Investing is as littered with abbreviations and confusing jargon as bars are filled with college basketball fans this time of year. These confusing and complicated sounding words and signs can often be a hard barrier to entry to overcome for beginner investors. There are so many words and abbreviations to look up that many just end up giving up! One such term is ETF. In reality ETF’s make investing even for the most beginner investor very simple. ETF stands for Exchange Traded Funds and although they have been around for decades, they are becoming more popular for their radical outlook on investing.
There are many different people who get into investing but I think financial theorist William Bernstein summed it up well with the follow quotation: “There are two kinds of investors: those who don’t know where the market is headed, and those who don’t know that they don’t know.” That is the beauty and scary reality of today’s markets. No one knows where the market is heading and if someone tells you that they do then it is probably in your best interest not to listen. Personal wealth managers and fund managers alike obese their entire career about beating the market. Some years they do, and some years they do not. Regardless the traditional investing mindset is “try to beat the market”. In reality however, the vast majority of investors and fund managers average a return that runs very close to the major stock indices. This leaves many wondering, myself included, why put all of that time, effort, and often commission money into something that doesn’t work better than the market? That is where ETF’s come in.
An Exchange Traded Fund (ETF) is a fund that tracks a major index, such as the NASDAQ-100, S&P, Dow, and others. The easiest way to differentiate between ETF’s and other funds is that others try to beat the market, while ETF’s attempt to be the market. This is a radical idea to most investors but makes sense if you think about it. The average return on the stock market on the whole typically runs around 6-10% and over the past 100 years was 8.15%, which is a great return on an investment. Investing in all of the stocks out there to get this “average” return would be complicated and very costly. Even investing in the stocks of a major index, such as the S&P 500 would be very costly because you would have to purchase trades on each of those 500 companies every time you wanted to invest more money in the stock market. ETF’s instead have large holdings within a specific market or sector index fund allowing you to invest directly into those individual stocks by investing in one ETF fund. ETF’s try to match a market index in a passive management style. This cuts down on fees that are charged to invest in them because managers are not as active in their trades. Unlike mutual funds, which are priced at the end of trading, ETF’s are traded just like stocks continuously throughout the day. This adds the enormous benefit of flexibility to ETF’s because they can be bought and sold freely throughout the day at accurate market prices. Exchange Traded Funds are a great way for you to invest in market indices easily and cost effectively.
Overall ETF users get a simple, easy to use, and cheap way to invest their money while still maintaining a great return on their investments. In the future investors can expect a broader variety of ETF’s available as new firms decide to enter into the industry, as it becomes a more popular way to invest in today’s markets.
Financially Stephen grew up in a family that preached saving and living below your means. That, in part, translated to his interest in Economics, especially how economics can affect individuals’ financial lives. Through his financial markets class in the fall of 2011, he furthered this interest by analyzing macroeconomic events. Stephen believes that finance, personal finance in particular, is a subject severely left out when it comes to public schooling in this country, and it is a problem that has manifested itself and contributed to many of the problems seen today. He also believes that education is the key to improvement and hopes that through his writings he will be able help people learn about finance, macroeconomics, and how to be financially savvy for the future.
In his free time Stephen enjoys playing and watching sports, wakeboarding, sailing, and country music. At UNC he has participated in Strive for College, UNC Dance Marathon, and UNC Relay for Life.
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