When you venture into finance-land, you’re going to be eating a lot of alphabet soup: ETF, VTI, VOO, CPI, NYSE, as the great Gayle once said…
Trust me: I know what it’s like to want to shut down from jargon-overload. I know when a new financial acronym comes up, the impulse is to say: “I don’t know what that is! Time to walk away!” But hiding behind these acronyms are actually really important investing vehicles that you absolutely should know about.
Today, I’m covering important an especially important one: ETFs.
WTF is an ETF?
It’s a strange phenomenon, but ETF is the acronym I see people goof more than any other. For whatever reason, so many people say “E-F-Ts” when they’re actually talking about “E-T-Fs.” This is really common in the finance world; people get acronyms wrong because they don’t know what they stand for. And that’s not a dig at you! That’s a dig at the world of finance for being so damn inaccessible. So let’s clear it up. ETFs stands for exchange-traded funds.
You can borrow my mnemonic device for ETFs. Remember E.T.? Yes, like alien movie from the 80s. Remember E.T.’s one line in the whole movie?
“E.T. phone home.”
When I am struggling to remember the acronym, I think E-T-F…unds your next home. It works for me, so I hope that stock talk sticks with you (say that five times fast).
While Index Funds are my jam, there’s a lot to be said for ETFs.
ETFs are similar to Index Funds in that they are made up of slices of lots of different companies from one index or sector. For example, there are ETFs that track the S&P 500, there are ETFs that track commodities, and so on. And like Index Funds, ETFs are less risky than buying and selling individual stocks, because if one company fails within the fund, you have all the others to prop it up. In other words, there is built-in diversification.
ETFs are different from Index Funds because they are traded like stocks all day, every day. Index Funds, however, are bought at a set price at the end of each trading day. So, unlike Index Funds, you could buy an ETF at noon and sell it at 2:00pm… but you shouldn’t. That’s a strategy day-traders use to gamble on some short-term rewards, but that’s not a strategy for the sustained, consistent growth we want here on The Money Minute.
ETFs also tend to have lower investment thresholds; often you can buy shares for less than $100 (or even less if you buy fractional shares through a roboadvisor). In contrast, there can be minimums of more than $1,000 to invest in Index Funds.
Net-net, ETFs are a good investment choice for new investors, especially in topsy-turvy market times.
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