buy shares of an ETF.
And, lastly, they’re super easy to invest in. If you’re not into doing a bunch of research on stocks, an ETF is a great investment to put some money into and then forget about for a long time. Just pick an index (or a few) that you want to invest in for the long term and you’re done. Easy peasy.