Transcription
Say you want to invest in an entire industry like tech, or something like the S&P 500. What do you do?
One option is to invest in an ETF, or an exchange-traded fund. And here to help me explain it, I'm going to tap in Stephanie.
Thanks, Jay. You see, back in the '90s, investors realized this whole “how do I invest in more than just one stock” thing was a common problem. But the result? ETFs were introduced.
Unlike stocks, ETFs aren’t individual companies. ETFs are a collection of other investments. This can include stocks, bonds, and currencies. The idea was it would trade just like a stock with a single ticker symbol.
I skipped lunch. So let me give you a hungry metaphor. Imagine you go to a food truck that you’ve wanted to check out. Problem is, you can’t decide what to eat. Do you order the sesame chicken, the shrimp fried rice, or the beef and broccoli? An ETF is like ordering a combo platter that includes a little bit of all those things. Just by ordering one platter, you get to try a bunch of different foods. And just by buying one share of an ETF, you get exposure to many more investments.
What makes that approach so appetizing is you get to try everything, and even if the shrimp fried rice is a total fail, then hey, you got the rest of the platter to chow on. Your order is diversified, so your whole meal isn’t ruined. When you buy ETFs, you're doing the same thing.
According to Fidelity, this helps reduce your risk because you're not going all in on a single stock. This doesn’t ensure a profit or guarantee against loss, but it does give you the potential to improve your returns.
If you’ve ever heard of mutual funds, ETFs are like those, except there are some key differences. ETFs can be bought and sold throughout the day and are usually lower-cost. Many brokerages and banks have automatic investing plans that allow regular purchases of mutual funds.
A common ETF you’ll find is an index ETF, which is designed to reflect the performance of a particular index. An index is just a fancy way of saying a group of securities that try to replicate a part of the market. For example, you've probably heard of the S&P 500. That’s an index that tracks the 500 largest companies listed on U.S. stock exchanges. So, in this case, an S&P 500 index ETF might see similar performance as the S&P 500 itself.
Other common ETFs include:
* Sector and industry ETFs, which are designed to provide exposure to a specific industry, like pharma or tech.
* Style ETFs, which are designed to track an investment style or focus, such as value or growth.
* Foreign market ETFs, which are designed to track non-US markets, such as Japan’s Nikkei Index or Hong Kong’s Hang Seng index.
* And actively managed ETFs. Remember how index ETFs aim to match the performance of indexes like the S&P 500? These ETFs try to outperform them instead.
So, what does all that look like in practice? Say there’s an ETF that has all these stocks in it. You can see there are a few that are doing great, like this stock. And some that aren’t so great, like this stock. The ETF’s overall performance might look like this line I’m drawing, where it measures how they’re all doing as a whole.
Quick side note: ETFs usually invest in some parts of its fund more than others to help limit your risk. ETFs are sort of like taking all those stocks you want to invest in and squishing it all into a single fund.
Thanks for the rundown, Stephanie. There’s an ETF for almost everything. Nowadays, ETFs are more popular than ever. I went on Fidelity.com and found so many listed on the stock exchange. And more ETFs are always being created.
What I’ve learned from investment professionals like Stephanie is, bottom line, if you're trying to build your portfolio and diversify, ETFs can potentially be helpful building blocks to do that. So look around and see if any of them align with your investing strategy.
Well, that’s it for now. Still have a question? Drop it below in the comments or check out Fidelity’s socials where they discuss all sorts of topics like this and more. See ya’ next time, investors.