Don’t
See that was simple, wasn’t it?
By don’t I mean don’t buy individual stocks. Sure there are great companies to invest in like Pepsi and Apple, Microsoft, and CVS but you probably shouldn’t be buying individual companies. That’s because it’s far easier to buy ETFs and get pretty much the same result.
What’s An ETF?
Good Question. The simple answer is Exchange Traded Fund. This investing product is designed to help investors get exposure to a wide variety of stocks in one convenient place.
The best example is the SPY. This ETF is by far the largest with over $340 billion of investors’ money held in the fund, otherwise known as Assets Under Management.
But before we get too ahead of ourselves let’s take a step back.
As I said SPY is an ETF and is basically a collection of stocks. In the case of SPY, you are buying a small piece of the 500 largest publicly traded companies in the United States. Currently, the price for one share of this ETF is ~$360 dollars.
The S&P 500 is something you may hear of often on the news, it and the Dow Jones Industrial Index are the main indicators of the stock market in the US. It is important to remember that these two indexes while big are not the entire stock market.
And here are some of the stocks you get when you buy 1 share.
This also means 7% of your $360 dollars (25.20) is going towards ownership in Apple, the largest company in the United States, 5.8% is going towards ownership in Microsoft, and so on.
Instead of investing $360 into just shares of Apple and betting all your money on the success of one company you can bet on the success of hundreds of companies. SPY specifically is an index that has existed for a very long time and looking at its performance over the last 90 years it’s almost straight up.
Each of those gray lines is a recession. Thinking of all the world-changing events over the last 90 years the performance is remarkable. Of course, this ETF is just one in the vast world of funds that allow you to get access to a wide selection of companies.
The big takeaway is that ETFs are a way for investors to be able to own lots of companies instead of going out and buying their shares individually.
Different Kinds of ETFs
Another extremely popular ETF is VTI, an ETF that holds over 4,000 stocks. It covers virtually every public company in the US. While this does expose investors to a lot of the smaller companies that may not last forever it also increases the likelihood of returns.
And for investors looking to get the maximum exposure to the stock market, there is VT, the total world stock market ETF. VT holds over 9,000 publicly traded companies from all over the world. The United States, Japan, and The UK are some of the countries in the fund has holdings.
For a relatively small amount of money (in this case $80 dollars) anyone can get access to the entire world of publicly traded companies. But there are some other kinds of ETFs that track specific trends or investing styles as well.
My personal favorite ETF is called SCHD and it tracks some of the best dividend-paying companies in the US.
This ETF tracks the 100 financially strong companies in the United States that are going their dividends every year. Every 3 months this ETF pays out those dividends to shareholders and can be a great source of income for investors who are looking to retire. Some of its top holdings include Pepsi, Coke, and Home Depot. Again the same principle applies, for $70 dollars you gain access to a wide variety of companies that pay you money every 3 months just for holding them.
Let's say you are wanting to get exposure to a growing trend in the US. Well, there is an ETF for that. How about space, that seems like a growing field, well UFO is one of the ways you can get access to some of those companies. UFO is an ETF that holds companies most likely to benefit from heavy investment in space travel. Here are some of the top holdings, mostly satellite companies right now:
I wouldn't invest all of your money in ETFs like this and it may even be better to stick to some of the larger ETFs mentioned earlier as they have a longer track record of good performance but it is good to know of these alternatives.
Expenses
Unfortunately, ETFs do cost money to own. Fortunately, many of the largest ETFs have very low expense ratios, but some other ETFs… Not so much.
For instance, the expense ratio for SPY is 0.09%. If you were to invest 10,000 dollars into this ETF they would charge you $9 dollars per year to own the fund. This expense goes to the company that runs the ETF. While this expense ratio is very small there are some ETFs that can get crazy. Our earlier example of UFO has an expense ratio of 0.75% which means you would get charged $75 dollars a year to own the fund. Sometimes ETFs like CGV can get as high as 1.2% which is just insane.
Expense Ratio is certainly one of the things to keep a close eye on when making any investing decisions.
I hope this gave you a quick primer on some of the various ways you can get exposure to the stock market on a broader scale. We plan to dive further into this topic so be sure to subscribe to learn more every week.