ETFs Explained

An ETF is an exchange-traded fund is a pooled security that is traded on a stock exchange, just like individual securities. 

The most common type of ETF is an index ETF. You might hear somebody say “I’m invested in the S&P 500”. While what they’re saying is technically true, they’re not invested in an index itself. An index is not an investible asset – what they really mean is they’re invested in an ETF that tracks the performance of an index. Instead of investing directly “in the S&P 500”, they’re likely invested in something like SPY, which is an ETF that tracks the S&P 500.

Another example is the VIX, which is an index on the market’s volatility – it’s actually not possible to invest directly in the VIX, but you can invest in an ETF like VIXY, which will track the performance of the VIX. 

There are a few key points of information to know when you invest in an ETF. To start, if you look up something like SPY online, you’ll see its full name: SPDR S&P 500 ETF. SPDR refers to the provider of the ETF – this is the actual manager of the assets responsible for its performance. Another example of an index ETF is VOO: Vanguard’s S&P 500 ETF. 

If both SPY and VOO are S&P 500 ETFs, we’d expect the same results from them, right? This actually isn’t the case. While the difference is small, SPY and VOO have different expense ratios. The expense ratio is the management fee paid to the provider. SPY has an expense ratio of 0.09% while VOO has an expense ratio of 0.03%. These expenses are paid yearly, meaning if you have $10,000 in SPY and hold it for a year, you’ll pay $90, while if you have $10,000 in VOO, you’ll only pay $30.

While index ETFs are the most popular, there are plenty of other types of ETFs. They each will have their own expense ratios and strategies implemented. You can think of investing in an ETF like investing in a thesis, depending on what your beliefs in the market are. If you believe the technology industry as a whole is going to rise, instead of just investing in Apple or Amazon, you can invest in an ETF that covers more of the industry, like XLK: SPDR’s Technology Select Sector ETF, which includes 76 different technology assets from the S&P 500.

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