You’ve probably heard about ETFs or Exchange-Traded Funds a few times, not only on this blog but on other sites as well. So for today’s post, let’s delve into the discussion about ETFs.
What is an Exchange-Traded Fund or ETF?
ETF is a type of investment fund that tracks an index, commodity, or basket of assets like stocks, bonds, or commodities. ETFs are typically managed by a group of professionals who are responsible for selecting the securities that make up the ETF’s portfolio, determining the fund’s investment strategy, and managing its day-to-day operations.
Think of ETF as a Christmas basket in a supermarket. The supermarket management is the one who decides what items will be on the basket based on the “Christmas” theme. The items inside the basket can be ingredients for a macaroni salad like macaroni pasta, fruit cocktail, condensed milk, mayonaise, nata de coco, kaong, etc. So in layman’s terms, investing in ETF is like you getting that Christmas basket and being done with it instead of buying the individual ingredients for your macaroni salad. Does that make sense?
Are ETFs a good investment?
ETFs are good investments for a variety of reasons. They offer:
- diversification since an ETF is comprised of different investment commodities or stocks
- low expense ratios (management fund cost) compared to Mutual funds and VULs
- ability to trade or buy and sell them as you do with stocks
Are ETFs suited for beginners?
Actually, ETFs should be the go-to for beginners since it removes the factor of having to decide which stocks or commodities you need to invest in. Even those who are seasoned investors keep 1 or 2 ETFs or have a bulk of their investments in ETFs.
Furthermore, since you’re starting out, you might not have a big amount to invest in individual stocks just yet. So buying ETFs automatically exposes you to a wide range of stocks or commodities.
That said, for beginners, it would be best to invest in ETFs that track the S&P 500 or the total US stock market. This will give you a solid foundation for investing in the stock market.
What are the popular ETFs?
There are many well-known ETFs covering various asset classes and investment strategies. Here are some of the most well-known ETFs based on their popularity and brand recognition:
SPDR S&P 500 ETF (SPY)
- tracks the performance of the S&P 500 index, which includes 500 large-cap U.S. stocks
- one of the oldest and largest ETFs
Invesco QQQ ETF (QQQ)
- this ETF tracks the performance of the Nasdaq-100 index, which includes 100 of the largest non-financial companies listed on the Nasdaq stock exchange.
- known for its exposure to technology and growth stocks
Vanguard Total Stock Market ETF (VTI)
- provides exposure to the entire U.S. equity market, including large-cap, mid-cap, and small-cap stocks
- one of the largest and most popular ETFs
Vanguard S&P 500 ETF (VOO)
- Similar to the SPDR S&P 500 ETF (SPY), this ETF also tracks the S&P 500 index and provides broad exposure to the U.S. equity market
Schwab U.S. Dividend Equity ETF (SCHD)
- provides exposure to high-quality U.S. stocks with a track record of paying dividends, with a focus on companies with sustainable dividend yields
Blogger’s note
If you missed my previous post, 60% of my portfolio in eToro is comprised of VOO, QQQ, and SCHD. The remaining 40% are individual stocks that pay out dividends.