ETFs Explained

Investing has always been an interest of mine (all hail glorious capitalism, right?), but in today's world, it can be a terrifying prospect, especially for a student who doesn't have a lot of money to lose.

As Albert Einstein said: "the power of compound interest the most powerful force in the universe", a pretty bold claim coming from the guy that casually hypothesized the theory of relativity. Yet I have realized this slightly too late, as now when I need money the most, I'm also frantically trying to put it aside so that one day I will be able to say "screw it" and buy the cappuccino as opposed to the instant coffee. So how does one balance the need to save, the need to spend as well as the terrifying volume of content and information out there screaming at you to invest in a certain thing, right now. I don't have a lot to lose, yet I have everything to lose.

Enter ETFs, or Exchange Traded Funds. Put very simply, an ETF is a basket of assets managed by an asset manager. These managers build the ETF based on certain guidelines- e.g. buying the S&P top 500 shares in proportion to their market capitalization. However, the real power comes in their cost and liquidity.

These ETFs trade on exchanges, much in the same way as shares. They are highly liquid, thus you can exit your position very easily. Yet the thing that has attracted so many investors is their cost. By pooling together funds from many investors, buying the assets to make up the ETF and then allocating fractions of the basket to investors, the transaction costs can be split between all of the investors, making it far cheaper than going out and buying each share individually. You therefore gain exposure to a whole range of assets for a fraction of the cost. Oh, and they also pay you the dividends/interest from the assets in the basket. Pretty cool right?

I am very comfortable knowing that an ETF is designed by someone else, thus I won't personally be able to beat the market. I'm not Warren Buffet, and much in the same way as Socrates, the only thing that I know for certain is that I know nothing. For now, I'll let the experts handle it, and hopefully when I graduate, I'll be able to buy a bottle and not a box of wine!