WTF is an ETF? And Why is America Obsessed with Them?

The hottest investment category, according to a recent Blackrock study, is the ETF market. We’ve had numerous discussions with people who have suddenly taken an interest in the subject. So what is an ETF and why should we care?

An ETF is an exchange-traded fund. Like a mutual fund, it’s a collection of stocks, bonds or other investments. Unlike a mutual fund, however, it trades moment by moment on the stock exchange (mutual funds and index funds settle up deposits, withdrawals, gains and losses at the end of the day). ETF’s are touted as having lower fees and less taxable distributions.

An ETF can be managed or made up of anything; It can be designed to track a specific index, industry, or commodity (like gold or oil). Would you like an ETF that owns only cyber security stocks? Or a broad international index fund? There’s an ETF for that!

The funds can be low cost and “passive”, meaning they don’t have a manager, or are managed by a specific rule set. ETF’s can also be actively managed towards goals like income or growth. There are literally thousands of ETF’s now available in the marketplace. Although most people probably think ETF’s are low cost passive funds, the truth is many of them can charge high internal fees… We’ve seen some that charge upwards of 2%!

Saying something like “this year, I’m doing most of my investing through ETF’s” may seem interesting at a cocktail party. However, the truth is that investor returns in funds don’t exclusively depend on the business structure of the fund. Investor returns in funds are always going to depend on the holdings’ performance, less management fees. Choosing an ETF, Mutual Fund, Closed End Fund, Hedge fund or any other fund will always follow the same rule.

It’s important to realize not only what you own, but how it fits into the context of your portfolio and ultimate goals.

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