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Beginner's Guide to ETF's

Updated: May 12

An exchange-traded fund (ETF) is a type of pooled investment security that operates much like a mutual fund. Typically, ETFs will track a particular index, sector, commodity, or other asset, but unlike mutual funds, ETFs can be purchased or sold on a stock exchange the same way that a regular stock can.




An ETF can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. ETFs can even be structured to track specific investment strategies.


The 'S & P 500' is a fund which tracks 500 of the best companies in the USA.


You can search 'S&P 500' on Sharesies and this is one of the funds which will come up.

iShares Core S&P 500 ETF IVV | NYSE




It should cost around $450USD for one share. This is about $650 NZD


Hint: You do not need to buy a whole share. I've been investing for several months now and I own about 1.3 shares.


You can top up in increments of $10 +


I like to keep as consistent as possible.




Investing Hacks:


I like to 'Dollar Cost Average'


Dollar Cost Averaging is when you buy regular amounts of an investment which will allow you to average out the highs and lows of the market. For example: If you invest $10 at -5% in week 1 and then another $10 at +5% then your investments have averaged out, otherwise known as: Dollar Cost Averaging.


I also like to invest for the long term:


Investing for the long term allows for exponential growth, but my favourite thing about investing for the long term is that you don't need to worry during volatile times such as the 2022 stock market, post corvid impacts on the market, and the crumbling healthcare systems all over the world. Investing for the long term allows you to ride out the lows and be in for the wins long term.


I like to follow this quote. So, if one week I can only invest $10, I do it. If another week I can invest $100 I do that. The idea is to be consistent and to invest no matter what.


An exchange-traded fund (ETF) is a basket of securities that trades on an exchange just like a stock does.





ETF share prices fluctuate all day as the ETF is bought and sold; this is different from mutual funds, which only trade once a day after the market closes.


ETFs can contain all types of investments, including stocks, commodities, or bonds; some offer U.S.-only holdings, while others are international.


ETFs offer low expense ratios and fewer broker commissions than buying the stocks individually.


An ETF is called an exchange-traded fund because it’s traded on an exchange just like stocks are. The price of an ETF’s shares will change throughout the trading day as the shares are bought and sold on the market. This is different from mutual funds which are not traded on an exchange, and which trade only once per day after the markets close. Additionally, ETFs tend to be more cost-effective and more liquid.


This graph shows you the average increase, over time, of the S&P 500 Ishares Fund:





What the graph tells us is that over time, the graph consistently has ups and downs but overall it heads in an increasing direction.


What this means for you, as an investor, is that as time goes on - your original investment will increase in value.


This means that if you were to sell your shares, you would be able to leave with a profit.


Example:


This is a picture of my sharesies account.


It shows that on the 29th March 2022 my investment in the S&P 500 iShares was worth $611.09. But, I had only put in $600.32. So, I had made $10.77


This means that if I decided to sell my shares, I would be able to leave with a $10 profit.




An ETF is a type of fund that holds multiple different assets rather than only one like a stock does. Because there are multiple assets within an ETF, they can be a popular choice for diversification ETFs can thus contain many types of investments, including stocks, commodities, bonds, or a mixture of investment types. An ETF can own hundreds or thousands of stocks across various industries, or it could be isolated to one particular industry or sector. Some funds focus on only U.S. offerings. For example, banking-focused ETFs would contain stocks of various banks across the industry.


With a multiplicity of platforms available to traders, investing in ETFs has become fairly easy. Follow the steps outlined below to begin investing in ETFs.


How To Get Started With Investing:


Find an investing platform: ETFs are available on most online investing platforms, retirement account provider sites, and investing apps like Robinhood. Most of these platforms offer commission-free trading, meaning that you don’t have to pay fees to the platform providers to buy or sell ETFs. However, a commission-free purchase or sale does not mean that the ETF provider will also provide access to their product without associated costs. Some areas in which platform services can distinguish their services from others are convenience, services, and product variety. For example, smartphone investing apps enable ETF share purchasing at the tap of a button. This may not be the case for all brokerages, which may ask investors for paperwork or a more complicated situation. Some well-known brokerages, however, offer extensive educational content that helps new investors become familiar with and research ETFs.


You can use this link to sign up to sharesies where you can buy ETF's : https://sharesies.com/r/3H4KNX This link will also give you $5 just for signing up to sharesies.


You can click on the sharesies logo and it will take you to the page you use to sign up.



Step 3 (After you have signed up) :


Research ETFs: The second and most important step in ETF investing involves researching them. There is a wide variety of ETFs available in the markets today. One thing to remember during the research process is that ETFs are unlike individual securities such as stocks or bonds. You will need to consider the whole picture—in terms of sector or industry—when you commit to an ETF. Here are some questions you might want to consider during the research process:


  • What is your time frame for investing?

  • Are you investing for income or growth?

  • Are there particular sectors or financial instruments that excite you?


Step 4 After you've done some research:


Consider a trading strategy: If you are a beginning investor in ETFs, dollar-cost averaging or spreading out your investment costs over a period of time is a good trading strategy. This is because it smooths out returns over a period of time and ensures a disciplined (as opposed to a haphazard or volatile) approach to investing. It also helps beginning investors learn more about the nuances of ETF investing. When they become more comfortable with trading, investors can move out to more sophisticated strategies like swing trading and sector rotation.


A brokerage account allows investors to trade shares of ETFs just as they would trade shares of stocks.


After creating a brokerage account, investors will need to fund that account before investing in ETFs. The exact ways to fund your brokerage account will be depend on the broker.


To add money to your account on sharesies all you need to do is select 'wallet' and then you can either top up your 'wallet' with your card, or a bank transfer.


After funding your account, you can search for ETFs and make buys and sells in the same way that you would shares of stocks. One of the best ways to narrow your ETF options is to utilize an ETF screening tool. Many brokers offer these tools as a way to sort through the thousands of ETF offerings. You can typically search for ETFs according to some of the following criteria:


  • Volume: Trading volume over a particular period of time allows you to compare the popularity of different funds; the higher the trading volume, the easier it may be to trade that fund.

  • Expenses: The lower the expense ratio, the less of your investment that is given over to administrative costs. While it may be tempting to always search for funds with the lowest expense ratios, sometimes costlier funds (such as actively managed ETFs) have strong enough performance that it more than makes up for the higher fees.

  • Performance: While past performance is not an indication of future returns, this is nonetheless a common metric for comparing ETFs.

  • Holdings: The portfolios of different funds often factor into screener tools as well, allowing customers to compare the different holdings of each possible ETF investment.

  • Commissions: Many ETFs are commission-free, meaning that they can be traded without any fees to complete the trade. However, it is worth checking if this is a potential dealbreaker.


Examples of Popular ETFs

Below are examples of popular ETFs on the market today. Some ETFs track an index of stocks, thus creating a broad portfolio, while others target specific industries.


  • The SPDR S&P 500 (SPY): The “Spider” is the oldest surviving and most widely known ETF that tracks the S&P 500 Index.

  • The iShares Russell 2000 (IWM) tracks the Russell 2000 small-cap index.

  • The Invesco QQQ (QQQ) (“cubes”) tracks the Nasdaq 100 Index, which typically contains technology stocks.

  • The SPDR Dow Jones Industrial Average (DIA) (“diamonds”) represents the 30 stocks of the Dow Jones Industrial Average.

  • Sector ETFs track individual industries and sectors such as oil (OIH), energy (XLE), financial services (XLF), real estate investment trusts (IYR), and biotechnology (BBH).

  • Commodity ETFs represent commodity markets, including gold (GLD), silver (SLV), crude oil (USO), and natural gas (UNG).

  • Country ETFs track the primary stock indexes in foreign countries, but they are traded in the United States and denominated in U.S. dollars. Examples include China (MCHI), Brazil (EWZ), Japan (EWJ), and Israel (EIS). Others track a wide breadth of foreign markets, such as ones that track emerging market economies (EEM) and developed market economies (EFA).


Advantages and Disadvantages of ETFs

ETFs provide lower average costs because it would be expensive for an investor to buy all the stocks held in an ETF portfolio individually. Investors only need to execute one transaction to buy and one transaction to sell, which leads to fewer broker commissions because there are only a few trades being done by investors. Brokers typically charge a commission for each trade. Some brokers even offer no-commission trading on certain low-cost ETFs, reducing costs for investors even further.


An ETF’s expense ratio is the cost to operate and manage the fund. ETFs typically have low expenses because they track an index. For example, if an ETF tracks the S&P 500 Index, it might contain all 500 stocks from the S&P, making it a passively managed fund that is less time-intensive. However, not all ETFs track an index in a passive manner, and may therefore have a higher expense ratio.


Pros

  • Access to many stocks across various industries

  • Low expense ratios and fewer broker commissions

  • Risk management through diversification

  • ETFs exist that focus on targeted industries

Cons

  • Actively managed ETFs have higher fees

  • Single-industry-focused ETFs limit diversification

  • Lack of liquidity hinders transactions



Actively Managed ETFs

There are also actively managed ETFs, wherein portfolio managers are more involved in buying and selling shares of companies and changing the holdings within the fund. Typically, a more actively managed fund will have a higher expense ratio than passively managed ETFs. To make sure that an ETF is worth holding, it is important that investors determine how the fund is managed, whether it’s actively or passively managed, the resulting expense ratio, and the costs vs. the rate of return.


Anyways, thanks again team for yet another week of Maori Millionaire. Let me know in the comments what your financial goals are for 2022.


It's never too late.


Remember that.

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