This episode is part of the Investing 101 Series.
Investing 101 is your introduction course into all things investing. Think of this like taking a finance class, but in bite size pieces. Each episode in this series is meant to build upon each other in order to teach you the fundamentals of investing.
Today we are tackling ETFs!
Meet Today’s Guest – Caleb Silver
Caleb Silver is the Editor in Chief of Investopedia. He began his career as a documentary producer, but was quickly swept into covering business news for Bloomberg as the dot com bubble was growing. He went to CNN to run its business news coverage and spent 10 years at the network in a variety of executive capacities, including the Executive Producer for CNNMoney, the Director of Business News and a Senior Producer on the Situation Room with Wolf Blitzer. Caleb came to Investopedia in 2016 because he was fascinated with the website, having been a user for more than ten years. He quickly learned just how vast it is, how many people it reaches every day and how critical it is to helping them make sense of the financial world. Investopedia has come a long way as a site in 20 years, but Caleb says its best years are ahead.
What is an ETF?
An ETF is an Exchange Traded Fund. Now, what does that mean? Exchange traded fund means, like a mutual fund it has a bunch of different securities in it. I explained what a mutual fund is in Episode 098 and that is basically a basket of securities that you can buy all together versus buying them one at a time. An ETF is very much the same thing except it trades like a stock and then it trades throughout the course of the day. A mutual fund trades throughout the day but you only get a settle price at the end of day. An ETF, you can buy and sell throughout the course of the day so it moves a lot more, it’s a lot more active and volatile but it has the same characteristics of a mutual fund in that many stocks are packed into one.
If you want exposure like a mutual fund to the technology sector or the energy sector, you can buy an ETF, an exchange traded fund that has just technology stocks in it or just energy stocks in it or just healthcare stocks in it or ones that just track an index like the S&P 500 or the Dow Jones Industrial Average. You can buy exposure to those groups by buying an ETF but it trades more frequently than a mutual fund does.
Why would someone choose to invest in an ETF over a mutual fund?
ETFs are generally cheaper, in terms of fees. When you buy a mutual fund you’re paying with the price of the fund and you’re also paying the manager of that fund, a portfolio manager, inside a company like a Fidelity or a Schwabb or a smaller money manager to manage it so there are fees associated with it. ETFs also have fees but they’re much lower fees than mutual funds. You would do it for lower fees, you would do it if you wanted to buy a fund that trades throughout the course of the day so you can buy and sell more frequently, although we don’t encourage that, but it behaves more like a stock than a mutual fund does. There’s more flexibility and it’s cheaper, that’s why you might want to do that.
Is the process of buying a ETF different than buying a Mutual Fund?
They are similar except. Let’s say you bought one of each, you bought a mutual fund and you bought an ETF. If you were checking the performance of either during the day, you wouldn’t get a change in price on the mutual fund until the end of the day, what they call the NAV. The net asset value is calculated at the end of the day so you don’t really know what’s going on through the course of the day. An ETF you could look at on your watch list and you could look at it like you’re looking at a stock like Nike or Amazon and you could see where it’s trading in the middle of the day. That gives you a little bit more visibility into how it’s doing.
Although many institutions or many investors trade ETFs throughout the course of the day, we don’t encourage that, obviously, but it behaves like a stock in that you can do that. But the process of buying one and owning one is no different.
If you looked inside my portfolio, I only hold mutual funds and ETFs. Because of my job, I don’t like to own individual stocks but if you look at the tickers on the ETFs they would look just like a stock ticker. They’re usually three letters and you could see them trading throughout the course of the day. The process of owning them, buying them, and having them in your portfolio is very similar to a mutual fund.
Where can I learn more?
We encourage folks to come and explore the site, we have our online video academy there if you want to take courses to become an investor or learn to become a better investor or just learn financial tools like Excel for Finance. We have great tutorials that are free. If you want to learn how to trade options or start investing or build a portfolio of your own, all of that is out there for you on our site plus a lot of videos that can help explain things for you as well so all-you-can-eat at investopedia.com. Come anytime, we’re always open.