What Tha Finance?!: ETFs
Snatching stocks can be a bit risky for some, especially those who are getting used to investing. The market can go up and down in the blink of an eye. I know when I first started investing well over 6 years ago, that was one of the biggest things that had me shooked. That you can pay $10 for something and in 5 minutes it can be down to $5 only to run up to $20 the next day. Confused, much? I was.
But just as with anything, there is a risk. The key to investing to not only know your “Build” fund (budget), but mostly your financial objectives. Think of those as goals (we’ll chat about this later). How much risk are you willing to do to get a certain reward? Being broke is a risk and working on your wealth is a risk - pick which one you want to push towards. Simple.
Check out my Soundbite talking about them!
Back to the subject - ETFs. In true WTF fashion, some folks have asked me what are those and what makes them dope. Well, Beloved - let me break this down for you easily:
You know those assorted bags of chips that you can grab from the big box stores? That’s what they are. Seriously. An ETF or Exchange Traded Funds is simply a mix of funds (companies) within one bag that you can purchase. There can be roughly between 50 -100++ of funds within one ETF. Wild, right? Not so much; it’s called lessening the risk. One of the oldest and coldest ETFs is SPDR S&P500 and it is one of the most popular ones (Tea).
No matter the level of investor, these are a good way to either start or diversify your portfolio. Why? One fund/company can’t sink the ship. Just like you get mad when that one bag of chips has roughly 2 chips in it, but you have the rest of the assortment to balance off the cost of the overall purchase. Compared this to an individual stock is like Otis being by himself. If folks don’t come to see him (it doesn’t perform well), ticket sales or the stock price can go down.
How so? An ETF's expense ratio is the cost to operate and manage the fund. ETFs typically have low expenses since they track an index - which makes them attractive to investors!
What types are there?
Equity ETF: These pretty much track the index of equities. Most ETFs are these or mirror them.
Bond/Fixed Income ETFs: This allows you to diversify your portfolio with some bond action without investing in them. Investors like these due to them being ‘fixed’ meaning, not much change will happen with them. The risk will be moderately low. There are even ETNs (Exchange Traded Notes ) that would allow you to have Bond exposure.
Commodity ETFs: If you’ve been waiting to invest in gold, silver and other commodities like oil. It’s easier obtain the ETF than the asset itself! Will touch on this point later.
Currency ETFs: These will allow you to invest in a single currency, like the US dollar, or a basket of currencies. They will often mix two or more currencies within them. These have a bit more risk out of Motley Crew due to how the value of the dollar or currency changes (inflation). You heard of “strength of the dollar or _____” ? ; this would be impacted by that flow. Especially internationally coint.
Factor ETF: These are geared towards specific funds like Real Estate, etc. Within that, the returns might be different. Case by case situation. Another Term, “Smart Beta”.
Bitcoin/ Cryptocurrency ETF: In my eyes, these new-ish types of ETF fuses Factor, Commodity and Currency into one. With this type of currency popularity growing by the second, even NASDAQ can’t deny it. There have been ETF filings for years but by November 2021, et could stand to see up to 4 listed. I do see this growing beyond Bitcoin in the future hence my title. Here are my feelings about the Bitcoin Futures ETF (No wrong or right more here, IMO.
Sustainable ETF: Sustainable investing combines traditional investment approaches with environmental, social and governance insights; And ESG investing is another sector that is rapidly growing.
Additional Tea: One of the things that I want to call out is that some of these ETFs give you exposure to certain things without owning those things. As crazy as that sounds. Yet, it does off you the chance to learn how they work prior to you purchasing or test driving. This helps decrease your risk to holding (owning) that direct asset as well (ex Bitcoin, Bonds, Pound, etc)
What makes them dope?!
Exposure: You are basically buying stocks across various industries within one purchase. Access is key. They also help you diversity easily. Due to the fact that many ETFs can have many different types of funds in them.
Risk: You get to keep your sanity while you are learning your portfolio mix and investing style.
Dividends: Depending on this mix, you will more than likely get a lick (paid). They are often paid either monthly or quarterly. This is against the performance of the entire ETF. One apple can’t spoil the bunch.
Compounding: I love to tell folks to mix it up (diversification) when it comes to their portfolio. Some long-term and some short-term. ETFs are dope when it comes to long-ball play making with your wealth!
Low Cost: Some Index Funds + Mutual Funds can come with fees, ETFs have lower fees.
Two things to be mindful of:
Single industry ETFs stump diversification; this isn’t for all types of ETFs.
Lack of liquidity hinders transactions. Meaning that they might not have as much cash on hand, depending on the funds within.
Tax Risk. If you have some international exposure within that ETF you might experience some tax changes. Research. Be mindful also of Currency ETFs.
Check the weight. Each holding within the ETF is listed out (talk about transparency), make sure you are getting the amount you want out of a specific fund before you purchase. Oh, make sure you aren’t purchasing the same holdings with similar exposure within two different ETFs, its like buying the same shirt twice.
Example -
You want to purchase some oil, but you aren’t very sure of what funds or how to go about snatching some. Look into ETFs that have a good weight (percentage) of oil funds. This gives you lead way into that industry.
Resource: ETF Screener. This platform is amazing for you finding out about ETFs before reaching for your wallet.