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1/ ETFs 101 My Mom texted me recently asking, “What’s an ETF?” A financial advisor had pitched her on investing her money in a “diversified pool of ETFs” (to sound complex, obviously). But what is an ETF and how does it work? So for my Mom (and all of you), here’s ETFs 101!
2/ Just think of an Exchange-Traded Fund (“ETF”) as a basket of goods. The goods are financial assets, such as stocks, bonds, commodities, etc. You can buy shares (partial ownership) of this basket. It’s similar to a mutual fund, but can be freely-traded, just like a stock.
3/ ETFs can track sectors, asset classes, indexes, etc. They provide liquid (convertible to cash), low cost diversification. The biggest ETF isssuers are @blackrock (@iShares), @Vanguard_Group, and @StateStreetETFs. The largest ETFs are $SPY $IVV $VOO (all track the S&P 500).
4/ To illustrate how it works, let’s use a simple story. Imagine you live in a remote village in 1700s France. You don’t have access to the bustling street markets of Paris, you have no way of getting there. You want to trade in exotic goods, but you can’t.
5/ Luckily, the richest man in town, Mr. ETFienne, has a plan. He rides to Paris in his carriage and buys a big basket of exotic goods. He offers you a share, on paper, of his basket. He takes your money (and a small fee for his trouble!). You now own one share ETFienne’s ETF.
6/ You’re an exotic goods trader now. All without leaving the comfort of your own village! You paid 5 Livre (the 18th century French currency for you non-history buffs) for the one paper share. With it, you indirectly invested in a diverse basket of exotic teas and spices.
7/ If war breaks out in the colonies and the prices of these goods become volatile, you can buy and sell the ETF shares to speculate on these price movements. If the prices are stable and growing, you can hold onto your ETF share to accumulate wealth. “ETFs are great!” you say.
8/ So as we see in this story, Mr. ETFienne’s ETF was just a basket of goods whose shares were freely-traded on an open market. Why use ETFs? 1️⃣ - Liquidity 2️⃣ - Diversification 3️⃣ - Tax Efficiency In summary, ETFs may be a better option than mutual funds for many investors.
9/ That was ETFs 101! Mom, I hope you’re reading this, and I hope you see that ETFs aren’t as complicated as you may have been led to believe. Please share with your friends and family and send any other suggestions for topics my way. Stay tuned for more...
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10/ Note: There are complexities to ETF construction that I have glossed over in this 101. If interested, I can cover them in a future thread, but in the interim, please see the link below. My smart friend @SeifelCapital would be happy to talk shop on it. https://www.investopedia.com/articles/mutualfund/05/062705.asp

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