ETF Investing for Better Results

Missional Money Podcast

ETF Investing and Why We Love to Trade Them

ETF Investing is better than Mutual Fund investing, but you do need to learn a few things about ETF investing. If you’re new to trading or just beginning you may have never heard of ETF investing.

Let's take a closer look at ETF Investing. Starting with ETFs; what they are, how do they work, the different types of ETFs; the pros and cons of ETFs and how they benefit (or hurt) you as a trader.

Much of this post comes from Investopedia.com which is IMO the best source of information for all things investing, including ETF Investing.

What is an ETF?

The acronym stands for exchange-traded funds. So what does this mean? An ETF represents a basket of assets. Basically, that is a portfolio of stocks, bonds, options, and other tradable assets. that are put together by a professional money manager and put on the stock exchange for investors to buy and sell quickly.

When you’re investing in an ETF you’re investing in multiple companies that represent or mirror an index. For example, if you were interested in investing in the S&P 500, you don’t actually invest in the index itself. Instead, you would invest in an ETF that represents a portion of that index. The ETF for the S&P 500 is “SPY”. When investing in SPY, instead of buying all 500 companies that the S&P represents you are participating in that index at a fraction of the cost.

There are two main types ETFs, “Market” or “Index” ETFs. Like the name suggests, Market ETFs or Index ETFs replicate the index of a market. There are different ETFs for the different indexes. For example, as talked about earlier, the S&P 500 is known as SPY and the NASDAQ 500 is referenced as QQQ.

The second type of ETFs is known as Sector ETFs. These let you invest in specific sectors of the markets such as healthcare, or tech stocks. Like the Index ETFs each sector is represented by a unique ticker. So, for investing in the healthcare sector the ETF would be represented as XLV.

What Makes Them Different from Mutual Funds:

Although ETFs have basic similarities to the two and can often be very comparable, they do present slight differences.

1. Unlike mutual funds, ETFs can be traded throughout the day versus only being able to trade at market close.
2. They also present lower fees than mutual funds. Generally, mutual funds charge a 1.42% fee while fees on average for ETFs are 0.53%. Further, the total price you pay for ETFs is the share price times the number of shares. Basically, you can’t place an ETF order for a dollar amount as you can’t place a mutual fund order for a number of shares.
3. ETFs take about 3 days to settle versus the 1 day it takes for mutual funds.
4. Lastly, minimum investment price of ETFs and the function of automatic reinvesting. ETFs typically have a very low investment minimum compared to mutual funds, and this price depends on what the price of the share is at the time.