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WTF Are ETFs and Why Do I Care?

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Everyone’s out there talking about low-cost investing this, and robo-advisor that, so you’ve likely heard of ETFs – but if you know more about E.T. than ETFs, it’s time to phone home … I mean, listen up.

ETFs are the building block of a huge number of low-cost investing approaches, and, in case you missed the memo, low-cost investing is exactly the kind of investing you want. When you compare the teeny fees associated with a low-cost portfolio, which run anywhere from 0.1 percent to one percent, to the ultra-high-cost mutual funds of the past, lowering your investment fees will save you thousands of dollars over your lifetime.

So what are ETFs, exactly?

Exchange-traded funds (ETFs) are kind of like the best things about mutual funds, index funds, and stocks – all rolled into one.

Just like mutual funds, ETFs are a single product you can buy, that’s made up of an underlying bundle of stocks. Depending on which one you buy, you might be investing in 20 stocks, 200 stocks or more! This makes sure you’re not betting your life savings on the performance of a single stock, and it’s a quick way to diversify your investments.

Similar to index funds, ETFs are usually designed to track – not beat! – the performance of a specific stock index. (Quick explainer time: A stock index is something like the DOW Jones, or the S&P500, which aims to represent the market as a whole for a specific geographic area.) By aiming to match the market, they can keep their costs way down, and pass those savings onto you with lower fees.

Last but not least, ETFs also have a lot in common with individual stocks, since they trade like individual stocks. They’re easy to buy and sell throughout the day, and their prices fluctuate based on demand. So, basically ETFs give you a diversified stock portfolio, at a low cost, and they’re easy to buy and sell. Best of all three worlds, amirite?

Plus, since ETFs have become so widely available, you can find ETFs that track just about anything, not just the major indexes. Want an ETF that tracks the American defense industry, or the retail industry? You can find both of those, and many more, for ultra-low fees.

How did this all start?

There’s a bit of debate over which ETF was truly “first”, but the first one that was widely successful – and still around today! – was the S&P Depository Receipt (called SPDR, or “spider,” for short). It came around in 1993, and offered people the opportunity to track the performance of the S&P 500 for a shockingly low fee.

It took a bit of time for the ETF trend to catch on, but catch on it did. Today, you can buy ETFs that track just about anything, and range from super-simple to “better leave that to the experts.”

How many ETFs are out there?

There are thousands of ETFs available today, built to mirror just about any stock index or specific market performance of a bundle of stocks. You can find ETFs built to invest in almost any sector if you look hard enough.

So while ETFs are the foundation of a lot of set-it-and-forget-it investing approaches, they can also play a part in a more hands-on, tailored investment portfolio if you’re about that life.

How do I buy and sell ETFs?

If you want to DIY your investment portfolio, you’ll need an online brokerage to buy and sell ETFs – and you’ll need to be ready to rebalance and monitor your portfolio yourself.

If you’d rather be all “Look ma, no hands!” with your investments, almost every robo-advisor uses ETFs as a major component of their portfolios and chooses them for you. They do all of the dirty work, you get to sit back and know your money is invested in ways that make sense for you.

(P.S. For more on robo-advisors, check out our in-depth feature – and if you want to dive in, we’ve also taken closer looks at Betterment, Wealthfront, and WiseBanyan.)

Do I need a lot of money to invest in ETFs?

How much money you need to invest in ETFs depends on your investment approach.

Many robo-advisors will get you up and running with as little as $10, but some online brokerages have minimum investments that range from a few hundred to a few thousand dollars. You’ll need to choose a platform that fits with how much you have to invest, but luckily, there are so many that you’re bound to find at least a few that meet your needs.

Have something to add to this story? Comment below or join the discussion on Facebook.

*This piece is meant only to expand awareness of available financial tools and products and should not be considered an official endorsement of the product or its outcomes by GenBiz

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