Part 4: Exchange-Traded Funds (ETFs)

Welcome back to The Apricot Investor’s Glossary series, where we take complex terminology and turn it into bite-sized pieces of knowledge, perfect for seasoned investors and newbies alike. The series starts with fundamental vocabulary and will delve into more complex terminology over time.

In Part 1: Investment, Risk, Diversification, we compared investments to planting an apricot tree. In Part 2: Stocks  and Part 3: Bonds, we started exploring some of the “seeds” – different investment types – you can plant in your financial garden. Now let’s discover ETFs.

Exchange-Traded Funds (ETFs)

Choosing the seeds yourself and then taking care of the garden on a regular basis requires time, knowledge of gardening (like investment, stock market) and work (like research of stock performance, market, etc.)

Say you don’t have enough time or knowledge to create your own mix of seeds and you don’t want to actively manage your garden, but still want to get fruits (like dividends, capital growth). In this case, you might choose to buy a ready-made bundle: Exchange-Traded Funds (ETFs) composed of diverse seeds. These bundles are managed by professionals who have knowledge and experience of managing gardens and they charge a small fee for that. 

Some ETFs are composed of seeds of different types of the same fruit : ETFs that invest in stocks in the same industry like XLB* (shares of companies in the chemicals, construction materials, metals and mining sectors), XLU* (shares of companies involved in producing, transmitting, and distributing electricity or natural gas), XLF* (shares of insurance companies, banks and other financial companies). Others are composed of seeds of different fruits and even vegetables : a mix of different stocks, bonds, or other assets like SPY* and VOO* (stocks that are included in the S&P 500 Index), Invesco QQQ* (stocks that are included in the Nasdaq 100 index) and others.

By buying a bundle instead of picking seeds on your own, people free themselves from the work needed to research individual seeds, constantly monitor their performance and ease the work of maintenance of their garden as this is taken care of by professionals in exchange for a small fee. ETFs also offer instant diversification (spreading your investment across different asset classes, industries, companies, etc. to minimize risk).

One of the world’s most famous gardeners (investors) Warren Buffett has stated on several occasions that index funds are a great way for non professionals to get into gardening (investment).

– Think of it as buying a pre-made bundle, getting exposure to a variety of investments, managed by professionals who charge a small fee.

– Risk: Varies depending on the underlying assets in the ETF (what the ETF’s invest in).

It’s important to remember that investments are subject to market fluctuations and carry inherent risks. Before investing, consider your financial goals and your ability to take financial risks.

See you in Part 5 where we’ll explore more investment terminology. And remember, investing in knowledge is one of the most valuable decisions you can make.

*The examples in this text are for illustrative purposes only. This does not constitute investment advice or a recommendation to buy or sell any specific investment instrument.