Investing 102: Understanding Investment Funds
If you haven’t read our previous article on understanding the stock market, I invite you to start there. You can access our Investing 101 article here.
This article serves as a follow up to the conversation we started in our last article.
Today we will discuss more about specific types of investment funds. Namely ETFs, Mutual Funds, Index Funds, and REITs. So, let’s get right to it!
To get us started, I need you to first understand what we mean when we say “securities”.
In financial terms, a security is something that is traded on the stock market. I.e., each stock is a security. It is a tradeable financial tool used to raise capital. So, most things on the stock market are securities.
ETF (Exchange Traded Fund)
An ETF is a type of security that involves a collection of securities. For example, an ETF can be a collection of a variety of stocks. An ETF is called an exchange traded fund since it's traded on an exchange just like stocks.
Inside 1 ETF there can be multiple stocks from different companies. And they contain different types of investments which can include:
Mixture of other types of investments
ETFs are a good way to diversify your portfolio and are bought and sold on the market just like stocks. Think about it like you are trading and entire basket full of different treats, instead of trading just one treat at a time.
As an investor, you make money on the percentage of the average of the performance of all of the different securities inside the ETF.
ETFs are created by an ETF manager or sponsor and then presented to the SEC (Security Exchange Commission), then it goes public. Once it goes public then we as investors can buy into the ETF.
The SEC is a regulatory body that is part of the federal government and works to make a positive impact on capital markets. We won’t go too much into this process here, because it’s not relevant to our core discussion for this article.
What is good to know, is that ETFs tend to offer lower expense ratios and fewer broker commissions than buying the stocks individually.
Also, ETF share prices fluctuate all day as the ETF is bought and sold; which is different from mutual funds that only trade once a day after the market closes. In addition, ETFs tend to be more cost-effective and more liquid when compared to mutual funds.
We’ll talk more about mutual funds in the next section.
What’s the difference between mutual funds and ETFs?
A Mutual Fund is a financial vehicle or tool made up of a pool of money collected from many investors to invest in securities. ETFs don’t use a pool of money exactly the same way, and instead, as we mentioned earlier, are traded just like stocks.
Mutual funds are operated by professional money managers, and are generally not self-funded.
They also charge annual fees
They are usually comprised of different asset classes, we’re not going to discuss this here, but it is worth looking into. You can always reach out to us individually for more information about the things that we don’t cover fully in our articles.
So, when you buy a mutual fund, you are buying a part of the portfolio’s value. Unlike stocks, mutual funds do not give you partial ownership of a company.
A mutual fund is also a group of securities not just one.
So they are similar to ETFs except these key differences.
ETFs may hold stocks that provide you with partial ownership of a company, whereas mutual funds do not.
A mutual fund is both an investment and a company, so instead of like a stock where you buy partial ownership of a company like Tesla, you are purchasing into the investment company that is the mutual fund (where a piece of the portfolio could be put into a company, but you do not gain ownership of that company)
And as previously mentioned ,mutual funds are traded once a day, where as ETFs can be traded multiple times a day.
An index fund is like a mutual fund except it tracks the S&P500 (Standard and Poor 500).
The S&P500 are the 500 largest companies in the US stock market that are traded on the New York Stock exchange. This is the leading market index.
Index funds are usually a very stable investment. And you are buying into whole portfolios.
The performance of an index fund is based on the Market Index versus the performance of an individual company.
They can be an effective passive investment strategy. Whereas others are active because you have to control them and be involved in the process, this one just sits there and just performs with the market.
So, as you may have guessed, index funds are meant for long term investments.
The widely accepted theory is that the market usually out performs any individual investment. Which can be generally true in a sense… but really it isn’t necessarily true because you can make a better return than the index on individual investments, if you know what you’re doing.
REIT (Real Estate investment Trust)
The cool thing about REITs is that it allows you to invest in real estate without needing to have the capital to buy the property!
A REIT is like a mutual fund, but only for real estate.
It works like this: a pool of investors put their money together and the investment goes towards real estate. It could be toward real state investments, medical centers, offices, houses, etc. Typically, REITs are for commercial real-estate investments.
They are also like ETFs, because they are publicly traded on the market. So, they are highly liquid unlike owning actual properties
As an investor, you can receive the gains based on the REIT’S portfolio performance.
The best part is, it allows you to partake in real-estate without owning properties, or having lots of capital to invest in a physical location.
So, there you have it, 4 different options for investing!
Remember that this is not specific individual financial advise! I am not suggesting that you invest your money in all or any of these options. Remember that making decisions around how to invest your money is a very individual and personal thing. Something you should definitely get support with from a financial professional, before making any big decisions. We here at S|A|G Financial Group can of course help you with this.
But my point is, this article is just meant to serve as a place for you to start learn a little more information about the various types of investments out there. However, if you would like to get started in investing and would like help in creating some strategic financial plans to help you get there, please reach out to us.
Whether you choose to work with us or not, please makes sure you are always fully informed before choosing to make a serious investment. Make sure you put your financial health first, foremost, and always!