A few weeks ago, I made a post about saving vs. investing. In that post, I talk about how buying ETFs is a great way for people to start investing. I realized that I did not explain what ETFs are and so today, I will provide a quick introduction to them.
ETF stands for exchange-traded fund. It is a financial security/instrument that contains a collection of various other securities such as stocks and bonds. ETFs are listed on exchanges and trade like a stock. ETFs are typically passively managed meaning that come with lower management fees compared to mutual funds. They usually track a specific sector or index such as the tech sector or the Dow Jones Industrial Average.
Since the financial crisis in 2008, ETFs have surged in popularity. Prior to 2008, many investors focused on active management to beat in the market. Very few have done it with success, and most have realized that it is better to simply “be the market” instead of “beating the market”. This shift in perspective contributed to the popularity of this financial instrument. Asides from greater average returns, ETFs are also cheaper than buying each individual stock in a sector or index. Take the S&P 500 index for example. If you wanted to track the index by buying one share of each company in the index, it would cost you tens of thousands of dollars. However, if you buy one share of a S&P 500 ETF (ex. SPY), it would cost you only $340. The ETF lowers the barrier to entry for investors.
Overall, I want to reiterate that ETFs are very good for beginner investors. It is a great entryway for anyone looking to invest. ETFs will allow you to invest on fundamentals instead of a specific company. If you believe that the technology sector will do well but you do not know which company to invest in, just buy a technology ETF. That way, you are diversified amongst the industry as a whole and minimize the impact of any firm-specific risk. To buy ETFs, you can simply open an investment account through your bank. Alternatively, there are online brokers such as Questrade that allow you to trade ETFs commission free.