The most common questions we get about investing in the US stock market are “what should I invest in?” and “how can I choose my stocks?”. So, here’s the answer we’ve been giving – ETFs.
We hear about investing and how it’s one of the best ways to generate wealth. Then you hear the word stocks and say oh no, that’s not for me – I don’t like to dabble in what I don’t understand. With so many charts and numbers, it can be intimidating to take your first step into the investing world.
So, what if we told you that you can get expert asset managers to manage your investments for you? You get access to all the companies in the US stock market and so much more, and also get the same people who manage trillions of dollars to manage whatever it is the amount you choose to start with.
All this is possible through investing in ETFs. We’ll tell you how to choose the right ones for you in 4 simple steps. But, first let us tell you how an ETF works.
What is an ETF?
You can think of an ETF or an Exchange Traded Fund like a basket of companies. By investing in the fund, you get to own a little portion of all the companies in the basket. These ETFs are managed by the experts who manage trillions that we just talked about.
Step 1: Choose a theme you like
ETFs have themes – it’s very important to invest in what you believe in and what you think has a future. There’s no ‘one size fits all’ portfolio and that’s why the first step is you choosing your themes.
A cool example to look at is VOO 500. VOO invests in the largest 500 companies in the US stock market. This fund’s return has been about 10% a year on average. You think China is the next big thing? There’s another ETF that does the same thing but for companies in China instead called MCHI. So, you can decide depending on the economy you believe in more. We don’t all support or believe in the same things. You might be big on water treatment (PIO) while someone else is big on gold (GLD) and another is big on innovation.
What really makes ETFs cool is that they are:
We can look at how this works to help make this a bit more clear. Let’s say you want to invest in real estate. So, come on, let’s go buy a house now. First you’ll need to figure out where you want to buy this house. Is it in Cairo? Cyprus or Greece? You choose the city, compound, and find the street with the best view. Now, you’re faced with a huge down payment. What if you don’t have this money now? Or what if you want to invest a little less at the moment? If you moved past the down payment and you bought the house. You want to make money from this house – it takes time and effort to rent and manage. Let’s say you did all that and the house price went up – amazing! The property is illiquid – you can’t sell and turn this back into cash instantly.
Another much cooler (Faster, cheaper, safer, and easier) way to invest in real estate is to invest in a real estate themed ETF. There’s an ETF called VNQI that invests in companies that own real estate all around the world (excluding the US). This ETF is run by Vanguard who basically pool in your money with the $4bn+ they have from everyone else, and they invest in this fund according to the mandate. This ETF has an average yield of about 7% on the dollar. And, all the hard work of choosing locations, managing, renting, and reselling is all done for you by a team who’s bread and butter is to do just this. (Easier, Safer, Faster). You can invest with $50 or $100. You don’t need that big down payment (Cheaper). You’re also not limited to that one house on that street right. You now actually own property ALL around the world too.
Let’s look at safety using another example – this safety comes from diversity. If you wanted to invest in the biggest 500 companies in the US. imagine Facebook, Microsoft, Google, Amazon. So you instead of investing in 1 or two of these companies you diversify by investing in all 500 through the VOO 500 ETF which is also more safe.
Like we were saying earlier, there’s ETFs for almost anything and everything. Our first step is choosing what you believe in and then finding an ETF that invests according to this mandate.
Step 2: Choosing your asset manager
There will always be more than one asset manager offering an ETF in real estate or gold or whatever the theme you choose is.
Vanguard, who run VNQI the real estate ETF we mentioned, manage 7 trillion dollars in total, that’s bigger than GDP of all the Arab countries put together. So, when you google the asset manager and learn this about Vanguard, you know they’re credible and you feel confident to invest in a fund run by them. There’s other guys you can also checkout like Blackrock and Fidelity.
Step 3: Check the tracking error
Oh no, that sounds complicated doesn’t it? Don’t worry it’s not. If VOO 500 invests in the biggest 500 companies in the US stock market then it would make perfect sense for their certificate price to go up and down with the S&P 500 index which tracks the performance of the biggest 500 companies in the US. If your ETF invests in gold, then you check the price of gold. Do the movements in price match? Yes? Then you’re golden.
Step 4: Look at the fees
The final step – these asset managers take a fee. So, what’s the expense ratio? Or what will this cost you? You chose your theme, you found Blackrock and Vanguard both have ETFs with your theme. You checked their tracking error and all matches up. You see that one of them takes 0.1% and the other takes an 0.5% fee. You choose the cheaper one and you’re good to go.
Check out these 2 lists of top ETFs
List 1 – ETFs in different industries
List 2 – Top ETFs (measured by total assets managed)
You can navigate between both sheets by using the tabs at the bottom of the document.