(In 3 minutes) Everything I wish I knew before investing in ETFs

In this week’s edition:

• What is an ETF 

• A Typical ETF investment strategy

• How to pick an ETF

• 3 Myths about ETFs

If you follow online Finance Content, you’ve probably come across this type of post:

“The Power of Compounding: If you invest $500 in an S&P500 ETF, you’ll have $4 Million at retirement”

Amazing. 

Great. 

I want that…

How do I do that ?

In this newsletter, I’m condensing everything I wish I knew about ETFs in one 3 minute read.

But before we dive into how to choose the right one, let's quickly cover what an ETF actually is.

What's an ETF?

An ETF is essentially a basket of assets (like stocks or bonds) that you can buy or sell on a stock exchange, just like individual stocks. This means you get instant diversification, spreading your risk across multiple holdings.

How to Choose the Right ETF: A Step-by-Step Guide

1. Decide What You Want to Invest In:

The most popular ETFs track major indexes like the S&P 500. However, you can also find ETFs that focus on specific sectors (like technology) or commodities (like gold). Remember, the more niche your investment, the higher the risk.

A popular and straightforward strategy for beginners is the "3-fund portfolio," which offers broad diversification across various asset classes. Here's the breakdown:

• Total Stock Market Index Fund (U.S.): 60% of total

  • Invests in a broad range of U.S. companies, providing exposure to the overall U.S. stock market.

• Total International Stock Index Fund: 20%

  • Offers exposure to companies outside the U.S., diversifying your portfolio geographically.

• Total Bond Market Index Fund: 20%

  • Provides stability and income potential through a diversified bond portfolio.

This approach is popular because it can help manage risk while still offering the potential for long-term growth. By adjusting the percentages, you can customize this portfolio to match your risk tolerance and investment goals.

(Just because it’s a typical strategy, doesn’t mean it’s the right one for you)

Once you’ve decided on your strategy, it’s time to find the ETFs

2. Research Individual ETFs:

Let’s say you’ve decided to invest in an S&P500 ETF. 

You’ll find there are multiple ones that do the same thing…with slight differences.

Most trading platforms and specialized websites (like justetf) allow you to research and compare them. Here's what to look for:

• Tracking Accuracy: How closely does the ETF's performance match the index or asset it's tracking?

• Fees: Lower is generally better, as fees can significantly impact your returns over time (Index tracking ETFs will charge less than 0.2% with some as low as 0.0X%).

• Accumulating or Distributing: Accumulating ETFs reinvest dividends automatically, while distributing ETFs pay them out to you. Your choice depends on your tax situation and investment goals (Dividends are taxable in many countries).

• Trading Volume: Higher trading volume means more liquidity, making it easier to buy and sell the ETF.

• Currency: Stick to ETFs in your home currency to avoid the risk of currency fluctuations.

Once you’ve found your ETF, note down its ISIN (the International Securities Identification Number, ISIN, is a 12-digit alphanumeric code that uniquely identifies a specific security).

3. Buy the ETF from an Exchange:

Double-check that you're buying the correct ETF via the ISIN, and be mindful of transaction fees. Even small fees can add up over time. There are multiple Exchanges you can buy from.

3 Myths about ETFs:

1. They are all “Low Risk”: It’s probably less risky to invest in a basket of Stocks than 1 Stock. That much is true. But some ETFs track volatile assets. Less Risk or Low risk is not No Risk.
   

2. They are just for beginners: not true. Long term investors have held etfs and index funds for decades. The largest US Hedge Fund, Bridgewater associates, holds nearly 6% of its position in the SP500 (US stocks) and 5% in Emerging markets (2 of its largest positions)
   

3. You should hold them forever: while they are usually held long term, if you no longer believe in the index or market it’s tracking, you might need to change strategies.

The information contained in this newsletter is for general informational purposes only. It should not be construed as financial or investment advice. Please consult a qualified financial advisor before making any investment decisions.