What is an ETF?
A beginners guide to ETFs and what you need to know.
👋 everyone,
This week I came across an article in the FT which talked about the unstoppable rise of the acronym. So much so, the Germans have an actual word for being excessively fond of abbreviations - abkürzungsfimmel - try pronouncing that one if you’re not familiar with the German language 😬.
Anyway, what got me thinking about this in the first place was this week’s topic - ETFs, which stands for exchange-traded funds. Just another in a very long list of financial acronyms that gets people all hot and bothered.
Let’s jump in and explain what this one is all about.
Today I am going to cover:
A quick explanation of ETFs
🕵🏾 Differences between an ETF and a mutual fund (which often get confused)
Thinking about ETFs like they’re a bag of M&Ms 📹
📖 Key terminology you need to know
Helpful ETF finder 🔎
(Quickly) explained…
In super simple terms, an Exchange-Traded Fund (ETF) is like a bundle of different investments that you can buy as a single unit.
It's like buying a mixed bag of stocks, bonds, or other assets all at once. ETFs are designed to track a specific market index e.g. S&P 500 or group of assets, and when you invest in an ETF, you own a tiny piece of each of the investments inside the bundle.
It's an easy way to invest in a diversified portfolio without having to choose individual investments yourself.
👀 What’s the difference between an ETF and a Mutual Fund?
🧱 Structure: Mutual funds are typically managed by a professional fund manager who actively buys and sells securities within the fund. ETFs, on the other hand, are passively managed and aim to replicate the performance of a specific index.
💸 Trading: Mutual funds are bought and sold at the end of the trading day. ETFs, on the other hand, trade on an exchange throughout the day like individual stocks, and their prices can fluctuate in real-time.
✍🏼 Costs: ETFs generally have lower admin costs compared to mutual funds. This is because ETFs are passively managed, while mutual funds often involve more active management and research, which can lead to higher expenses.
🧐 Minimum Investments: Mutual funds often have minimum investment requirements, which can vary but are typically higher than ETFs. ETFs have no minimum investment requirements, allowing investors to buy even a single share.
🪟 Transparency: ETFs provide transparency as they disclose their holdings on a daily basis. Investors can easily see the underlying assets and their weights within the ETF. Mutual funds typically disclose their holdings on a quarterly basis, offering less frequent visibility into their portfolio.
ETFs explained…in 23 seconds!
🔑 terminology you need to know
Net Asset Value (NAV): The NAV represents the total value of all the assets held by an ETF, minus any liabilities, divided by the number of outstanding shares. It is calculated at the end of each trading day and serves as the indicative value of one share of the ETF.
Expense Ratio: The expense ratio is the annual fee charged by the ETF provider to manage the fund. It represents the percentage of the fund's assets that are used to cover administrative, operational, and management costs. A lower expense ratio is generally favorable for investors as it reduces the drag on investment returns.
Index: An index is a statistical measure that tracks the performance of a specific market or sector. ETFs often aim to replicate the performance of an underlying index. Examples of popular indices include the S&P 500, Dow Jones Industrial Average (DJIA), and Nasdaq Composite.
🕵️ Where can you find ETFs?
Here’s a starting point - you can use this tool to help you find and refine your search for an ETF!
Thank you very much for reading 🙏 if you found this helpful and enjoyed the post, I’d be super grateful if you could hit the ❤️ below - thank you! And if you have topics you’d like me to explain just hit reply and let me know.
DISCLAIMER: None of this is financial advice. Concepts of Finance newsletter is strictly for educational purposes.