ETFs 101: Investing Made Easy

If you’re debt free and have built up extra savings, congratulations! The next step for many people is putting that money to work through investing.

For new investors, one of the biggest challenges is deciding where to start. With thousands of individual stocks available, building a diversified portfolio can seem overwhelming. Rather than trying to pick the "perfect" combination of stocks, many investors choose Exchange Traded Funds, commonly known as ETFs.

 

What is an ETF?

An Exchange Traded Fund (ETF) is an investment fund that holds a collection of assets such as stocks, bonds, or other securities. Instead of purchasing individual investments one at a time, an investor can buy a single ETF and gain exposure to dozens or hundreds of underlying holdings.

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

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

What are the advantages of investing in ETFs?

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 investment 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. 

While both ETFs and mutual funds provide diversified exposure through pooled investments, ETFs offer several advantages that have made them increasingly popular among investors. 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.

Buying and selling ETFs is often as simple as trading a stock through a brokerage account. Because they are actively traded on exchanges, many ETFs offer ample liquidity, making transactions straightforward and efficient for most investors. 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.

ETFs are often considered more tax-efficient than traditional mutual funds due to the way shares are created and redeemed. ETFs typically use an in-kind creation and redemption process, which allows for trades of the underlying securities without triggering a taxable event. When underlying assets of a mutual fund are sold, capital gains are realized and passed onto the shareholders as capital gain distributions. 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. Because of this, ETFs typically distribute fewer capital gains than mutual funds. While tax implications vary by individual circumstances, many investors appreciate the potential to reduce unexpected taxable income.

 

What should you consider when buying ETFs?

Although ETFs provide convenient diversification, it is important to understand what you will actually own 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. Making sure an ETF aligns with your financial goals, risk tolerance, and investment timeline is just as important as choosing to invest in other assets.

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

Using Your Money For Good

"Money is the root of all evil" is the first suggestion Google makes when searching about money. This is reflected in a lot of people's attitudes about money. While money is indispensable in the modern economy, we often feel a bit of disgust or shame about accumulating it and spending it on ourselves. It does not have to be this way! Beyond just living off of the profits from your hard work, there are plenty of ways to use your money as a force for good in this world. Here, we will briefly look at three ways, and hopefully I will expand those into longer posts later.

You can just give it away:

• If your money really disgusts you, or if you just know of someone who needs the money more than you, you can always just give it away. Each U.S. taxpayer can give $14,000 to each other without running into any gift tax issues. (If you're interested in going overboard, the giver has to pay the taxes.) There are a lot of uses in estate planning here. If you are thinking of giving to your children or grandchildren, just giving cash is the most advantageous way to do it with no strings attached.

You can give it away and collect some great benefits for yourself:

• If you don't just want to give unrestricted cash to a child or grandchild, consider a college savings account. Each state runs a 529 plan with possible tax benefits within that state.

• Give to charity - with more control. A Donor Advised Fund is an account you can set up which acts like your own personal charitable foundation. You can donate cash, appreciated stock or other assets for an immediate tax deduction. From there, you can grant money to a regular charity at any time. This is useful for taking advantage of the tax break before actually planning who and when to donate it. If you have a stock with a large capital gain, you can transfer it to the account, get the full amount as a tax deduction and not have to recognize the gain either. This could be a huge tax benefit!

You can invest it in responsible companies or projects who will provide you with a return while they make a positive impact in the world:

• Sustainable and Responsible Investing is attracting a lot more attention and money these days. Sustainability and Responsibility may form part of the core thesis of your investments, and you can generally expect similar returns investing this way as you can expect conventionally. You can either pick stocks and bonds yourself or you can invest through a fund. My main caution with investing through a fund is making sure that your actual beliefs and desires are accurately reflected in the fund management and portfolio. With a lot of investors and views to please, not everyone will be perfectly satisfied. That being said, there are now some really good options out there from both an investment standpoint and a sustainability standpoint.

• Some bonds are designed to finance noble causes. There are bonds that directly finance solar panel installation, microfinance, women and minority business support and many other socially responsible projects. These often have fixed terms and lower risk than an equity investment. You get to support the project and still earn a return on your money!

• Some credit unions also focus on financial education and anti-poverty practices that you can support just by opening a savings account!

• Some municipal bonds may be funding projects or government entities in your community you want to support. The interest payments are often tax exempt as well. Participating in a new offering directly lowers the cost of borrowing for the issuer. Be very careful here as these bonds can fund anything from bridges and schools to prisons and factories. Any broker or investment advisor should be able to tell you not only the terms and risk of the investment but the issuer and use of the proceeds to help you make a decision.

Keep in mind with each of these options there are a LOT of considerations to make. Consult your financial advisor as to what the implications here are. There are a variety of ways you can use your money for good and it may be refreshing to learn that you can do good with your money AND earn a decent return as well!

Not all of the investments are appropriate for all investors. This is only meant to give you some insight into the different ways you can use your money for good. As always, consult a trusted financial advisor before making any decisions on gifting, taxes or investing.