Exchange Traded Funds…What’s That?
Written By: Nick Nguyen | Read full profile
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“What happens if you did all that work, bought the stock, and then it ended up plummeting?”
It’s hard to pick individual stocks. I mean...how are you going to keep track of them all? Unless you really enjoy reading about different companies, digging through their P/L statements, 10-K and 10-Q reports, and stalking different CEOs on social media, this would be pretty stressful and time consuming.
What happens if you did all that work, bought the stock, and then it ended up plummeting? (That was me on Nikolai (NKLA), Chegg (CHGG), and Genius Brands (GNUS) in the second quarter of 2020…)
All your hard work will seem like it went to waste! Not to mention, a bigger percentage of your portfolio will take a beating from those losers that are dragging down your net worth.
So instead of putting yourself through all that time, stress, and anxiety, just be like Ash and catch ‘em all!
There are 3 ways to do this: (1) Mutual Funds, (2) Index Funds, and (3) ETFs.
I talk about the first two in a few other blog posts linked below, so be sure to check those out if you haven’t already. But ETFs are another way to own a piece of everything!
If you haven’t realized it yet, ETFs are just funds (like it’s literally in the name). The difference is, the fund is traded real-time as a stock! Remember, the price of Index and Mutual funds are updated at the end of the trading day. This means that you don’t actually know the price you’re paying for shares of that fund until the trading days over! The bright side is that you get to buy fractional amounts of index and mutual funds without needing a brokerage with fractional share capabilities like Fidelity. (If you want to know more on how to buy fractional shares on the Fidelity app, I created a step-by-step video on How to Buy Fractional Shares of Stocks and ETFs in Fidelity on youtube!)
ETFs fix this problem. Since they’re traded real-time, you can take advantage of buying it at a lower price if it drops in the middle of the day. For example, if the *VOO was at $330 at the beginning of the day, dropped to $290 for an hour in the middle of the day, but then closed back up at $320 at the end of the day, you could buy it for $290 if you happened to catch the dip (or set a limit).
*VOO is a very popular ETF from Vanguard that tracks the S&P 500.
If you bought the equivalent index fund, VFINX (yes they are the EXACT same thing), you would’ve only been able to buy at the end of day price.
Other than that, ETFs are effectively the exact same as the fund that they are meant to track. And with the ability to buy fractional shares, they hold all the same benefits as index and mutual funds. I personally prefer ETFs because I can trade options with them, they can occasionally have a lower expense ratio than the equivalent fund**, and I can buy ETFs offered from any brokerage without having to worry about paying fees!
**Vanguard’s Total Market Index Fund, VTSAX has an expense ratio of 0.04% whereas it’s ETF version is 0.03%. They have the exact same holdings.
This was one of the big reasons why I opened my Roth IRA with Fidelity. I can buy Vanguard’s equivalent ETFs as a stock and effectively invest in Vanguard funds without having to worry about having the $1000-3000 minimum or paying $20-40 for buying another brokerage’s fund.
Yup - that’s the loophole to invest in Vanguard’s world-famous funds even if you only have $1 and don’t want to pay the extra fees. Just make sure this is true of your brokerage. I know off the top of my head the Fidelity and Schwab do not charge fees for buying ETFs.
Stay tuned for a future post with popular ETFs you should look into!
Update: Post regarding popular ETFs can be found here!
*Nguyening Lifestyles is not a registered financial service provider and does not give financial advice. All information in these posts are for entertainment purposes only. Nguyening Lifestyles is not liable for any actions or outcomes that transpired after your reading of the following post.
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