By the time you’re done reading this article, you’ll have a better grasp of what an ETF is and how it can benefit your financial future!
The main topics I will cover are those things I WISH I HAD KNOWN ABOUT AND PUT INTO APPLICATION as a young professional fresh out of graduate school.
You’ve heard it over and over again… That one acronym… “E-T-F”
“Ee, tee, eff”
ETF. VTI, VOO, VFINX, BND, VEU…
Sounds like some alien language to me.
That one annoying coworker won’t shut up about them.
Same with that one friend who seems so good with money.
ETF this, ETF that…
“Change Chumps! What is an ETF? And how the heck does it help me?!”We thought you’d never ask…
Grab a cup of hot coffee, turn off the TV and let’s dive deeper into the subject, shall we?
What is an ETF?
ETF stands for Exchange-Traded Fund. Simply put, it is a basket of diverse assets that you can buy, hold and sell like a normal stock. It’s a stock that contains multiple stocks/bonds/commodities/etc… So you buy ONE low-maintenance, low-cost stock on an exchange and you get MANY shares of DIVERSE assets. They also pay out DIVIDENDS and appreciate or decrease in value like a stock.
They are sometimes referred to with abbreviated symbols:
- VTI (Vanguard Total Stock Market ETF)
- VOO (VANGUARD IX FUN/S&P 500 ETF)
- VEU (VANGUARD INTL E/VANGUARD FTSE ALL W)
- SPY (SPDR® S&P 500 ETF)
- SCHF (Schwab International Equity ETF)
Diversification with ETF
That’s nice and all, Change Chumps, but I still don’t f**** get it!!
Alright, please calm down. Here, eat a Twix bar. Do you like Twix bars? Maybe you do, but your partner doesn’t. They rather eat Snickers.
So when you go to the grocery store, instead of buying a bunch of Twix and Snickers individually-sold bars, you come up with the brilliant idea to buy…. Wait for it….
The f**** VARIETY PACK!!!
Oh hell yeah! It’s cheaper, conveniently packaged, and every one is happy. You’ll just feed your annoying neighbor the gross Milky Way and Musketeer bars.
Buying an ETF is like buying a variety pack of stocks or bonds. You get a bit of everything! Amazon, Google, Microsoft…
And the people who decide what goes in the pack are professionals whose only job is to maintain the pack with the best that the market offers!
Buy the entire market
So if you bought $5,000 of tech-stock ABC for $10/share because it’s a new start-up and unfortunately it dumps a year later down to $0.4/share, you’d be screwed. Congratulations! You just turned $5000 into $200 by trying to time the market. Don’t feel bad, I’ve done it.
If you do your research and buy your ETFs correctly, it’s like BUYING the ENTIRE MARKET, or at least a big chunk of it.
So for your shares to reach $0.4/share like the single-stock example above, this means the WHOLE MARKET would have to tank and come close to zero.
I don’t know about you, but if the whole market tanks, I think we have bigger problems on our hands. I’m pretty sure things would look like a zombie apocalypse movie at that point. As a result, money wouldn’t even matter because zombies don’t take money.
Anyway, you can own shares in many different companies by buying just ONE ETF. In doing that, you are effectively achieving HIGH DIVERSIFICATION.
Diversification comes at the price of average returns since you’re not holding and banking on just a few stocks (all eggs in one basket), but rather, buying the market average (a few eggs in all the baskets).
Over the last 100 years, the stock market has averaged 7% yearly returns. While this is no guaranteed predictor of future performance, historical data is all that we have to anchor our decisions.
However, that’s all we need: CONSISTENTLY AVERAGE (or slightly better than average) results.
For example, here’s how Vanguard’s VTI index (Total US Stocks) has performed over the last 15 years.
Buying ETF is the LAZY and EFFICIENT way to invest PASSIVELY
I don’t know about you, but I’m all about spending the least amount of time to get the most results. I’m lazy and I want to make money while I sleep.
- ETFs are low-maintenance: you literally don’t have to do sh*t. Just buy and hold them. They’re already managed for you by professionals (charging you hopefully a low Management Expense Ratio or MER).
- ETFs are low-cost: every broker out there has their own version of an ETF that tracks a stock or bond index, and they often offer them with NO transaction commissions (Vanguard’s version of SP500: VOO).
- ETFs are liquid: liquidity is how fast you can liquidate an asset and access your funds. With ETFs, unlike mutual funds, a house, or a Certificate of Deposit, you can pull your money out at any time at the click of a button, usually within the same day. You’ll just realize the gains/losses on your shares (don’t forget taxes too).
- ETFs return dividends: typically quarterly, you get paid dividends (cash flow!) because you’re a SHAREHOLDER of a sh*tload of different companies! This is a major key, and possibly the best benefit from owning ETFs.
- ETFs are adaptable: for the ethical and environment-minded young investors out there, there are many indices that purposefully screen out companies that have been known to violate child labor laws or disregard the environment (socially-responsible Vanguard ESG)
“Change Chumps, SHUT UP AND TAKE MY MONEY!!!”
Hold up! Before we keep going, there’s a few things I think you should know about.
Drawbacks of ETF
Like with anything, always consider the cons before you dive head in. Here are some of the things that can go wrong.
- Can be illiquid: if you pick a thinly traded ETF, then sometimes you can’t sell your shares off because there’s no other party to buy them from you. You’re stuck holding the hot potato.
- Can be volatile: if you invest in an ETF that tracks the economy of a country where there is social unrest or if the place becomes war-torn, your assets may be subject to huge fluctuations.
- Can have factors out of your control: what if you like the performance of a certain index but don’t like some of the companies that it tracks? Tough luck, as there’s not much you can do besides choosing another asset at the cost of performance.
More about ETFs and investing
Now that’s that out of the way, check out our next article: Invest in ETF with your first $5,000
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Did you know what ETFs were before you found this article? Perhaps you’re more interested in mutual funds? Are there any ETFs that you really like or dislike? Do you prefer Twix or Snickers?! We’d love to hear your feedback in the comments below!
As usual, Change Chumps cannot be held responsible by any party for any application of the information mentioned on this page. Always do your due diligence and research thoroughly before investing your hard-earned money.