At our farmers market one vendor sells a sampler basket, a little bread, a little jam, a few tomatoes, one price. The stock world sells baskets too, they're called ETFs, and tonight those letters stop being scary.
By the end of this one you'll know what an ETF is, what all three of those letters mean, and what the small yearly fee actually costs.
The lesson
ETF stands for exchange traded fund, three words we'll take one at a time. A fund is a big shared basket of many stocks, a stock being a small piece of a company, so one basket might hold slivers of hundreds of companies. Exchange traded means the basket itself sits on the market shelf and trades like a single stock, one purchase, whole basket. It's exactly that sampler basket at the farmers market: instead of putting your whole bag on one vendor's jam, somebody assembled a little of everything, and if one jar in there turns out bad, the rest of the basket is still the rest of the basket. The person who builds and tends the basket charges a small yearly fee called an expense ratio, skimmed quietly out of the basket, so tiny you never see a bill. That's the whole idea: one buy, lots of little pieces, small caretaker fee.
Walk the $100
Same lesson, told by a hundred dollar bill. Tap to walk it one step at a time.
In this example an ETF share costs $100 and the basket holds 500 companies, so $100 buys one share and with it a sliver of all 500.
The expense ratio is 0.
10%, which works out to about 10 cents a year on that $100.
If the basket overall falls 5% the share shows about $95, and if it rises 5%, about $105.
At your kitchen table
You're working the bake sale table at the school fundraiser when your friend admits, between customers, that she wants to try investing someday but freezes at the thought of picking the wrong company. She's asking you like you run a bank, and you're holding a tray of brownies.
Pick your move. Then peek at the other roads if you're curious.
I tell her to pick one winner. Some people do fine that way, and it's honest to say some don't. In real past years, 100 dollars riding on one single company has grown, shrunk, and in some famous cases gone to nearly zero, one jar carrying the whole bag.
I bring up baskets called ETFs. You describe the sampler basket, one purchase that holds slivers of hundreds of companies, with a caretaker fee of about 10 cents a year on every 100 dollars at 0.10 percent. Then you add the part beginners miss, the whole basket can still drop together in a bad year, spread out is not the same as protected.
I tell her waiting is fine too. Nothing is lost by learning first. In this example her 100 dollars in a savings account paying 4 percent collects about 4 dollars while she reads up, and nobody at the bake sale can say whether the market year she sat out would have been up or down.
An ETF is one buy that holds a whole basket of little company pieces, with a small yearly fee for the basket keeper.
Quiz yourself
🐓 Got a question about this one? Ask it on the live at 7 AM or 7 PM Mountain, TikTok @247candles. Steven answers class questions by name. Or drop it in the ask me tab and it rides the basket to the next class.