ETF investing may be one of the most underrated investing strategies out there. Here’s a strategy that not only lowers the stress and risk in your investing but can also help you get higher returns…what’s not to like?
That’s why I wanted to do a complete ETF investing video from start-to-finish, from the basics like, “What is an ETF?” to pros and cons as well as how to analyze these funds. We’ll start with the ETF basics before getting into those details but please watch through the entire video because there are a lot of misconceptions about exchange traded funds and you need this knowledge!
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An ETF is a lot like a mutual fund but without many of the drawbacks. Exchange Traded Funds are a portfolio of stocks, bonds or other investments managed by a company. The stocks or other investments are determined by a theme or index like sectors of the economy, small cap stocks or dividend-payers. The portfolio manager then sells shares of the entire fund and charges an expense ratio to manage it.
It’s a great way to get a wide group of stocks with just one investment. That’s going to lower your investing risk because all your money isn’t bet on just one company. It’s an easy way to get exposure to a broader theme or group of stocks and many of these charge next to nothing to invest.
ETFs are less costly to own than mutual funds and they trade just like stocks so you get instant pricing. You’ll also only pay taxes on gains after you sell a fund, whereas you might owe taxes on a mutual fund every year whether you sell or not.
There are some disadvantages to ETF investing though like the risk of getting too diversified and only getting the market return. For this, I like using the core-satellite strategy which means investing most of your money into 3-5 funds and then picking 10-15 stocks that can give you those added returns.
Another drawback to investing in ETFs is the expense ratio. Many of these funds charge less than 0.5% annually which ends up being next to nothing but others may charge 3% and more so you really need to be on the lookout when buying an ETF.
That’s a big part of analyzing an ETF, comparing the expense ratios among a group of funds. You also want to pick ETFs by either themes you think will do well or to fill the gaps in your portfolio. Analyzing an ETF isn’t about picking through each stock held in the fund but about understanding how the larger economy or trends will affect the group of stocks.
1:35 What is an ETF?
1:50 ETFs Explained
2:17 ETFs versus Mutual Funds
3:02 How to Invest in ETFs
5:02 Disadvantages of ETFs
6:23 How to Analyze an ETF
7:15 How to Pick an ETF
10:04 3 Fund ETF Portfolio
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Joseph Hogue, CFA spent nearly a decade as an investment analyst for institutional firms and banks. He now helps people understand their financial lives through debt payoff strategies, investing and ways to save more money. He has appeared on Bloomberg and on sites like CNBC and Morningstar. He holds the Chartered Financial Analyst (CFA) designation and is a veteran of the Marine Corps.