Episode #7 - A,B, C, D, ETF

Let's do this dive so next week we can check out Mutual Funds!

Intro:

Over the previous episodes of this newsletter, I’ve deftly avoided getting too into the weeds about different concoctions of stocks/bonds. I’ve laid out in broad strokes what your portfolio should look like (different types of companies) and I’ve suggested that you not try to time the market, but in this episode I’ll give you some explanation for the now famous Exchange Traded Funds (ETFs).

We’ll use this to foreground an episode about mutual funds and finally a full-on comparison issue. Put on your seat-belts, put back your dramamine because it’s going to be a bumpy ride.

To get the earlier, smoother ride follow the red button:

(I’ve inserted this Google ad for effect, when you “search” for what an ETF is, before you get to any articles you get three ads…that means when someone starts talking ETFs they usually want you to buy them.)

Background:

In the world of Way Back Machine, you might presume that I’d start with mutual funds as we go down this road, but I think the more emergent product, ETFs, will get us to a good start to understand what we’re trying to do with our portfolios.

First and foremost, and ETF is a PRODUCT. Yes, similar to an iPhone, you COULD make it at home, but it would likely be much worse than what you buy at a heavily sanitized Apple store, same with an exchange traded fund. You could buy every stock in an exchange/index and then carefully buy and sell them as the market moves, but instead you can use the handy ETF.

Developed in the 90s (90s babies, email me and tell me what your most vivid 90s memory was, I presume it’s not the invention of the ETF) over the course of a few starts and stops, the ETF took full shape under the auspices of State Street Global Investors in the form of S&P 500 SPDR (yes, like spider-man). It was developed in the spirit of passive investing, as we’ve discussed in the past, the less an investor needs to monitor their trades the better. However, in the previous iterations of these types of products (mainly, mutual funds), you would have a much higher minimum investment to get a piece of this passive investment. For a more in-depth take on the different types of ETFs, click here.

What is the significance of the ETF?

First off, these ETFs cost much less money to manage than mutual funds (again, more next week), which makes them more affordable for a less savvy or well-positioned consumer of specialized investment products. Because ETFs are not actively managed, their fees stay low. Additionally, the minimal management fee means that they are not traded as often and cost less on the tax side of things (remember, the main time you pay taxes is when you sell shares, or when the person/company that arranges the ETF sells shares in the bundle).

The other nice part about the ETF is that you can get in on it for much less than a mutual fund. For example, our earlier discussed S&P 500 ETF SPY for for just a tad over $300/share. Compare that to a mutual fund that will often start at $3,000.

Takeaway:

ETFs get you into bundles of stocks, indexes, small-cap, large-cap, mid-cap, and all other types of stock arrangements with the click of a button. You can sell all of the stocks in the bundle with the same click. Simplicity is not the only takeaway here. You also get the power of a diverse portfolio with fewer steps and less risk than you would if you owned each stock individually and manually managed them.

Interact:

You likely saw the 90s baby reference (i.e. what would you have said was the most significant advance of the 1990s), however I would urge you to find an ETF that interests you and just buy one share of it. Perhaps it’s something as simple as buying a share that covers the whole S&P 500, maybe it’s pacific rim stocks, really just any ETF will do for this stage. Once you pick it up, give it some time to follow its growth (or drop) and see what you learn about it. What is its market cap? How many points did it go up or down? Any questions that emerged from seeing it?

Gratitude:

Thank you for continuing to follow me on this journey, and please share the letter with a friend, or five.