Posted on January 4, 2019
Today’s Letter from Grandma Sylvia
This blog is for beginning investors who want to know the simplest way to invest. In my earlier letters I’ve discussed the simple approach: buy index funds. However, I’ve also mentioned several other types of investments and some readers have asked for more information. This post is about one of those investments: exchange-traded funds (ETFs). I found it was fun discovering how popular ETFs are and how many different ETFs have been created.
I like ETFs. In fact, I buy index mutual funds and index ETFs both. They are simple to buy and sell. The ETFs act like stocks for my tax situation. I can buy some specialty niches if I feel so inclined. So, I have a few ETFs that I primarily buy and hold. Nothing very fancy, mainly passive index ones.
Some ETFs follow an index which means they are passively managed; some have a specific buy and sell set of strategies and are actively managed by market professionals.
To begin, it was easier for me to understand ETFs by first looking at stocks, mutual funds, and index funds. The chart below shows them in this order and a brief statement about each one.
Pease take a few minutes to read about each one.
|Mutual Funds||A basket of stocks,
after the close of
the trading day.
|Index Funds||A basket of stocks
using an index.
|Exchange-Traded Funds (ETFs)||A basket of stocks either passively
or actively managed
where the fund owns
the underlying assets,
divides them into
shares; trades during
the day; and is more
tax efficient that a
ETFs have become very popular because they:
♦Have the advantages of mutual funds that have a basket of assets
♦Focus on hundreds of different special interests or niche investing topics
♦Trade during the day (whereas mutual funds settle at the end of the trading day) and
♦Have some tax efficiencies.
There are thousands of ETFs. Passively managed ETFs mirror an index, like the S&P 500. Actively managed ETFs may be products of brokerage firms that have professionals who buy and sell the underlying assets.
Here are two examples:
One passively managed ETF is Vanguard’s S&P 500 ETF, Ticker VOO.
One actively managed ETF is PIMCO’s Enhanced Short Term Maturity ETF, Ticker MINT.
The graphic at the beginning of this blog is a fascinating set of ETFs from the website Finviz1 Interested readers can go to the web site and click on any of the ETF squares on the graphic and find many ETFs that correspond to a specific index or sector. Colors indicate the gains or losses of the ETFs.
Although most of the ETFs follow traditional indexes or topics, there are some unusual ones2,3 such as:
The Obesity ETF that includes biotech and pharma
Global X Millennials Thematic ETF that includes some reliable growth companies and some companies that might appeal to millennials.
A livestock ETF specializing in beef and pork.
Some investors have a portfolio with index funds; others with passively managed ETFs. Both are good choices and depend on personal preference and tax considerations.
Because there are so many index funds, it is wise to buy ones that have a long, strong track record. From time-to-time some ETFs get withdrawn from the market. Investors can sell while the ETF are still being traded or wait until a final cash settlement is made. In late 2018, the investment management company INVESCO closed nearly 20 of its ETFs.
Recently, there have been ETF ‘wars’ where competing investment firms are lowering the expenses on their funds to almost near zero. It’s always good to have lower expenses, but sometimes there are other expenses that are not so apparent. Good to be aware of the entire picture.
ETFs are bought and sold in the market like stocks and mutual funds. For all trades, there are some expenses involved. It’s important to consider costs in any transaction and not let your money vanish into thin air.
♦Exchange-traded funds (ETFs) are a popular way to invest with many choices and favorable trading and tax advantages
This year I’m almost finished with my taxes and will go out the enjoy a breath of fresh air. Wish you were here.