ETFs 101: Investing Made Easy

If you are new to investing and don’t know where to start, check out ETFs! 

What is an ETF? 

An ETF is an exchange traded fund that like a mutual fund holds a collection of assets such as stocks, bonds, or other securities. While both ETFs and mutual funds provide diversified exposure through pooled investments, ETFs offer several advantages that have made them increasingly popular among investors.

Source: https://www.westernsouthern.com/investments/types-of-etfs

What are the advantages of investing in ETFs? 

1. Instant Diversification 

ETFs can be designed to track: 

· Broad market indexes like the S&P 500, NASDAQ Composite, Dow Jones Industrial Average, or Russell 2000 

· Fixed Income, including U.S. Treasury, corporate, municipal, and international bonds 

· Specific industries such as technology, healthcare, energy, or financial services 

· Commodities like gold, oil, and timber 

· Investment styles for high growth or value stocks 

· Different company sizes, including small-cap, mid-cap, and large-cap stocks 

Because this collection or portfolio of securities can include a wide range of investments, one of the biggest advantages of ETFs is diversification. Imagine investing all of your money in a single company. If that company’s stock price declines, your investment could suffer significantly. An ETF spreads your investment across many companies or assets, helping reduce the impact of any one security performing poorly. With a single purchase, you can own a small piece of a broad section of the market instead of relying on the success of one company. 

2. Low-Cost Investment 

ETFs generally have lower expense ratios than many mutual funds. The expense ratio represents the annual cost of managing the fund. For example, SPYM has an expense ratio of approximately 0.02%, and QQQM has an expense ratio of approximately 0.15%. While these percentages seem small, investment costs can add up over time. Lower fees mean more of your money stays invested, which could mean more portfolio gains in the long run. 

3. Flexibility 

ETFs trade differently than mutual funds. Because they are actively traded on exchanges, many ETFs offer ample liquidity, making transactions straightforward and efficient for most investors. Buying and selling ETFs is often as simple as trading a stock through a brokerage account. Mutual funds, on the other hand, are priced only once at the end of each trading day. Regardless of when an order is placed, all investors receive the same end-of-day price. This flexibility from trading ETFs gives investors greater control over when they enter or exit positions. 

4. Passive Investment 

Instead of purchasing individual securities one at a time, an investor can buy a single ETF and gain exposure to dozens or hundreds of underlying holdings. Some ETFs achieve this exposure by tracking broad market indexes. Rather than trying to beat the market by picking the "perfect" combination of stocks, some passive ETFs aim to capture the entire market. This approach involves less trading of the underlying securities, lower fees, and more diversification than actively managed ETFs and mutual funds. Automating deposits to buy and hold passive ETFs can help investors build a strong portfolio with low costs and little to no effort. 

5. Tax Efficiency 

ETFs are often considered more tax-efficient than traditional mutual funds. Unlike mutual funds, you have more control on declaring capital gains. Unexpected capital gains may increase income for investors and cause them to pay additional taxes even if they never sold any shares of the mutual fund. While tax implications vary by individual circumstances, many investors appreciate the potential to reduce unexpected taxable income that ETFs offer. 

What should you consider when buying ETFs? 

Although ETFs provide convenient diversification, it is important to figure out what you want in your portfolio before purchasing one. Two ETFs may have similar names but very different investment objectives and risk levels. Some may focus on large, established companies, while others concentrate on emerging industries, small businesses, or international markets. Before investing, take time to review the fund's objective, top holdings, industries/sectors represented, expense ratio, and overall risk level. Morningstar.com is a great resource to use when researching ETFs. Once you’ve narrowed down the securities 

that align with your financial goals, risk tolerance, and investment timeline, look for the low-cost ETF alternative. 

Investing doesn't have to be complicated. For many people, ETFs offer a simple, affordable, and effective way to start building wealth while maintaining diversification. Successful investing is less about finding the perfect stock and more about consistently investing in a diversified portfolio over time. 

Sources:

https://www.ici.org/faqs/faqs_etfs

https://www.fidelity.com/learning-center/smart-money/what-are-etfs

https://investor.vanguard.com/investor-resources-education/taxes/tax-saving-investments

Trump Accounts – What Are They?

Starting July 5^th, 2026, any American child born between 2025 and 2028 qualifies for a free $1,000 from the US government to kick start their financial future. This is the base of the new Trump accounts. What you may not know is that ANY child under the age of 18 can also open a Trump account with funds contributed by parents, grandparents and others. The free money for those new children makes this a no-brainer for parents, but the question is whether they should they be used for older children. And should parents continue to fund the Trump accounts annually? Are there better alternatives? 

At a high level, Trump Accounts were established by the One Big Beautiful Bill[1] as a way for children to begin building wealth. The best way to think about a Trump Account is as an Individual Retirement Accounts (IRA) that parents can open for their children to secure their financial future. They’re “baby bonds,” accounts that are funded early in a child’s life with the goal of compounding over decades, not years, to support financial security and help build generational wealth.

But is this what families want and need? Most savings for children are focused on education, and these accounts can be used for that purpose, but that is not the main goal. Although the accounts are intended to be easy to open (you can fill out IRS Form 4547 to create one), there are still significant unknowns. Currently, Trump Accounts appear to be limited in scope, with only one custodian and one brokerage involved. 

Like all tax-advantaged accounts, there are limits and provisions that must be followed. First, there is an annual limit of $5,000 that can be contributed[2].That can come from anyone. There’s also a provision that allows employers to contribute up to $2,500 of the $5,000 annual limit in a child’s Trump Account annually (so check those employer benefits). Contributions may also be given philanthropically, much like Michael and Susan Dell who are giving $250 for the first 25 million children under the age of 10 that do not qualify for the $1,000 from the federal government.

Investment options for Trump Accounts are limited. Funds must be invested in low-cost mutual funds or exchange-traded funds (ETFs) that are invested in primarily U.S. stock indices such as the S&P 500[3].  While this may keep things simple in investment selection, it might not give you the most diverse options that you may be looking for. 

From a tax perspective, the treatment is mixed. Contributions will generally be made with after-tax dollars, while contributions from your employer, a charity, or the government are made with pre-tax dollars. Withdrawals depend on what part of the account is being withdrawn. Withdrawing the after-tax amounts will be tax free, while any pre-tax amounts will be taxed at the child’s income tax rate. Much like the growth of a Traditional IRA, the growth is tax-deferred, being taxed as income when withdrawn.

Looking ahead, these accounts are clearly designed with retirement in mind. Once the child turns 18, they can fully access their Trump Account. At that time, it will be considered like a Traditional IRA. Meaning that there’s a withdrawal penalty of 10% if taken out before the age of 59 ½ and would be taxed as ordinary income rates. While your child’s retirement allows for many years of compounding, it limits the flexibility and practicality for more immediate financial goals. 

As with a Traditional IRA, there are exceptions to the 10% withdrawal penalty such as with purchasing a first home ($10,000 limit), educational expenses (tuition and fees, not room and board), or the birth of a child ($5,000 limit per child), but the withdrawal amount will still be taxed as income.

As a result, the real-world use case for Trump Accounts is likely smaller than it initially seems. For many families, priorities such as emergency savings, retirement planning for parents, and education funding will be the priority. In that context, placing funds to a long-term, relatively inflexible account would likely not be the most efficient choice. While educational expenses can be used from the Trump Accounts once they change to a Traditional IRA at 18 years old, the 529 plan is more tax friendly with tax-free earnings for qualified educational expenses and the ability to be used for room and board.

For those new babies in the family, you certainly want to take advantage of the initial $1,000 government contribution, but they are probably not the best option for older children or for continuing contributions. In fact, if the overall goal is to cover educational expenses, we prefer the state-sponsored 529 plans.  

Ultimately, Trump Accounts are an interesting addition to the financial field, but as they currently stand, are unlikely to be the first solution for most families. They work best as a supplemental tool, especially when taking advantage of initial funding opportunities, rather than a replacement for more established and flexible strategies.

Savings Plan for Children

Attribute	Trump Accounts	529 Plan	UGMA/UTMA
Tax Treatment	Tax-Deferred Growth	Tax-Free Growth; Tax-Free Withdrawals for Qualified Education Costs	Taxable
Non-Qualified Withdrawal	Taxed at Ordinary Income Rate and 10% Early Withdrawal Penalty	Taxed at Ordinary Income Rate and 10% Early Withdrawal Penalty	Capital gains tax
Investment Options	Low-cost US Equity Index Funds/ETFs	Plan selected mutual funds and index funds	Any investment
Qualified Uses	Retirement; Exceptions for higher education, first home	Higher Education, K-12 Tuition	No restrictions
Account Owner	Owned by Child	Owned by Account Owner	Child takes full control at age 18-21
Best Used For	Long-term retirement wealth building with possible Roth conversion	Tax-Free growth for college and education costs	Maximum Flexibility

 

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[1] https://www.irs.gov/newsroom/one-big-beautiful-bill-provisions

[2] https://trumpaccounts.gov/

[3] https://www.irs.gov/newsroom/one-big-beautiful-bill-provisions

Financial Lessons from 2015!

Susan and I had a lot of fun coming up with financial lessons we learned from events in 2015. I was super excited to see Ashley Redmond of GoBankingRates.com include them all in her article! While the news about rising wages may have the most important impact on your pocket, there were lessons to be drawn from One Direction splitting up, Lamar Odom falling into a coma and even the excitement of getting new, high resolution photos of Pluto!

Here were a few of the lessons I found in recent news:

• There has been some pretty cool news coming from outer space this year. New Horizons has sent us our best images of the surface of Pluto and we have our best evidence yet that there is water on Mars! These are amazing accomplishments that were a very very long time in the making. These are a good reminder that it is important to stay focused on long term goals, even when there is trouble in the short term.

• The shocking and tragic story of Lamar Odom is a harsh reminder that estate planning is not just for the elderly! Estate plans need to be made early, and updated at any major life event. While I do not know the details of his planning, things like a Will and a Medical Directive are super important for people at any level of assets or relationship status. These need to be updated whenever anything changes, such as a marriage, divorce, birth of a child or retirement.

• We were all very shocked, of course, when Zayn Malik left One Direction. When the entire band announced they will go on hiatus in 2016, our inner tween fell into deeper despair. Like a working relationship, it is important to always evaluate our financial relationships. Sometimes it is a budget item that just has to go to make room for another, or maybe an adviser that just isn’t providing appropriate advice anymore. One of the hardest relationships to break off is one with a sentimental stock, maybe an old family gift or a company a retiree has pledged undying loyalty to. These are important to evaluate in the context of the investor’s entire portfolio and sometimes, the stock just does not fit with the investor’s goals anymore. Always evaluate your financial relationships and make sure they are still fully aligned with your own financial goals.

• Exciting for workers everywhere, Target, Wal-Mart and several other very large employers announced that they would be raising wages. While this is a direct boost to those workers paychecks, it will also spread to, and lift the fortunes of all other low-wage workers. These wages aren’t being raised because the employers are kind and loving people, but because they are having a hard time filling positions. Raising the wages effectively puts an above minimum wage floor on what an American worker will be earning going forward. This will likely lead to inflation of basic goods in the coming year, however.

• Tesla made big headlines when their Model S was awarded 103 of 100 in the consumer reports rating system - the highest they ever awarded. This was gold in the hands of their confident promotor and CEO, Elon Musk. On the surface, it is an amazing car, incredibly safe, incredibly fun to drive and quite good looking to boot! Digging deeper into the Consumer Reports article, I noticed one glaring flaw. The car was very new, with little operating history. The section on brand reliability was essentially ignored. Reliability is a major factor when buying a car! Fast forward to a few days ago, some reliability numbers came out and they were “worse than average”. If you had bought a Tesla already, you might not be so happy about your future with it. If you had done a bit of deeper digging at the time, you might have suspected the reliability adjustment was coming (even an article sent to me by a Tesla salesman mentioned having to get a motor replaced). This lesson of doing your research can be applied to a lot of things, but particularly to investing. Far too often I see a mutual fund with a short operating life and a great track record being pitched to me or my clients. Without digging deeper into the sources of return and the risks being taken, you can’t build a realistic outlook for the future of the fund. A long operating history is no guarantee of future success (look at Volkswagen!) but it provides a lot more data for you to understand what you are getting into.

avoiding mistakes

Everyone makes mistakes. In much of life, we learn the most by making our own mistakes and figuring our way out of them. When it comes to your money, however, mistakes can get very, very expensive. Here are a few mistakes that are very costly, but easy to avoid.

1. Not getting started early. At an oft-quoted 7% annual return, your money will double roughly every 10 years. That means that your money will quadruple in twenty years, or increase 8- and 16-fold over 30 and 40 years. If you are saving for retirement at 65, putting money away at age 25 is twice as effective as waiting until age 35 and four times as effective as waiting until 45!
2. Getting into high fee products. Fees take a haircut right off the top of your accounts. So-called "Loads" on some mutual funds may take around 5.5% of your initial investment - which needs 6% returns to recover! Variable annuities and riders on them also rob your account and performance. Surrender charges of up to 10% keep you locked into restrictive products for up to 10 years and annual fees easily top 2% for even the most basic line. With fee only advisors, discount brokers and services like Betterment, there is no need to pay much at all to get your investments on track.
3. Not understanding debts. Debt is a double edged sword - it can be incredibly useful and sometimes the only way to afford something, but the extra cost of interest can sometimes become a unsustainable burden on its own. Keep your eye on interest rates - a 4-5% mortgage is some of the cheapest money available and it may not be worth it to pay off if your extra cash could be be earning more invested elsewhere. Introductory credit card rates may be attractive, but if they are hiding a high regular rate, make sure that balance is low as possible before interest kicks in.

While you may learn from making financial mistakes - they are much better avoided completely. A little time with a calculator and a knowledgabe financial advisor can show you how much these mistakes could end up costing you. It's better to see the risk of a hypothetical mistake before you actually make it!