🌱 Welcome to Sprouts Finance! Here we like to separate our recyclables from our food waste. We’re trying to make personal finance just a little bit more fun, let’s go. 👏
Estimated reading time: 4 minutes and 5 seconds
ETFs today my fellow chums. Exchange traded funds! What are they, what’s the point and how do I get them? As per usual, we’ve got a few questions at the bottom for you to test your knowledge too.
🕵️♀️Fact of the day One nostril at a time
🔍Index Tracking: What is an ETF?
🔑Access and Exchange: Where can I buy ETFs?
Key takeaways:
💡ETFs track an index, commodity or sector and are an effective way to diversify investments
💡ETFs are traded on an exchange like a regular stock
💡Individual stocks are likely riskier than an index
FACTS
🤯 Fact of the day
Humans and animals unconsciously alternate the nostril they breathe through with congestion and decongestion of the nasal cavity! It is from the alternation of the nervous system by the hypothalamus. source
🎬Recap
Here is a recap of where we left off on stocks.
💡An index tracks the performance of a group of assets for example the largest 200 stocks by market capitalisation in Australia
💡You can buy and sell shares in the market on different platforms or through stock brokers
Here’s a link to last week’s post if you want to read more!
EXCHANGE TRADED FUNDS
An ETF is a fund that holds positions in multiple underlying assets versus a stock which is related to only one company. We’ll go through a handful of types in a bit but for example’s sake we’ll keep it familiar with stocks. So when you buy an ETF, think about it a little as essentially buying a share of a company. The company you’ve bought into just so happens to be made up of a diverse portfolio of other little companies.
Who’s that Fund type?
It’sssss Exchange Traded…look we said we were trying to make it fun ok
We mentioned last week that ETFs emulate indexes and that can be of bonds, commodities, stocks, currencies, sectors, the list goes on and on (and hopefully you’ll stick around to learn more about these products in future). ETFs can be less risky than single stocks because you are diversifying your risk across a range of companies rather than trying to pick one clear winner, say for example, in the bean farming industry…no like, for real, you can buy a bean ETF.
ON THE EXCHANGE
Exchange traded funds, as in…traded on the open exchange. ETFs can be accessed in the same way as stocks and on a lot of the platforms or brokers we introduced last week.
ETFs can be traded in the same hours that stocks are traded which makes them highly accessible for beginner investors!
We also end up paying less brokerage, for example an ETF that tracks the ASX 200 will be 1 transaction for ‘200 companies’ while if we were to do this ourselves not only would it take a long ass time but we’d have to pay brokerage on each one of those 200 transactions.
Nine nineeeeeee…any fans out there?
There will of course be some sort of fee associated with this though, there is no such thing as a free lunch (popular finance saying that there are trade offs for everything, and a good one to remember). Companies that build ETFs are called managed funds and there are people who put these together who also need to get paid. We therefore pay a management fee on our ETFs also called an expense ratio (total fund costs/total fund assets).
Typically the more active the managed fund and its minions are in building the ETF the higher the expense ratio. This is where you get passive versus active ETFs. The more passive ETFs such as simply emulating the ASX200 the cheaper the fees. While the more complex we go with fund managers actively trading and adjusting their portfolio, the higher the fees. Simple!
So consider what you want out of your investment and how the type of ETF can fit into that picture. Do you want to actively try and beat the market but pay higher fees or do you want to go with the flow a little mo’ and have a more passive buy?
We’ll be back next week with an episode on Bonds, love ya bye.
Q&A
As always, we’ve got some questions/answers below for you to test your knowledge.
🙋♀️ True or False
❓Exchange traded funds (ETFs) track an index, sector, or particular commodity but can be traded on an exchange like a regular stock .
true
false
❓An ETF that tracks the ASX200 index is technically invested in all 200 stocks in the index.
tis’
tis’ not
❓A single stock is likely to be less volatile than an ETF that tracks the ASX200.
vrai
faux
👇 Answers
true, true, false
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DISCLAIMER:
None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.