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So, everyone always talks about ETFs,
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but nobody really says what the heck an
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ETF actually is so that we could
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understand it. In this video, I'll be
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going over what an ETF is and why it
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matters to you as an investor. It's
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absolutely the most simple way to invest
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and takes all the guesswork out of it so
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that you can focus on what matters in
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your life. And I doubt that has anything
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to do with the stock market or reading
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charts or finance reports all day. I'll
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also clear up some common questions like
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what is the difference between an ETF
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and an index fund and which one is
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better. By the end of this video, you'll
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be well informed so you can become a
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better investor and that's my goal here
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on this channel. So, if you don't know
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exactly what an ETF is, don't worry.
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You're probably in the majority, but
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after this video, you are going to be an
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expert. Here are some basics so that you
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can understand. ETF is an exchangeraded
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fund and it's basically like an index
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fund but traded like a stock. But for
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now, for all intents and purposes, ETF,
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index fund, synonymous, basically the
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exact same thing. So when you invest in
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a stock, say that stock is $50. And then
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you own one stock of that one company.
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So now you own $50 in that company. 100%
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of your portfolio is invested in that
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company. So 100% of that $50 is that
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stock. An ETF holds multiple stocks in
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one basket. The ETF itself is going to
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cost a certain amount just like one
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stock of a certain company is going to
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cost a certain amount. So let's look at
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QQQ, which is one of the best growth and
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technology ETFs out there. QQQ has a
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price today of $530.70.
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QQQ has 100 companies within the ETF. So
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if you buy one share of QQQ, you now own
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a small piece of 100 companies. When we
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look at the fun facts on Invesco QQQ's
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actual website, you can see that we have
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101 actual holdings within QQQ at this
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point. When we look at their top 10
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holdings within the ETF, it's got
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Microsoft at 8.65%,
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Nvidia at 8.56%,
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Apple at 7.58%,
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Amazon at 5.6%,
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Broadcom at 4.74%.
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And then the next five in the top 10 are
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Meta, Netflix, Costco, Tesla, and
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Alphabet or Google. The top 10 holdings
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in this are 50% of the entire fund. So
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even though there's over a 100
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companies, the top 10 take up half of
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this fund. So to put it all together,
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since you own one share of QQQ, which is
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$530.70,
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when you actually break down what's
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inside of that share, you just multiply
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the percentage of the holding by however
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much the ETF is worth. So as far as
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those top three in Microsoft, since it's
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8.65%, 65% you actually own $45.85
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in Microsoft. In Nvidia you own $4543.
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In Apple you own $4028.
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To figure out the rest of it, you would
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just do the math this exact same way.
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There are so many types of ETFs out
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there like like totally broad market
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type ETFs that cover the entire US stock
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market or it could be the entire
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international stock market. There's also
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ETFs that have very very niche type
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sectors like technology or healthcare.
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And then there's specifically growth
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type funds or dividend investing funds.
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Everybody's portfolio might be a little
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bit different. And that's totally okay.
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It's probably not your best move to just
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copy somebody's portfolio just because
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for them it's working out. And you'll
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see why by the end. So once you start
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getting into investing and you start
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listening to people talk about investing
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or reading about investing, you're going
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to see these two different categories.
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Something called an ETF and then
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something called an index fund. Probably
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also see things called mutual funds and
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individual stocks and all these other
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things. But the things that are the
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closest are the idea of the ETF versus
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the index fund. The biggest difference
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between ETFs and index funds is that
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ETFs can be traded throughout the day,
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like stocks, whereas index funds can be
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bought and sold only for the price set
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at the end of the trading day. For
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long-term investors, which most of you
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probably are, and I know I am, this does
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not really matter. Buying or selling at
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10:00 a.m. versus noon, is not really
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going to change the difference,
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especially 10 years from now. The couple
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pennies that you save or that you gain
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today don't really matter compared to
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the dollars or hundreds of dollars or
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thousands of dollars down the road. If
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you're interested in intraday trading,
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ETFs may better suit your needs. They
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can be traded like stocks, yet investors
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can still reap the benefits of
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diversification. ETFs may also have
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lower minimum investments and be more
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tax efficient than most index funds.
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Despite their differences, index funds
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and ETFs do have a lot in common,
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including diversification, low cost to
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invest, and strong long-term returns.
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One big thing that you're going to hear
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about a lot has to do with this idea of
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capital gains tax. ETFs are more tax
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efficient than index funds by nature
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thanks to the way they're structured.
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When you sell an ETF, you're typically
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selling it to another investor who's
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buying it, and the cash is coming
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directly from them. Capital gains taxes
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on that sale are yours and yours alone
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to pay. To get cash out of an index
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fund, you technically must redeem it
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from the fund manager, who will then
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have to sell securities to generate the
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cash to pay you. When this sale is for a
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gain, the net gains are passed on to
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every investor with shares in the fund,
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meaning you could owe capital gains
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taxes without ever selling a single
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share. This happens less frequently with
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index funds versus actively managed
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mutual funds. But from a tax
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perspective, ETFs definitely have the
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upper hand over an index fund. All of
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that was very deep and in the weeds, and
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for most of you, you're probably not
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going to notice the difference between
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the two. The big big difference between
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the two is that ETFs are definitely
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going to be more manageable as far as
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being able to afford buying one share.
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For example, one of the most popular
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index funds out there is called the S&P
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500 or the standard and pores index. And
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the S&P 500 right now is a little over
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6,000. But then there's an ETF called VU
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VO that actually tracks the S&P 500. And
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for this, it costs a little over $551
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to own one share. It's the exact same
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thing with almost identical returns
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because that ETF VU tracks the S&P 500.
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So, whatever the index fund does, the
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S&P 500, VU is going to move at the same
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exact pace. But to buy in at one share
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of owning VU, you get to pay 10 times
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less. Neither is better than the other.
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Because at the end of the day, the way
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that you look at your investments is
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total money invested, not in how many
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shares or of what specifically. For
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example, if you were to buy one share of
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VU, you'd have a little over $550
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invested in the S&P 500. Then, if you
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were to buy two shares of VU, that would
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basically be $1,100 invested in the S&P
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500. If you were to buy one share of the
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S&P 500 index fund, you'd basically say
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it like, I have $6,000 invested in the
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S&P 500. So it's about total money
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invested within the actual fund, not
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really how you get it there. The other
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thing is the ease with which how you can
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actually buy this asset. On some
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platforms, you can't really buy the
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index fund itself, but on most
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platforms, you can buy ETFs that track
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the asset. There's multiple types of
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ETFs and companies that own these ETFs
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that can track the same underlying
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index. So, for example, VU is one
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version that tracks the S&P 500. Another
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version of an ETF that tracks the S&P
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500 is SPY, SPY. And there's multiple
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ones out
