ETF Essentials

Summary

• Definition and Function

  • Following an Index

  • Buying and Selling Shares

  • ETFs for long-term investing?

  • Popular ETFs

• Cash Movements

Welcome, fellow rookie investors!

Today, we are getting ourselves into the world of ETFs. And today's post is all about discovering how they work: What are they exactly? What different kinds are out there? And are they a good place to start if you're new to investing?

A lot of people feel a bit lost when they first think about investing their money. Big-time investors like Warren Buffett (we'll talk more about him in another episode very soon) actually suggest starting by investing in ETFs. Overall, it's a smart move for beginners and people who don’t, or can’t spend enough time researching a specific company.

Definition and Function

We already covered the basic of ETFs in a previous blog. If you haven’t already, be sure to check it by clicking on the link down below before continuing this episode.

As described previously, an ETF is like a big basket filled with different types of investments, such as stocks, bonds, or commodities. When you invest in an ETF, you're basically buying a tiny piece of that basket; they let you invest in a variety of different things all at once, without having to buy each one separately.

One of the cool aspects about ETFs is that they trade on the stock exchange, just like individual stocks. This means that they can be bought and sold throughout the day while the stock market is open. Additionally, because ETFs often track a specific index or group of investments, they can offer a way to invest in a whole market or sector without needing to pick individual stocks. So, whether you're interested in technology, healthcare, or even gold, there's probably an ETF out there that suits your investment goals.

Following an Index

Following and index means that the ETF is designed to mirror the performance of a specific group of assets, that make up that index. Think of the index as a measuring stick for the overall performance of a particular market or sector. For example, the S&P 500 index tracks the performance of the 500 largest companies by market capitalization in the US.

So, when an ETF tracks an index like the S&P 500, it holds a portfolio of stocks that closely matches the composition of that index. This allows investors to gain exposure to the overall market or a specific sector without having to buy each individual stock in the index. The value of the ETF shares will generally move in line with the performance of the underlying index. In simple terms, if the index goes up, the value of the ETF should go up too, and vice versa.

Buying and Selling Shares

Buying and selling ETFs is similar to trading individual stocks. You can purchase ETF shares through a brokerage account, either online or with the help of a financial advisor. Simply place an order to buy the desired number of ETF shares, specifying the ETF ticker symbol (unique number) and the quantity you wish to purchase. Similarly, when you want to sell your ETF shares, you can place a sell order through your brokerage account.

ETFs for long-term investing?

ETF’s can be an excellent option for long-term investing, especially for investors looking for diversification and exposure to broad market trends. Since ETFs typically track an index or a specific market sector, they provide investors with a convenient way to gain broad market exposure without needing to select individual stocks. Additionally, ETFs tend to have lower expense ratios compared to actively managed mutual funds, making them cost-effective for long-term investment strategies.

Popular ETFs

Some of the most popular ETFs include:

• SPDR S&P 500 ETF (NYSE:SPY): Tracks the performance of the S&P 500 index, representing 500 of the largest U.S. companies.

• Vanguard Total Stock Market ETF (NYSE:VTI): Provides exposure to the entire U.S. stock market, including large, mid, and small-cap stocks.

• Invesco QQQ Trust (NASDAQ:QQQ): Tracks the performance of the Nasdaq-100 index, which includes 100 of the largest non-financial companies listed on the Nasdaq stock exchange.

• iShares MSCI Emerging Markets ETF (NYSE:EEM): Offers exposure to stocks in emerging market countries, such as China, India, and Brazil.

• ARK Innovation ETF (NYSE:ARKK): Focuses on companies at the forefront of disruptive innovation across various sectors, such as technology, healthcare, and finance.

Even Warren Buffett, one of the most renowned investors in history, has publicly recommended investing in ETFs. He specifically highlighted the S&P 500 ETF as a great choice for beginner investors. He has praised the S&P 500 ETF for its simplicity and effectiveness, suggesting that it could be one of the best decisions for beginners. This ETF, which tracks the performance of the S&P 500 index (the 500 biggest companies in the US by market capitalization), has historically delivered an average annual return of around 8-10% (more on the S&P 500 in a future blog).

In conclusion, investing in an ETF is one of the best moves for rookie investors in the investment world. While picking individual stocks might seem tempting for higher potential profits, it also brings more risks. ETFs are generally speaking a safer bet because they spread your money across many different investments, markets and sectors, lowering the chance of losing big amounts of money. If you're still unsure about anything or have more questions, don't hesitate to send me a message via email or on my Instagram. I hope today's blog was clear and easy to follow! Next week, we'll talk about Brokers. Until then, keep smiling, keep learning, and I'll catch you next time!

Trevor

Disclaimer: This post is NOT financial advice. It is intended for educational purposes only. Investing involves risks, and there is a possibility of losing capital. Always conduct thorough research and consider consulting with a financial advisor before making any investment decisions. Your financial well-being is important, so please invest responsibly.

Cash Movements

• 70,77€ to a Savings Account with a 4% interest on cash, paid monthly (total balance of 259,29€)

• 150€ to my Broker, distributed as follows:

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