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Investing for Beginners: What is an ETF?

Posted on Posted in Beginner, Invest

Anybody who started investing in the last decade has asked this question: "What the heck's an ETF?"

In this Investing for Beginners article, we'll tackle that question, then analyze VTI as our ETF example.

The Vanguard Total Stock Market ETF is one of the most popular Exchange Traded Funds on the market today.

Why?

Over the years, Vanguard has painstakingly built its reputation for providing low-cost options that cater to the every-day investor. Simply put, the performance has been solid and the cost is low. They have a multitude of cheap Exchange Traded Funds that prospective investors can choose from.

So what's an ETF?

An Exchange Traded Fund can be traded on the market just like a stock. ETFs generally will be passively managed, and will track an index such as the S&P 500. Since ETFs require less work to manage, they also typically come along with lower expense ratios. This can save an investor a ton of money in the long-term.

What defines a low expense ratio?

In our article Optimize These 5 Accounts for Early Retirement, we set 0.5% as the threshold for further investigation.

However, it's all relative to what types of options the investor has. For example, let's say a 401(k) plan allows for 6 potential investment options. The expense ratios range from 0.5% to 1.5%. In this context, 0.5% is pretty cheap. That view changes if the account owner has the option to purchase funds with expense ratios at less than 0.1% expense ratio.

So where does the Vanguard Total Stock Market ETF (VTI) come into play?

First, open up the VTI snapshot in a separate tab. Under ETF Facts (right side), the 4th bullet point down shows the Expense Ratio: 0.04%.

This means that, for every $1000 invested in VTI, the investor is only charged $0.40!

Here's some other important information we can glean from the snapshot:

What am I investing in?

Under product summary, you'll see that VTI seeks to track the CRSP US Total Market Index. Below that, under price and performance, you'll see what the price of the ETF has done recently. And directly to the right, you'll see Risk Potential with a slider showing that Vanguard rates this investment as a '4', as this fund is a 'moderate to aggressive fund'. Click on the link below Risk Potential, and you'll see the reason VTI is rated this way.

Scroll down a bit further and you'll find some details about the VTI portfolio composition.

On the left side, you'll find the sector diversification table. This shows that Financials lead the way at just over 20% of the fund, with Technology not far behind at 17.4%. 

Look to the right and you'll see the top 10 individual holdings of the fund as of June 30, 2017. #1 is Apple (AAPL), #2 Alphabet (GOOG) and #3 (MSFT). As of 6/30, top 10 holdings listed made up 16.4% of the fund. There are a few links below the top 10 table; the 3rd one down is Portfolio Holdings- click that and you can get more detailed information about VTI's holdings.

Let's do a quick look through the other tabs:
  • Price & Performance: allows you to view past performance in table and chart format. The chart allows for 1, 3, 5 and 10 year timeframes.
  • Portfolio & Management: This has very similar info from the front page. The top of the page shows a table that highlights VTI holdings as being Large Cap Blend. You can click the link below that table to learn more.
  • Fees: Again shows expense ratio for VTI and how that compares to the market.
  • Distributions: Shows the current yield %, per share distribution, the ex-dividend date (would need to have purchased prior to this date in order to receive the dividend), record date, and the payable date. Visit sec.gov for more info.
  • News & Reviews: recent news about VTI.
So there's a quick run-down of how we examine a potential investment snapshot.

Did we miss anything? Have any questions on ETFs or VTI? Leave them in the comments below.

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Disclosure: I am/We are long VTI, AAPL

The author of this article is not a licensed professional. This article and all information presented is for informational purposes only and should not be taken as financial or legal advice. We recommend our readers to consult with a licensed professional in the appropriate field prior to making any investment decisions.

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