Welcome To The ETF Journey

May 14, 2019

As a relative old-timer in the ETF space, I sometimes find myself experiencing massive bouts of deja vu. It would be reasonable to think that, after 25 years in the biz, I might have covered most of the important topics, or run out of new things to learn. But honestly, nothing could be further from the truth.

Sure, I’ve been at it a while. And I’m sure some of you reading this have been using ETFs for years. But everyone has to start somewhere, and in a space that’s moving this quickly, and providing so much value for investors, there’s a sizable portion of our readership that’s quite new to ETFs.

There’s no greater evidence for this than our weekly ETF.com Live! Chats, which we mostly do on Thursday afternoons.

Week after week I’m reminded there are no “dumb” questions when it comes to ETFs. I’m glad when people ask me the basic questions. First, it means I probably know how to answer! But more importantly, it means there’s a person on the other end of the question who’s about to have their investment lives improved.

How’s that? If you’re an investor new to ETFs, you probably fit into one of these categories:

The Stock Picker

I talk to these folks literally every week. I used to be one of these myself. Heck, for the tail end of the dot-com boom, I sat on a trading desk as an actively managed tech fund manager (I’m feeling much better now, thank you).

As a stock picker, you’re highly focused on the individual stories behind companies. The narrative you’re following might be based on technical lines and patterns, or it might be based on talking to management and analysts, or it might be based on weekends spent reading financial statements and annual reports. But fundamentally, the stock picker is about stories.

As a class, we all know stock pickers lose, but there’s an emotional component to being a stock picker that’s hard to replicate. If you’re moving away from choosing companies, there’s a real temptation as a new ETF investor to “pick ETFs.” The problem with that mentality is that there’s rarely the same kind of narrative satisfaction.

ETFs, once you learn how they work, are actually pretty boring. That’s precisely why they work so well. While the good news is you’ve probably got the trading part down, you’re going to need another hobby.

The Hot-Hand Finder

While there are certainly far fewer folks day-trading stocks then there were in the mid-1990s, a huge swath of the advisor community is still in the business of picking mutual funds—particularly actively managed funds.

Much like the stock picker, as a hot-hander, you’ve got a system. Maybe you just lean on our friends at Morningstar. More likely, you’ve developed relationships with a few funds, a few firms, or even a few individual managers (or more likely, the wholesaler who comes in and presents on behalf of the manager).

You’ve had good years, where you feel like a hero talking to your clients or your golf buddies, and you’ve had bad years, which you’ve either suffered through or used as the opportunity to find a new hot hand.

We know that, as a class, the hot-handers lose as well. The average mutual fund manager just doesn’t beat their benchmark over time. As a newbie to ETFs, you’re going to do great.

Your all-in costs are going to come way down. Most likely, your performance for the same basic asset allocation is going to be better—and as a funds-focused investor, you’re probably thinking in asset-class terms already. That’s the good news. The bad news is you’re going to need to learn how to trade ETFs. It’s not that hard, I promise.

The Index Fund Guy

The third class of investor may not even need ETFs. While that may sound like blasphemy coming from ETF.com, I’ve talked to plenty of you who are already in extremely low-cost stock, bond and alternatives funds from Schwab or Vanguard or any number of competitors, and honestly, you don’t have to move.

But there are still some reasons you might be considering it. ETFs give you access to all sorts of interesting things: commodities, smart beta, markets all over the world. ETFs give you flexibility in execution, and most likely, a bit of a tax deferral as well. If you’re willing to learn just a little bit on the trading side, many of you will slowly but surely migrate to ETFs over time.

Learning The Ropes

Part of what we do here is help new investors get up to speed on ETFs.

First, we have a lot of articles you can read on every aspect of how ETFs work in our ETF University section. If you’re not so much with the long reads, we’re producing videos for all the core concepts, the first few of which are up now, covering the basics of ETFs and the creation/redemption process at the heart of ETFs.

Second, of course, we’ve got the world’s best ETF screener to help you find the right ETF, individual fund reports for every ETF, and even tools to help you find out which ETFs own which stocks.

Third, we host ETF.com Live! each week, where you can play “stump the chump” with me about whatever ETF question is on your mind.

And last, we do webinars. Next week, Cinthia Murphy and I are doing an extra special one. It’s extra special because it’s just going to be pure education. We’ll walk through some of the basics, touch on creation/redemption and some of the key considerations for picking and trading ETFs. But more than anything, we’re going to have a conversation with the attendees—that would be you.

I hope you can join us. Registration is free, and we’re not even going to try to sell you anything.

Contact Dave Nadig at [email protected]

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