WTF is an ETF?!?!?

Why you should invest in cute lil asset bundles

Author

Bailey
October 10, 2023

Hello & happy FALL Monarch fam bam 🎃🦇🎉

Bailey here 👋

Since it’s spooky season, let’s unpack an investing acronym that, although scary on first encounter, is actually a FANTASTIC way for newbies to dip their toes into the world of investing💧

Without further adieu, let’s dive into WTF an ETF is ✨

Monarch Menu:

  • What is an ETF!!

  • ETFs as snack mix 😋

  • Benefits of ETFs

  • Types of ETFs

  • 10 ETFs for beginners

What is an ETF?

While the definition is right in the name (ETFs = "exchange-traded funds") we definitely need to unpack this further.

ETFs are a bundle of assets that you can invest in, similar to how you invest in stocks (ie you can buy and sell during typical market hours). You can view ETFs as a basket of investments.

An individual ETF can be structured to track a variety of things, from the price of an individual commodity (ex: oil ETFs) to a large and diverse collection of securities. ETFs can even be structured to track specific investment strategies!

To really understand wtf is going on, let’s apply the principle of ETFs to the snack world via one of my all time favorite snacks:

Wait… wut

Hypothetically, investing in a stock would be like buying a bag of just pretzel twists for $5. Maybe tomorrow we'll see a commercial where Taylor Swift is eating a bag of pretzel twists (wooh!!!!), so their demand shoots up, along with the price ($10 a bag). If I hadn't opened the bag and sold it for its new market value of $10, I just made $5!

BUT on the other hand, maybe tomorrow we learn that the Pretzel Twist packaging facility was accidentally dropping plastic bits into 75% of all Pretzel Twist bags, immediately dropping the price to $2 a bag. Uh oh - an immediate $3 loss if I try to sell my unopened bag!

Now, next time I'm in the supermarket Cheez It aisle, I decide the risk accompanied with buying only Pretzels is too much for me - I need some strong backup flavors to balance out the Pretzel in case another plastic fiasco occurs. So what do I do? I BUY SOME CLASSIC SNACK MIX, BABY.

⚠️Takeaway: ETFs help lower risk exposure by bundling a bunch of stocks together, just like the Snack Mix does!

ETF Benefits

The Allure of ETFs: Many noble vampires business baddies find ETFs to be their most trusted steeds in their pursuit of financial prosperity for three main reasons:

  1. Diversification: Much like a king's council with members from various provinces, ETFs encompass a broad array of assets from different classes (be they stocks from distant lands or bonds from neighboring territories) 🏇👑

  2. Cost Efficiency: A thrifty Monarch (👀💪) knows the value of gold. Similarly, ETFs are often more economical than other investment routes. They notably offer lower operating expense ratios compared to their active mutual fund counterparts (will unpack at a different time lol)

  3. Trading Agility: Combining the grace of individual securities with the might of mutual funds, ETFs cater to diverse investment goals 🥅

Types of ETFs

Just like the legendary Snack Mix, there are multiple kinds of ETFs for investors to choose from!

Me for the visual W (again), but credit to the queen @ Cheez Its

Various ETFs provide access to different assets and markets, and help investors achieve a variety of investment objectives.

Seven types of ETFs + one example of each!

  1. Active ETFs: These are actively managed by skilled portfolio managers with free range to buy and sell individual components of the ETF based on their own research (Non-traditional ETFs)
    Ex: Alger 35 ETF

  2. Thematic ETFs: Invest in a specific theme or trend
    Ex: Roundhill Generative AI & Technology ETF

  3. Stock ETFs: Pooled basket of stocks
    Ex: SPDR S&P 500 (also known as “the spider”) is the oldest living ETF

  4. Bond ETFs: Pooled basket of bonds
    Ex: Schwab Intermediate-Term US ETF (SCHR)

  5. Sector ETFs: Invest specifically in the stocks / securities of a particular industry sector
    Ex: SPDR Energy Select Sector Fund (XLE)

  6. Factor ETFs: Invest in companies that exhibit certain characteristics or factors
    Ex: U.S. Cash Flows Cows 100 ETF (COWZ)

  7. Sustainable ETFs: Allows investors to align their portfolios with their values
    Ex: Invesco WilderHill Clean Energy ETF 

Ten ETFs For Beginners

One of my favorite resources, The Motley Fool, took out the legwork of including examples here.. as they already released a PERFECT list of ETFs for beginners.

Check them out here (links to each individual EFT included!):

  1. Vanguard S&P 500 ETF (VOO) - Large U.S. companies

  2. Schwab U.S. Mid-Cap ETF (SCHM) -- Midsize U.S. companies

  3. Vanguard Russell 2000 ETF (NYSEMKT:VTWO) -- Smaller U.S. companies

  4. Schwab International Equity ETF (SCHF) -- Larger non-U.S. companies

  5. Schwab Emerging Markets Equity ETF (SCHE) -- Companies from countries with developing economies

  6. Vanguard High-Dividend ETF (VYM) -- Stocks that pay above-average dividends

  7. Schwab U.S. REIT ETF (SCHH) -- Real estate investment trusts

  8. Schwab U.S. Aggregate Bond ETF (SCHZ) -- Bonds of all different varieties and maturity lengths

  9. Vanguard Total World Bond Fund (BNDW) -- Includes international bonds as well as U.S. bonds of various lengths and maturities.

  10. Invesco QQQ Trust (QQQ) - Tracks the Nasdaq-100 Index, which is heavy on tech and other growth stocks.

Wrapping it up:

As we conclude this wonderful exploration into the vast ecosystem of ETFs, I hope it’s clear that ETFs, with their myriad advantages and varieties, hold a prominent place in the investment kingdom.

Whether you are a seasoned Monarch (👀) or a young squire entering the world of finance, there's an ETF for every quest!

Stay classy San Diego,

Bailey

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