If you heard about ETFs but don\u2019t completely understand what they are, you\u2019re at the right place.<\/p>\n
Note that this post is part of the How to Start Investing Series. If you\u2019re just starting out and want to kick-start your investment journey, you can start there.<\/p>\n
\nWhat are ETFs?
\n<\/h3>\nLet\u2019s start with breaking down the acronym first. Maybe it will answer more questions than only what it stands for.<\/p>\n
ETF stands for Exchange Traded Fund<\/strong>.<\/p>\nExchange traded<\/em>, as it suggests, means that it\u2019s traded on a stock exchange (similar to stocks<\/a>). And fund<\/em>, as it suggests, means that it\u2019s a fund (has similar characteristics to mutual funds<\/a>).<\/p>\nSo basically, an ETF is a like a basket that can hold stocks, bonds, currencies, commodities, or other underlying assets<\/strong>.<\/p>\nMost ETFs track the performance of a market index<\/a>.<\/p>\nThis might remind you of an index fund. And indeed, in many ways index-tracking ETFs are quite similar to index funds<\/a> but at the same time, they\u2019re also quite different.<\/p>\n\nDifference between index funds and ETFs
\n<\/h3>\nAlthough owning<\/strong> an ETF shouldn\u2019t feel much different than owning an index fund, buying<\/strong> an ETF shouldn\u2019t feel much different than buying a share in a company.<\/p>\nETFs trade on stock exchanges, just like stocks. So you wouldn\u2019t buy the shares from the fund itself, but through a broker.<\/p>\n
As you probably remember, index funds can be bought or sold at the end of a trading day for their NAV (net asset value). But since ETFs trade during trading hours, their value fluctuate throughout the day.<\/p>\n
So unlike index funds, it is possible to day-trade ETFs. Which doesn\u2019t mean that you should\u2026 You\u2019re becoming an investor<\/a>, not a trader.<\/p>\n\nUnderstanding an ETF Quote
\n<\/h3>\nYou can research the details about a certain ETF using its provider\u2019s website (such as iShares or Vanguard) or a third-party resource such as JustETF.<\/p>\n
The first thing you\u2019d see is the fund\u2019s performance \u2013 usually its 3 month, YTD (year to date), 1 year, 3 year, and 5 year returns.<\/p>\n
But the most important details will be in the factsheet\/fund facts section.<\/p>\n
Here\u2019s an example of what you would see:<\/p>\n
![\"etfs\"](\"https:\/\/monkwealth.com\/wp-content\/uploads\/2022\/07\/CSPXDetails.png\")
<\/p>\n
The fund facts cover almost everything you need to know as an index investor<\/a>.<\/p>\nAs you can see in the picture above, the\u00a0benchmark index<\/strong> field shows that it tracks the S&P 500.<\/p>\nKeep in mind that these fields can have different names in different resources. But when you know what you\u2019re looking for, it won\u2019t be a problem to figure it out.<\/p>\n
Below are some more characteristics you might be interested in:<\/p>\n
\n- \nDistribution policy<\/a>\u00a0<\/strong>(Dist. vs Acc.), describing whether the fund pays out dividends or reinvests them. In the picture, it\u2019s the Use of Income<\/em> field and it\u2019s Accumulating<\/em>.<\/li>\n
- \nDistribution frequency\u00a0<\/strong>(yearly, semi-annually, quarterly) and the yield\u00a0<\/strong>(similar to stocks \u2013 the ratio between the annual per-share dividend and the ETF\u2019s price).<\/li>\n
- \nManagement fee<\/strong> or total expense ratio<\/strong> is what you\u2019ll need to pay close attention to. Similar to mutual funds, all ETFs have annual management fees.<\/li>\n
- \nShares outstanding<\/strong>\u00a0and the\u00a0volume\u00a0<\/strong>describing how much is traded over a period of time.<\/li>\n<\/ul>\n
\nHow to Pick ETFs
\n<\/h3>\nThe good news is that you\u2019d only need a subset of the characteristics mentioned above to successfully pick an ETF.<\/p>\n
Once you determined your index<\/strong> and distribution policy<\/strong>, it comes down to picking the ETF with the lowest\u00a0TER\u00a0<\/strong>(Total Expense Ratio).<\/p>\nFor ETFs that track an index, this should be a small percentage. To help you understand the scale, the ETF from the screenshot above (CSPX) has a TER of 0.07%. That means that on a portfolio of $10k, you\u2019d pay a 7$ fee. This is for the privilege of clicking a button and having BlackRock worry about distributing your money across 500 companies.<\/p>\n
Spend some time comparing the costs of ETFs, as a low cost is crucial for long-term investing. In my T<\/a><\/b>otal Expense Ratio post<\/a>,<\/strong> I already described how big of a difference a 1% fee can make in the long run.<\/p>\nIn summary, you can save hundreds of thousands dollars over the years by making a good decision today.<\/p>\n
Apart from the TER, the volume is also pretty important. A low cost doesn\u2019t do much for an ETF that nobody trades. To avoid liquidity issues, try to pick ETFs from the largest providers. These include:<\/p>\n
\n- BlackRock (managing iShares)<\/li>\n
- Vanguard<\/li>\n
- SPDR<\/li>\n
- Amundi<\/li>\n
- Charles Schwab, etc.<\/li>\n<\/ul>\n
To compare ETFs from different providers in an uniform manner, I recommend using the ETF screener at JustETF.<\/p>\n
It\u2019s a really useful tool that allows you to filter ETFs by type (equity, bonds, commodity, real estate, etc.), region, country, sector, and much more. It offers an easy way to compare the most important details of your top picks without of going to the websites of various providers with different UIs.<\/p>\n
\nSummary of picking ETFs
\n<\/h3>\nPick an index and a distribution type<\/a>, and then choose a liquid ETF with the lowest TER<\/a>.<\/p>\nLearning is much easier when you have a tight grasp on the fundamentals, isn\u2019t it?<\/p>\n
\u00a0<\/p>\n
This post is Part 6 of the How to Start Investing Series.<\/em><\/p>\n\u00a0<\/p>\n
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Exchange traded<\/em>, as it suggests, means that it\u2019s traded on a stock exchange (similar to stocks<\/a>). And fund<\/em>, as it suggests, means that it\u2019s a fund (has similar characteristics to mutual funds<\/a>).<\/p>\n So basically, an ETF is a like a basket that can hold stocks, bonds, currencies, commodities, or other underlying assets<\/strong>.<\/p>\n Most ETFs track the performance of a market index<\/a>.<\/p>\n This might remind you of an index fund. And indeed, in many ways index-tracking ETFs are quite similar to index funds<\/a> but at the same time, they\u2019re also quite different.<\/p>\n Although owning<\/strong> an ETF shouldn\u2019t feel much different than owning an index fund, buying<\/strong> an ETF shouldn\u2019t feel much different than buying a share in a company.<\/p>\n ETFs trade on stock exchanges, just like stocks. So you wouldn\u2019t buy the shares from the fund itself, but through a broker.<\/p>\n As you probably remember, index funds can be bought or sold at the end of a trading day for their NAV (net asset value). But since ETFs trade during trading hours, their value fluctuate throughout the day.<\/p>\n So unlike index funds, it is possible to day-trade ETFs. Which doesn\u2019t mean that you should\u2026 You\u2019re becoming an investor<\/a>, not a trader.<\/p>\n You can research the details about a certain ETF using its provider\u2019s website (such as iShares or Vanguard) or a third-party resource such as JustETF.<\/p>\n The first thing you\u2019d see is the fund\u2019s performance \u2013 usually its 3 month, YTD (year to date), 1 year, 3 year, and 5 year returns.<\/p>\n But the most important details will be in the factsheet\/fund facts section.<\/p>\n Here\u2019s an example of what you would see:<\/p>\n The fund facts cover almost everything you need to know as an index investor<\/a>.<\/p>\n As you can see in the picture above, the\u00a0benchmark index<\/strong> field shows that it tracks the S&P 500.<\/p>\n Keep in mind that these fields can have different names in different resources. But when you know what you\u2019re looking for, it won\u2019t be a problem to figure it out.<\/p>\n Below are some more characteristics you might be interested in:<\/p>\n The good news is that you\u2019d only need a subset of the characteristics mentioned above to successfully pick an ETF.<\/p>\n Once you determined your index<\/strong> and distribution policy<\/strong>, it comes down to picking the ETF with the lowest\u00a0TER\u00a0<\/strong>(Total Expense Ratio).<\/p>\n For ETFs that track an index, this should be a small percentage. To help you understand the scale, the ETF from the screenshot above (CSPX) has a TER of 0.07%. That means that on a portfolio of $10k, you\u2019d pay a 7$ fee. This is for the privilege of clicking a button and having BlackRock worry about distributing your money across 500 companies.<\/p>\n Spend some time comparing the costs of ETFs, as a low cost is crucial for long-term investing. In my T<\/a><\/b>otal Expense Ratio post<\/a>,<\/strong> I already described how big of a difference a 1% fee can make in the long run.<\/p>\n In summary, you can save hundreds of thousands dollars over the years by making a good decision today.<\/p>\n Apart from the TER, the volume is also pretty important. A low cost doesn\u2019t do much for an ETF that nobody trades. To avoid liquidity issues, try to pick ETFs from the largest providers. These include:<\/p>\n To compare ETFs from different providers in an uniform manner, I recommend using the ETF screener at JustETF.<\/p>\n It\u2019s a really useful tool that allows you to filter ETFs by type (equity, bonds, commodity, real estate, etc.), region, country, sector, and much more. It offers an easy way to compare the most important details of your top picks without of going to the websites of various providers with different UIs.<\/p>\n Pick an index and a distribution type<\/a>, and then choose a liquid ETF with the lowest TER<\/a>.<\/p>\n Learning is much easier when you have a tight grasp on the fundamentals, isn\u2019t it?<\/p>\n \u00a0<\/p>\n This post is Part 6 of the How to Start Investing Series.<\/em><\/p>\n \u00a0<\/p>\n Share This Post<\/span><\/p>\n \n \nDifference between index funds and ETFs
\n<\/h3>\n\nUnderstanding an ETF Quote
\n<\/h3>\n<\/p>\n\n
\nHow to Pick ETFs
\n<\/h3>\n\n
\nSummary of picking ETFs
\n<\/h3>\n<\/p><\/div>\n