30 Day Investing Challenge, Day 16: Know What An ETF Is
A confusing part of the investing world is all the naming conventions, acronyms, and jargon they like to use. Half the time you listen to a financial advisor you’re scratching your head thinking “WTF did he just say??” I actually had a good friend almost come to tears the other day when I was trying to explain a financial concept to her because all the jargon left her feeling confused and frankly stupid (she definitely is NOT). I decided to take a different tactic and explained things in real terms, which helped immensely. So, if you’re ever feeling overwhelmed by all the jargon, don’t worry: you’re not stupid, you’re not uneducated. The financial world does this on purpose to keep regular folks out and feeling like you need to hire someone to run your finances. It’s basically a ploy and a scam to get you to shell out money. But with a little time and effort you can beat these bozos at their game and learn the investing jargon essentials.
One common jargon mishap is the difference between index funds and ETFs. But essentially they’re the same thing. They both track broad indexes. They both have low fees. They both provide a simple way for you to invest in a lot of different companies at one time without a lot of work. The only difference is how you buy them. Index funds are mutual funds, so when you go to your brokerage firm to buy an investment you would select the “mutual fund” option. You can also only buy or sell them once per day. ETF means “exchange traded fund;” they’re traded like stocks. Unlike mutual funds, you can buy and sell them multiple times per day, but that’s not necessary for long term investors like you and me.
ETFs also usually have no minimum investment requirement. As you probably saw in yesterday’s exercise, Vanguard’s total stock market index fund (VTSAX) requires a $3,000 investment minimum to buy it (it used to be $10,000). But guess what? There’s an ETF equivalent called VTI that also tracks the total stock market index. The only issue with buying an ETF is you have to actively buy it each time, you can’t set up an automatic investment to buy it in the Vanguard portal (believe me, I’ve tried; I’m investing in VTI right now in my brokerage account and I have a reminder set up each month to go and buy it). Once you hit the minimum threshold though you can sell the VTI, switch it over to VTSAX, and set up an automatic investment. This is not an issue with Schwab or Fidelity because they don’t have investment minimums for their total stock market index funds, so you can start an automatic investment into those funds right away.
Action Step: Compare 3 ETFs
Let’s look at 3 ETFs from Vanguard, Schwab, and Fidelity:
Create a chart that has 4 columns and 4 rows; the column headers should be: Fund, Type, Expense Ratio, and 10 Year Performance
Look up ticker symbols VTI, IVV, and SCHD — put these under the “Fund” column
Record each fund’s type (see example), expense ratio, and 10 year performance returns (in a percentage)
Without knowing anything else, which of these ETFs would you choose and why? Write your explanation down.
Your chart should look something like this.
See you tomorrow for your next challenge: How much should you invest?
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