Not to be confused with the EFF (the South African political party or the lesser-known Electronic Frontier Foundation…), ETFs have been gaining popularity in investment portfolios for about a decade.
ETFs (exchange-traded funds) were first developed in the early 1990s by Nathan Most, they offer both retail and institutional investors a great passive investment option.
Nathan initially started thinking about the ETF option in this way:
“I started thinking about a warehouse receipt holding the shares in the fund, which could then be divided up into pieces,” said Most in a 2004 interview with CBS MarketWatch, recalling his background in commodities trading. “You could reassemble the pieces and get back the stocks, but otherwise only the pieces would trade.”
It took him about six years to finalize the offering that we now recognize as ETFs.
“I never thought they would be this big,” said Most. “But the ETF was designed with the investor in mind, and they have low fees. Also, ETFs are a natural fit for stock exchanges, which have gotten behind them.”
Andrew Goldman, in his 2020 blog on ETFs vs Stocks, draws a much richer definition that speaks more directly to those looking to enjoy some DIY investing lessons. He puts it like this:
“The difference between a stock and an ETF is like the difference between a can of soup and a whole grocery store. When you buy a stock you’re investing in a single company [a can of soup] — Apple for instance. When that company does well, the stock price goes up and so does the value of your investment. When it goes down? Yipes! When you buy an ETF (which stands for Exchange-Traded Fund) you’re buying a whole collection of different stocks [the whole grocery store]. But more than that, an ETF is like investing in the market as a whole, rather than trying to pick individual ‘winners’ and ‘losers.’”
This is a very general definition that is painted with broad strokes, but it helps show that ETFS offer benefits like:
- Automated diversification
- More discretion when it comes to buying and selling
- Lower cost entry and management
- Higher level of transparency
- Can be more tax efficient
ETFs are not the be-all and end-all of investing and they’re not the answer to volatility in the markets – but they offer a healthy space to develop savings habits and understand the markets a little better without having to spend all of your investment budget in one place.
As the markets mature, these products are going to start to offer complex sub-types (like Leveraged ETFs) and will require more prudent and experienced management, so even if you do want to learn a little on your own, make sure you bounce your ideas off your financial adviser first.
Otherwise, remember this: a robust portfolio succeeds only in the scope of its diversification and time to grow with the markets. Don’t place all your bets on one horse and, unless you’re an investment specialist, don’t go it alone.
If you’d like to read even more, here are some great articles: