Over the years, ETFs have become incredibly popular and there are a lot of reasons for this that I'm going to explore in this article. Spending a short amount of time with anyone who's knowledgeable in investing will result in you hearing about ETFs no doubt. Some of the most famous investors in the world recommend ETF investing and use ETFs and index funds for their children. This article will explore the reasons and hopefully paint a good picture of what an ETF is, what ETFs exist, and what I think about them personally.
Firstly, let's look at how many people have been searching on Google for ETFs. The graph below shows the gain in popularity over the years.
ETF is the abbreviation for Exchange Traded Fund or an investment fund traded on stock exchanges. ETFs are traded throughout the day whilst the markets are open which differs from mutual funds, for example, which typically trade only at the end of the day - in other words, you can easily purchase them as you would a regular stock. ETFs can hold shares, bonds, currencies, or commodities and might track things such as the S&P500, the Russel 2000, or even the price of gold. ETFs disclose their holdings and trading costs or what management gets paid to construct and administer the fund - this means that it's possible to see what assets the ETF holds to make sure you're happy, and knowing the costs empowers you to make an informed decision. ETFs have become incredibly popular due to their fees which are often much lower than mutual funds, and in some cases, there are ETFs that charge no fees.
I appreciate that the above description might not be simple enough so I want to break it down a bit further. The S&P500 is a stock market index tracking the performance of 500 large companies listed on stock exchanges in the United States. This index tracks the movement of the aggregate performance of these 500 companies and offers us a broad understanding of what's happening in the market. Now, an ETF can track the S&P500, in other words, the ETFs value will increase or decrease based on the performance of the S&P500. What this means is that you're able to purchase an ETF that tracks the S&P500 at any time during the day when the stock market is open, and if the S&P500 goes up, the value of your ETF goes up which means you make money (if you sell) - the same applies for the inverse.
Here is a quick look at the S&P500 over the last 90 years:
One of the most popular S&P500 ETFs is the Vanguard S&P500 ETF with the ticker symbol VOO. This ETF invests in stocks in the S&P500 index. At the time of writing this, VOO is currently trading at $380.71. If you bought one share in VOO, you would have to spend $380.71. In doing so, you would give yourself exposure to roughly 500 large companies in the United States. If these companies' share prices go up aggregately, the price of VOO would increase and therefore your investment would appreciate.
I previously mentioned low costs, well, VOO has an expense ratio of 0.03% which means that they're only charging you 0.03% of your investment. This is versus plenty of funds that charge upwards of 0.5%. Vanguard themselves state on their website that the average expense ratio of similar funds is 0.8%. That might not sound like much but if you buy VOO consistently over a 30-year period and let's say amass $72,000 ($200/month for 30 years), 0.5% of that is $3,600 and that's without taking growth into account. At 0.03% it would only be $21.60 - that's a $3,578.4 difference! When your monthly deposits get larger and compound interest kicks in, this becomes an incredibly large amount so the fees really do make a big difference.
I'm not a financial advisor, this information is based on my research and my opinion.
I suppose the next question is, where can I buy an S&P500 ETF? The good news is that most brokerages offer you the ability to purchase an S&P500 ETF. The first thing that might get confusing is that there are many different S&P500 ETFs:
With the S&P500 being such a popular index, different companies create their own ETFs that track it, and then it's down to which brokerages want to sell it. This can be confusing and annoying because you might find an ETF you like but your brokerage doesn't offer it. It's sometimes best to look at the list of ETFs that your brokerage offers and see if they have an S&P500 ETF and if not, potentially look for another brokerage that does. Brokerages choose the ETFs based on an assortment of things from the expense ratio, liquidity, and minimum investment amounts.
Depending on your brokerage, you may have the ability to simply choose the ETF and click the "buy" button as if you were shopping online. A lot of them have made things as simple as that. Others might require you to go via your financial advisor and some require you to deposit money with an instruction and they purchase it for you. Take the time to investigate this so that you feel comfortable with the steps that you need to take.
It is incredibly important to do your research in this regard or to speak to your financial advisor.
As a side note, at the bottom of this post I speak about my holding of SPY, here's a chart that puts SPY against VOO, for interest's sake:
If you want to dive in deeper, here's an article that looks at VOO and SPY in more depth, comparably.
Up until now, we've focused entirely on the S&P500 and that wasn't my intention, it just made explaining this simpler. But at the top, I mentioned that an ETF could hold all sorts of assets. I'm by no means an expert in ETFs and often find myself interested in a share mix or commodity and then do some research by starting with a list of available ETFs. For example, if you're interested in gold and want to invest in it via an ETF then you might look at this list, or perhaps you want to focus on a more tech-heavy ETF, and then you might look into FAANG ETFs. Perhaps you're looking for something more diversified and then it might make sense to go for an ETF that tracks the world index. There are ETFs for almost anything!
Something I haven't spoken about is the ease of ETFs and it's important to cover. Because an ETF holds a basket of assets, let's say shares, instead of having to buy all the shares individually which is hugely time-consuming and very risky, by purchasing the ETF you mitigate this time-consuming hassle. This was a huge reason for me getting into ETFs, I didn't have the time to track 20+ individual companies. It's up to you what you want to do obviously, I merely found it simpler for my strategy.
It feels really wrong to explain this in a single paragraph because the importance of this is huge. Managing a portfolio of individual shares is really complicated, the emotional strain can be quite terrible, and the amount of time required to track these companies and understand their financials is complex and incredibly time-consuming when you have a number of them... for most people, this is too much, you might purchase some shares and then find yourself losing steam, and that's a huge problem. We want to make good investments for many years and realise the benefit down the line, there's no room for starting and then not finishing. I made my life easier by going with ETFs and I'm several years in without change, month after month it ticks over.
I like ETFs and actively purchase them. Right now, I'm investing a fixed amount each month into SPY. I "chose" SPY purely because it's the one that was listed with the brokerage I was using several years ago and it turns out that I'm very happy with it. Each month I have an automated payment that goes to my brokerage which then purchases the shares for me and that's that. I don't touch anything, the aim is to look again in 30 years and hope to have a large amount which I could then retire on or create a certain level of generational wealth from.
Trying to cover everything about ETFs in a single article is near impossible but perhaps you're feeling a bit more in the know and maybe you're inspired to go and do your own deep dive into ETFs and their place in the investing world - I hope you are! 🙂