What is an ETF?

Published: 02/11/23

Hello! Today’s topic is: ETFs.

ETF stands for Exchange-Traded Fund. An ETF allows you to buy a small percentage of a lot of stocks. For example, instead of putting $50 into Apple, you could put $50 into VGT, an ETF that allows you to have a small part in many of the top tech companies in the US. Its top holdings are Apple, NVDIA, Microsoft, Broadcom, Oracle, and 311 other technology related stocks. ETFs are less risky than stocks because you spread your money out across a variety of different companies. 

The S&P 500 is an ETF of the top 500 US companies. The beauty of this ETF is that if a company starts performing poorly, the other 499 companies are able to keep you making money. Because of this principle, the average yearly return of the S&P 500 is 10.628% over the last 100 years. That’s equivalent to you roughly doubling your money every 7 years. Instead of betting on a single company's success, you bet on the entire US economy.

The best strategy for ETFs is to buy them with disposable income that you don’t foresee yourself needing in the near future, and holding that money in the market for as long as possible. With the consistency of ETFs like the S&P 500, you lower your risk, and are able to buy and forget about them for a while. 

As always, remember, the early you invest, the more compound interest will help you make more money.