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ETFs Explained
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In this video I'll discuss Exchange Traded Funds (ETFs) and why they are a great investment tool. Here are the highlights...
To understand ETFs it helps to understand mutual funds because these two financial instruments are alike in many ways.
A mutual fund is a pool of money from many investors, that is used to purchase securities such as stocks. You buy shares of the fund and then you are invested in whatever stocks the fund owns. If it’s a managed fund, then a fund manager will pick the stocks, and if its an index fund, then the stocks in the fund are tied to an index such as the S&P 500.
An ETF is very much the same. Its also a pool of money, and it also buys stocks which you are now invested in as a shareholder of the ETF. So, what exactly are the differences? The main difference is that an ETF behaves more like a stock than a fund. What that means is there is no minimum to invest, and you can buy just one share of an ETF. ETFs can also be shorted and bought on margin, which means using borrowed money from a broker, which is something you can’t do with a mutual fund. ETFs are also very liquid and can be traded easily.
ETFs started their life, and became famous for, low-cost tracking of indices, and they are relatively new kids on the financial block, first appearing in 1990. 30 years later they’ve become quite popular with over 5,000 ETFs available worldwide, and with nearly $5 trillion in combined assets.
Just like with mutual funds, you can have all sorts of ETFs, and really the sky is the limit here. When most people discuss ETFs, they are talking about market ETFs, which all invest in indexed stocks. You can also invest in bond ETFs, commodities ETFs, and foreign ETFs, among others.
Here are some advantages of ETFs:
Advantage #1: Low Fees. This comes with the territory of being a passive index tracker, and this is something all such ETFs have in common with index funds. The average index ETF carries a 0.20% expense ratio, with many ETFs charging less.
Advantage #2: Diversification. This also comes with the territory of any ETF or mutual fund that tracks a major index. If your ETF is tied to the S&P 500, you are investing in 500 companies from just about every sector and industry.
Advantage #3: Low Entry Threshold. This is a major ETF-only advantage over mutual funds. If you check around, many desirable mutual funds have a minimum initial investment of anywhere from $1,000 to $10,000. Not so with ETFs – you can just buy one share to get started.
Advantage #4: Taxes. Index ETFs incur less capital gains tax because they sell far less stocks than managed funds.
Advantage #5: Liquidity, Transparency, and Simplicity. A significant benefit is that major ETFs are very liquid, which means it’s very easy to buy and sell them, and their holdings are fully transparent. They are also simple, user-friendly, and combined with the low fees, are a great entry point for a beginner investor.
There are some disadvantages to ETFs as well:
Disadvantage #1: Lack of targeted investing. Since there are much less ETFs available out there than mutual funds, you may not find exactly what you want if you’re looking for a very specific or unique investment opportunity. Most ETFs track major indices or large cap companies, so if you’re looking for something a bit more exotic, you’ll have to seek out a specialized mutual fund instead.
Disadvantage #2: You won’t beat the market. This really applies to all passive indexed investments, and you will only do as good as the market, never better, but never worse either.
DISCLAIMER
This video was created for informational and educational purposes only, and should not be construed as a source of specific investing, financial, accounting, or legal advice. This video should never be used as the sole source of information, without consulting with a financial or legal professional to determine what may be best for your individual needs. The creator of this video, Elliot J. Gindis, does not make any guarantee or other promise as to any results that may be obtained from using the information in the video. To the maximum extent permitted by law, the creator of this video disclaims any and all liability in the event that any information, commentary, analysis, opinions, advice, and/or recommendations contained in this video prove to be inaccurate, incomplete, or unreliable, or result in any financial or other losses.
Learn about building credit, establishing savings, effective budgeting, and managing debt!
✅ GET THE KEYSTONE FINANCIAL GUIDE:
The ultimate all-inclusive textbook on Money and Investing!
✅FOLLOW ME ON INSTAGRAM:
► @ejgindis
In this video I'll discuss Exchange Traded Funds (ETFs) and why they are a great investment tool. Here are the highlights...
To understand ETFs it helps to understand mutual funds because these two financial instruments are alike in many ways.
A mutual fund is a pool of money from many investors, that is used to purchase securities such as stocks. You buy shares of the fund and then you are invested in whatever stocks the fund owns. If it’s a managed fund, then a fund manager will pick the stocks, and if its an index fund, then the stocks in the fund are tied to an index such as the S&P 500.
An ETF is very much the same. Its also a pool of money, and it also buys stocks which you are now invested in as a shareholder of the ETF. So, what exactly are the differences? The main difference is that an ETF behaves more like a stock than a fund. What that means is there is no minimum to invest, and you can buy just one share of an ETF. ETFs can also be shorted and bought on margin, which means using borrowed money from a broker, which is something you can’t do with a mutual fund. ETFs are also very liquid and can be traded easily.
ETFs started their life, and became famous for, low-cost tracking of indices, and they are relatively new kids on the financial block, first appearing in 1990. 30 years later they’ve become quite popular with over 5,000 ETFs available worldwide, and with nearly $5 trillion in combined assets.
Just like with mutual funds, you can have all sorts of ETFs, and really the sky is the limit here. When most people discuss ETFs, they are talking about market ETFs, which all invest in indexed stocks. You can also invest in bond ETFs, commodities ETFs, and foreign ETFs, among others.
Here are some advantages of ETFs:
Advantage #1: Low Fees. This comes with the territory of being a passive index tracker, and this is something all such ETFs have in common with index funds. The average index ETF carries a 0.20% expense ratio, with many ETFs charging less.
Advantage #2: Diversification. This also comes with the territory of any ETF or mutual fund that tracks a major index. If your ETF is tied to the S&P 500, you are investing in 500 companies from just about every sector and industry.
Advantage #3: Low Entry Threshold. This is a major ETF-only advantage over mutual funds. If you check around, many desirable mutual funds have a minimum initial investment of anywhere from $1,000 to $10,000. Not so with ETFs – you can just buy one share to get started.
Advantage #4: Taxes. Index ETFs incur less capital gains tax because they sell far less stocks than managed funds.
Advantage #5: Liquidity, Transparency, and Simplicity. A significant benefit is that major ETFs are very liquid, which means it’s very easy to buy and sell them, and their holdings are fully transparent. They are also simple, user-friendly, and combined with the low fees, are a great entry point for a beginner investor.
There are some disadvantages to ETFs as well:
Disadvantage #1: Lack of targeted investing. Since there are much less ETFs available out there than mutual funds, you may not find exactly what you want if you’re looking for a very specific or unique investment opportunity. Most ETFs track major indices or large cap companies, so if you’re looking for something a bit more exotic, you’ll have to seek out a specialized mutual fund instead.
Disadvantage #2: You won’t beat the market. This really applies to all passive indexed investments, and you will only do as good as the market, never better, but never worse either.
DISCLAIMER
This video was created for informational and educational purposes only, and should not be construed as a source of specific investing, financial, accounting, or legal advice. This video should never be used as the sole source of information, without consulting with a financial or legal professional to determine what may be best for your individual needs. The creator of this video, Elliot J. Gindis, does not make any guarantee or other promise as to any results that may be obtained from using the information in the video. To the maximum extent permitted by law, the creator of this video disclaims any and all liability in the event that any information, commentary, analysis, opinions, advice, and/or recommendations contained in this video prove to be inaccurate, incomplete, or unreliable, or result in any financial or other losses.
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