What is ETF investing? What is an ETF and how does it work? Let’s explore the potential of ETFs, and look at specific examples. As this chart of the growth in total net assets of ETFs shows, it is one of the most popular financial innovations in recent decades.

⏱️TIMESTAMPS⏱️
0:00 ETF introduction
0:09 ETF popularity
0:19 ETF meaning
0:51 Active investing vs passive investing
1:29 Portfolio of individual stocks
2:10 Portfolio of ETFs
2:49 ETF example: S&P 500 ETF
4:27 ETF Total Expense Ratio example
5:11 Replicated ETF example

What does the acronym ETF mean? An #ETF is an Exchange Traded Fund. Exchange traded means that ETFs are bought and sold like stocks. They are continuously traded while stock markets are open, and you can invest in them through a broker account. Fund means that you are spreading your investment money into baskets of many different securities. ETFs appeal to investors who don’t believe that active management is helpful to the performance of their investments.

Personally, I use a mix of active investing and passive investing, in about a 50/50 split. Active investing is also called “stock picking”: trying to outperform the overall stock market by buying individual stocks that you strongly believe in. Passive investing is the opposite: not believing you can outperform the stock market, and choosing to just “follow the index”. In my case, I use ETFs for the passive part of my portfolio. I am not suggesting that you should do the same, but want to be fully transparent about my actual investment choices.

Here’s the list of individual stocks that I own. Two of them have been real superstars over the years (one in biotech, the other in software): they have gone up 10 times in value since I bought them! Two others have been a total loss: the companies went bankrupt and shares in the companies are now worthless. For the other stocks in my investment portfolio, some share prices are down since I bought them, others are up. Thanks to the amazing performance of my two superstar stocks, I have done pretty well overall, but my “average performance” is really a mix of a few extremes. Active investing can feel like a rollercoaster ride!

On the passive investment side, I own six ETFs. ETFs have scale, which is something that most individual investors lack. Most of the ETFs that I invested in consist of equity (stocks), one of them of bonds. As these are “baskets” of securities, the swings in value have been more modest, and the funds have gone up between 15% and 85% in value, in line with the overall market in the last five to ten years. Just like individual stocks, ETFs can rise or fall in price, and may or may not pay a dividend.

Want to track the total return on your stock portfolio (share price increase/decrease plus dividends received), then check out the easy-to-use online portfolio tracker called Sharesight: https://www.sharesight.com/thefinancestoryteller/

Philip de Vroe (The Finance Storyteller) aims to make strategy, #finance and #investing enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers finance training in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!