By: Jim Ward, Chief Investment Officer for Retirement Planners of America
With stock markets in turmoil, many investors are currently swimming in choppy waters and are trying to find the best ways to preserve their money. Exchange-traded funds (ETFs) may make good life preservers.
ETFs are just like tools. If I go to my mechanic and say, “I’d like you to fix my car.” Would you be comfortable if the mechanic only used one tool, or would you want them to use every tool at their disposal to fix your car? If you’re concerned about the current market volatility that has resulted in a bear market, this type of fund can help diversify your investment toolbelt. You may want to allow yourself more choices rather than limiting yourself to just one.
The Investment Company Act of 1940 created what you think of as a mutual fund. We all put in as much money as we want to. The way it’s supposed to work is that everyone pays, owns, and benefits equally. So, if you put in $1,000, and I put in $10,000, we have an identical experience — we pay the same fees, get the same relative return, and are treated the same. One thing that’s unique about mutual funds is they keep things orderly because they only strike a price once a day.
So, at the end of the day, they figure out the value of all the underlying securities and it gives you a price. If you bought the mutual fund for $10 and six months later it’s worth $12, you’ve made ostensibly 20%. An ETF is the same thing. Instead of wrapping these 100 securities in a mutual fund wrapper, they wrap them in a security wrapper — it’s basically a stock that is made up of the underlying 100 stocks. And because it’s an individual security, it prices in real-time, just like any other stock. ETFs provide exposure to funds and stocks that represent an ideal type of asset. They may also be attractive investments because they are generally not expensive to buy and hold. This uniquely benefits investors because ETFs traditionally have lower costs than mutual funds.
Another example is Apple stock. Apple stock right now might be $327, and then you could look it up an hour later and it’s at $325. An ETF moves in value throughout the day. If you sell it at noon and someone else sells it at one o’clock, there will be a different price even though you both own the same ETF. While you own it, you’re just like your mutual fund “brethren,” but you can sell at any point throughout the day in real time. Also, you could be harmed or helped by the buys and sells of other investors in a mutual fund structure. If other investors buy and sell, it could affect your tax situation. In ETFs, you’re only impacted by your own activity and therefore are more tax independent. They are more liquid and having ETFs in your portfolio may benefit you as an investor during this bear market.
At Retirement Planners of America, we have an interactive planning tool in place that helps clients understand how inflation and market conditions can affect them and help them plan appropriately. If you’re interested in meeting with one of our advisors to see how you can help make sure your money lasts as long as you do, visit our website here to set up a retirement plan consultation.