It’s an exchange-traded fund. It’s nice how an abbreviation gets explained through the words it stands for, right? Anyway, an ETF is a fund – meaning, it’s a pool of money collected from people. Where does it go? It’s invested in a collection of securities, be it stocks, bonds, or something else. Which ones exactly and how many of each type and company? The fund managers already decided all of that. All you do is just see whether you like this collection or not, and participate in the fund. In fact, ETF is the case when you best answer “what it is” through “what it is for”.
What is it for?
It is for security, mostly. Say, investing in stocks is a potentially profitable enterprise. But it’s also risky. You may shift to bonds then – they’re considered more secure. But for that, you need to know the difference between stocks and bonds, for starters, and then, you need to screen the market for what bonds you are willing to have. Now, doing that requires time. Although Orca is there to help you out with all possible analytics and guidance, it still requires a couple of steps from your side to come from “I want to invest” to “I chose this bond to invest in”. But that’s not the end of the story: bonds are safer, but, logically, less profitable. You didn’t think that you’d just outsmart the market, did you? Normally, stocks are considered profitable and risky, bonds – more secure and stable but with much slower value growth. One or another. Choosing between the two is a matter of your willingness to take risks. Now, you’ll be right to think that it’s best to have both and make a balanced portfolio: invest in stocks and bonds, have various types and companies in each. Now, as you can see, forming a balanced portfolio and doing it consciously requires quite some effort. Of course, no one stands in your way if you just want to pick this and that at will, randomly, but you know, if you want to see a good value growth in your investment, you have to do it smartly. Choosing assets, screening, and filtering them to assemble a healthy portfolio is the smart way. But it may just so happen that you don’t want to choose. Maybe, you are just bored, or, you don’t have time, or anything else. For whatever reason, you may want to look for a “one-window” approach: “Make a portfolio yourself, and let me just participate in it”. Fair enough – that’s exactly how ETFs work, and it’s a safe way to proceed.
Probably, you like food. Everyone likes food. So, how do you make a cake? You take basic ingredients in certain proportions, mix them into one pan (or whatever tableware you use – you’ll surely know), bake it, and voila – a delicious cake is out of the oven!
Now, can you ask for a portion of sugar or vanilla out of that cake? No. You can only have a part of that cake, that’s it. And whatever part of the cake you take, it will have the same set and proportion of ingredients.
So, an ETF is like a cake. One chooses primary investment instruments, assembles them in certain proportions according to the desired risk profile, and offers investors to take a part in this fund. You may buy one share in such a portfolio, you may buy as many shares as you want to reach 10% or 50%, or even become a 100%-owner of such fund. But you don’t get to change the ingredients in the portfolio this fund is invested in: if it’s, say, 10% stocks, 90% bonds – you will have this setting regardless of what part of the fund you have; if it’s 30% stocks, 40% bonds, and 30% something else – that will be the inner composition of the portfolio in every part of the fund.
Why ETF is a good choice
First, you don’t go screening the market, reading the analytics and news – even as nicely laid out before your eyes as Orca has it – you just pick a portfolio. Saves your time. Back to the food section: you may ask for this, and that, and also this on top of that, and a sauce – you’ve just made your portfolio; or, you may ask for a combo and enjoy your meal. ETF is like a security combo – if only you could buy a 10% or 57% of a meal! So to say, an investment fast-food, in a good sense.
Second, it is assembled by those who know how to do it. Let’s not get strict on assessing what a professional investor should be like, but ETFs are normally done by experienced investors and fund managers. Don’t mix the two: to be an investor, you just have to invest. Like, now, with Orca, having some of your money invested in certain stocks or other securities, you are a stock investor. Congratulations! Will you be able to make your portfolio value grow? No one knows, hopefully, yes. But would you be able to make the same if you know that there are many wealthy and powerful people who will have more or less depending on how you manage the portfolio in your fund? That’s already another level, right? Fair enough. So, ETFs are managed by professional investors and portfolio managers: people who know how to invest and how to manage when others invested in their funds. That’s just to say that an ETF is not a randomly assembled portfolio by someone who decided to see how to goes. It’s a collection of securities put together on purpose to fit certain risk profile criteria, and managed responsibly to reach certain financial objectives.
Third, participating in a fund normally requires less money than buying one security that is in the fund portfolio separately. For instance, Amazon stock now trades around $3,000. You cannot buy a fraction of this stock on the stock exchange – only one stock. So, unless you have $3,000 to spare, you don’t get to invest in Amazon. But what if you still want to have it? Here comes the ETF. It will have other stocks most probably but it will likely ask you much less than $3,000 to buy a minimum part in the fund. And you will have invested in Amazon as you wanted.
And last – the balance. ETFs frequently prove to be more balanced than hand-made portfolios of individual investors. Why? Once again, because they are assembled by professionals: people who study investment and do it 24/7 as their full-time job. Unless you do the same, there is no way you have the same knowledge and skill in managing funds as them, right? Exactly – why would you need that if you have Orca that gives you access to the tools you need and makes those professional fund managers effectively work for your benefit.
Did you get hungry while reading this article?