A listed Pooled Fund?

Hi Reader,

Welcome to The Money Series and if you are new here, thank you for signing up. Personal Finance can feel ambiguous and overwhelming, but I am here to help simplify the journey.

Recall that I wrote about the three major passive approaches to investing in stocks three weeks ago. Over the last two weeks, we have examined Mutual Funds and Index Funds and today, we will dive into ETFs.

What are ETFs?

An Exchange-Traded Fund (ETF) is a type of investment fund that trades on the stock market, much like a company's stock. Think of it as a cross between an index fund and a mutual fund but with the added flexibility of being able to trade it throughout the day on an exchange.

ETFs are similar to mutual funds in that they pool together a collection of assets and issue shares of the fund to investors. However, most ETFs are passively managed, meaning a portfolio manager uses a published index as a guide to decide which securities to hold and how to weigh them within the portfolio.

There’s a wide variety of ETFs available, each with its own investment objective. Some ETFs might focus on specific asset classes like stocks, bonds, or even Bitcoin. Others may target particular industries or sectors, such as technology. Many ETFs aim to replicate the performance of a specific index, making them a popular choice for equity investors.

Why ETFs?

• Diversification. Like regular Index Funds ETFs help to balance out your portfolio such that events that affect a single company or even a sector does not significantly erode your investments. It is important to note that the level of diversification that an ETF provides depends on the index the ETF seeks to track.

• Cost-Effective. ETFs generally have lower expense ratios than actively managed mutual funds, largely because most are passively managed. While the cost gap between ETFs and mutual funds is narrowing, ETFs still often come out ahead.

• Trading Flexibility and Liquidity. Unlike mutual funds, which are priced only at the end of the trading day, ETFs can be traded throughout the day. This means you can buy or sell an ETF whenever the market is open, providing more liquidity.

• Transparency. Most ETFs disclose their holdings daily, giving you a clear view of the underlying assets and helping you make informed decisions.

• Tax Efficiency. Thanks to their unique in-kind creation and redemption process, ETFs often have lower turnover, which can translate into fewer capital gains distributions and greater tax efficiency.

Potential Drawbacks of ETFs

• Trading Commissions. Since ETFs are traded on public stock markets, buying and selling them might incur commissions, which could add to your costs.

Consideration when investing in ETFs

• Fees. Look out for trading commissions, expense ratios, and management fees. As always, lower fees are better for your returns.

• Spreads. The bid-ask spread, which is the difference between the buying and selling price, can impact your costs. The narrower (the lower the difference) the spread, the better.

• Premiums and Discounts. Because ETFs trade actively, the market price may differ from the total combined value of the assets in the fund (known as Net Asset Value or NAV). These discrepancies are usually minor but can result in premiums (price > NAV) or discounts (price < NAV).

• Liquidity. An ETF's liquidity indicates how easily its shares can be bought or sold without affecting the market price. It's generally best to choose highly liquid ETFs.

ETFs can be a great investment for long-term investors and those with shorter-term time horizons. They are especially valuable to beginning investors. This is because they won't require the time, effort, and experience needed to research individual stocks. The cost to own an ETF is often lower than the cost to buy a diversified selection of individual stocks.

S&P 500 ETFs might be an appropriate addition to your portfolio. You can also use databases such as ETF Database to search and filter ETFs by type and choose the one(s) that meets your preferences.

Feel free to send in your questions; they might influence the next newsletter!

Act Now:

• Decide if ETFs fit into your investment strategy.

Reflect on This:

• How much money do you need to consider yourself wealthy?

Till next week, I am rooting for you, money-ly!

Dee

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Disclaimer: This does not constitute financial advice. Please conduct your research or consult your financial advisor for important financial advice.