Note: This post has been adapted from this week’s edition of Wealth Tip Wednesdays.
It is no secret that I am incredibly passionate about individual stocks. As a matter of fact, I’d go as far as saying that individual stocks are my “first love” when it comes to investing. However, I have to say that I find ETFs to be extremely fascinating.
I heard about ETFs for the first time around 2009 but didn’t understand their power, potential, and advantage until several years later.
Considering many of you are beginners in the investing world, I wanted to take this opportunity to share some wisdom about what these type of investments are all about.
In this post, we’ll break it all down: What they are, how they work, and a couple of examples.
First: What are they?
ETF stands for Exchange Traded Funds. You can think of an ETF as a “basket” of investments which contains pieces of different stocks. There is practically a “flavor” of ETF for every sector, industry, type of investment you can think of. There are also ETFs that represent the entire stock market. And so, by buying one of those, you’d technically own the whole market in one investment.
How they work:
ETFs differs from buying an individual stock because, as you might have guessed, instead of buying shares in one single company, you can purchase pieces of different stocks you like through one single investment. This has two main advantages:
1. You are automatically diversified. This means you’ll own various investments all at once without having to figure out which stocks you want to buy to build a diversified portfolio. And…
2. You can buy these investments at a fraction of the cost of what a single share would cost you.
Let’s look at REAL LIFE examples:
An ETF that falls into the “Consumer Discretionary” category and includes pieces of companies like Amazon, Home Depot, McDonald’s, Nike, Lowes, Booking Holdings, TJX companies – and several other high-quality, well-known companies – has generated a return on investment of 63.52% over the past 5 years alone. Over the past 10 years? Returns of over 393%.
Or, let’s say you’d like to be slightly more “conservative” and are interested in an ETF that represents the entire market. Well, a popular S&P500 ETF which does just that – has generated a return on investment of 50.08% over the last 5 years alone. Over the past 10 years? 165.5%.
There are just two examples. When it comes to ETFs, the choices are extensive! Have you ever heard of Index Funds? Those work very similar to ETF.
Side note – compare those returns to the 0.06% that the average brick and mortar bank would pay you in interest. It’s impossible to compare!!!
How to get invested:
The key with ETFs, Index Funds, Stocks, and beyond is to learn how to make EDUCATED investment decisions and know what metrics you should be looking into when selecting an investment.
In the case of ETFs – metrics such as expense ratios, performance over time, holdings, turnover ratios, and many others, are all important to reach an EDUCATED decision.
And that is all folks! Hope you learned something new today. Questions about any of this? Share in the comments or email me: Girlsonthemoney@gmail.com.
And as always – cheers to Health & Profits,
**For those of you that are interested in learning the skill of ETF and Index Fund investing, we have a course for beginners. Check out full details of what the course includes, student testimonials, and enroll by clicking here.
Additional Courses & Resources:
New to investing and looking for a guide that’ll explain all your options? Check out this excellent resource.
Stock Market Investing for Beginners – The summer 2019 edition of this course is sold out. If you’d like to be part of the Fall 2019 edition of the course, make sure your name is on the waiting list.