← Stocks · lesson 8 of 12
By the end of this one you'll know what an ETF is, what all three of those letters mean, and what the small yearly fee actually costs.
ETF stands for exchange traded fund, three words we'll take one at a time. A fund is a big shared basket of many stocks, a stock being a small piece of a company, so one basket might hold slivers of hundreds of companies. Exchange traded means the basket itself sits on the market shelf and trades like a single stock, one purchase, whole basket. It's exactly that sampler basket at the farmers market: instead of putting your whole bag on one vendor's jam, somebody assembled a little of everything, and if one jar in there turns out bad, the rest of the basket is still the rest of the basket. The person who builds and tends the basket charges a small yearly fee called an expense ratio, skimmed quietly out of the basket, so tiny you never see a bill. That's the whole idea: one buy, lots of little pieces, small caretaker fee.
Same lesson, told by a hundred dollar bill. Tap to walk it one step at a time.
In this example an ETF share costs $100 and the basket holds 500 companies, so $100 buys one share and with it a sliver of all 500.
The expense ratio is 0.
10%, which works out to about 10 cents a year on that $100.
If the basket overall falls 5% the share shows about $95, and if it rises 5%, about $105.
You're working the bake sale table at the school fundraiser when your friend admits, between customers, that she wants to try investing someday but freezes at the thought of picking the wrong company. She's asking you like you run a bank, and you're holding a tray of brownies.
Pick your move. Then peek at the other roads if you're curious.
An ETF is one buy that holds a whole basket of little company pieces, with a small yearly fee for the basket keeper.