I’ve blogged about Raiz (previously Acorns Australia) a few times now, and in some of those blogs, I make mention of ETF’s. Now, if I’m completely honest, I had to go and look it up myself to find out what ETF stands for and what an ETF actually is. It’s something that gets thrown around a lot on investment platforms like Acorns and within investment circles in general. Acorns and similar platforms make share-trading, bonds and the money market accessible for the everyday low-budget investor. Within the investment portfolio’s of these platforms, there are often ETF’s. In fact, Acorns portfolios are made up exclusively of ETF’s. For someone new to investments though, the question becomes, what exactly is an ETF?
ETF stands for an Exchange Traded Fund. Clear as mud right?
So what is an exchange traded fund?
This is how I understand it, and I am by no means a financial professional, so always best to seek financial advice. You could consider it a bundle that is traded in one go. So rather than buying 1000 shares in Company A and 2000 shares in Company B, you could buy 3000 shares in an exchange traded fund. One example used by Acorns is the US large cap stock asset which is actually the iShares Core S&P 500 ETF. So 3000 shares of the S&P 500 would give you 3000 shares of their investment in 500 companies that are presently in the S&P 500 bundle. They might have 1 million shares in each of those companies. You are just purchasing the investment value of whatever 3000 shares of those 500,000,000 shares is worth.
To try and simplify that a little more, they are already investing in 500 companies. You are just asking them to invest your money as well. Your money becomes a certain number of shares in their investment. You no longer directly own the asset, instead, you own a share of the investment which entitles you to a commensurate share of the return in the form of dividends, interest, or market value. So, you own a share of a share.
These funds are traded the same way as stocks are, so the concept is the same, you invest in a fund who in turn invests in some kind of asset.
An ETF could invest in shares, or it could invest in bonds, foreign currency, gold or anything else that has a value.
Investopedia has some more detailed information here: http://www.investopedia.com/terms/e/etf.asp