What Are Exchange Traded Funds? A Painless Explanation

We’ll run through these investment products and give you the tools to understand whether or not they might be right for your family

ETFs, or exchange-traded funds, can be a great way to invest for your family's future. They are low-cost, diversified, and liquid investments.

But what are exchange traded funds? In simple language, ETFs are baskets of assets that are traded on exchanges just like stocks. This means that you can buy and sell ETFs throughout the day, just like you would buy and sell stocks.

some of the benefits:

Diversification: ETFs can help you diversify your family's investment portfolio by investing in a variety of assets, such as stocks, bonds, and commodities. This can help reduce your family's risk because if one asset class does poorly, the others may still perform well.

Low costs: ETFs are typically very low-cost investments. This means that you keep more of your money when you invest in ETFs. For example, the average expense ratio for an ETF is 0.15%. This means that for every $10,000 you invest in an ETF, you will only pay $15 in fees per year.

Liquidity: ETFs are very liquid investments. This means that you can easily buy and sell them without affecting the price too much. This is important because it allows you to take advantage of market opportunities and sell your investments quickly if you need to.

Transparency: ETFs are very transparent investments. You can easily see what assets are in an ETF and how they are performing. This is important because it allows you to make informed investment decisions.

Here are some of the risks:

Volatility: ETFs can be volatile investments. This means that their prices can go up and down quickly. This is a risk for all investments, but it is important to be aware of it when investing in ETFs.

Complexity: ETFs can be complex investments. It is important to understand what they own before you invest in them. There are many different types of ETFs, and each one has its own unique risk profile. It is important to do your research and choose ETFs that are appropriate for your family's risk tolerance and investment goals.

Not FDIC insured: ETFs are not FDIC insured, which means that your money is not guaranteed by the government.

alternatives to investing in ETFs:

Two common alternatives to ETFs which are similar include the following:

Mutual funds: Mutual funds are probably the most similar to ETFs in that they track a basket of assets. However, mutual funds are not traded on exchanges, so you can only buy and sell them at the end of the day. Mutual funds also typically have higher fees than ETFs.

Index Funds: Index funds are similar to ETFs in that they track a basket of investments (usually as the name implies, a stock index). They typically are more focused on stocks and will also come with lower fees (but not always).

Final Thoughts…

Regardless of what you choose, here are some additional things to consider when investing in ETFs for families:

Think about talking to a financial advisor: A financial advisor can help you understand the risks and benefits of investing in ETFs and can help you create an investment plan that meets your family's needs.

As an aside, there as so many financial professionals today it’s confusing to get them all straight! If you need a quick guide of who does what, we have on here.

Start small: You don't have to invest a lot of money to get started with ETFs. You can start with a small amount and gradually invest more money over time as you get more comfortable.

Get the kids involved: Teaching your kids about ETFs can be a great way to help them learn about personal finance and to start building their financial future; one way to teach is to get them involved in the process. If you want, let them help you choose ETFs to invest in, and let them track their progress over time.

Ultimately, the best alternative for your family will depend on your individual circumstances and investment goals; if you are looking for a low-cost, diversified investment, then an ETF may be a good choice for you.

Whatever ETF you choose to invest in (if you go that route), the most important thing is to understand how said ETF works before you invest.

These can be complicated investments and you need to always know what you are investing in before you part with your money.