ETF stands for Exchange Traded Fund.
This doesn’t really mean anything so lemme break it down: when you invest in an ETF, you’re actually investing in a crapload of stocks/shares (same difference).
Sharesies says it’s like buying a basket of fruit instead of just one type. Guess that’s as simple as it gets. Buying stocks is like buying groceries, y’all. 💁🏻
Since you’ve got a whole bunch of different fruits, you’ll be able to ride out the different seasons, eating different fruits when they’re in season and avoiding those that are not cos they’re gonna be dank. (Okay, I think this is where the fruit analogy stops.)
Essentially, it’s a way of diversifying your risk – one of the fundamental rules of investing. So if a few stocks perform poorly, at least there are other ones that might perform well and they’ll balance each other out.
Let’s take an example – the Vanguard Australian Shares Index ETF (VAS). This bad boy ‘tracks’ the S&P/ASX 300 Index, which just means that the % change in the ETF’s price is supposed to replicate the performance of the index and all its 300 bloody companies. Fascinating, huh? I’ve never heard of 95% of the companies on that list. Mindblowing. 🤯
What makes a good ETF?
The ASX has a good article on this. It comes down to three key considerations:
👉 Coverage / exposure – how well it covers the market with the underlying assets it is made up of
👉 The issuer’s track record and reputation
👉 Cost – also known as the management expense ratio (or MER because this industry loves its acronyms). Obviously, the lower the better.
According to Stockspot, VAS dude has good diversification, lower costs and offers indirect exposure to property and commodities. Cool. It also apparently pays out quarterly dividends. Yay. 🤑
The all-important question: when do I sell this stuff?
Share Investing for Dummies says that 5 years is a good benchmark. That’s enough time to smooth out the ups and downs of the sharemarket, though there’s still a small risk of loss. Get up to 10 years, and it’s virtually guaranteed to have a positive return.
So I guess those fruits will be chillin’ in my freezer for a long, long time. And I’ll be able to enjoy a delicious frozen smoothie at the end of it. (Okay, sorry, I’ll stop now.)
Key takeaway: Don’t expect to get rich quickly. Investing in ETFs is for the long-term. If you want short-term rewards, you’ll have to take higher levels of risk.