Lecture on Investing in ETFs

Introduction to ETFs

ETF: Exchange Traded Fund
Type of investment that trades in the stock market
Holds multiple assets (e.g., stocks, bonds, commodities)
Diversifies investments by holding various securities in one basket
Difference from individual stocks: One ETF can hold thousands of different stocks/bonds

Essential to open a brokerage account to invest in ETFs
Recommended brokers: Fidelity, Vanguard, Charles Schwab, E-Trade, M1 Finance
Account types:
- For general investing: Standard individual investment account
- For retirement: Roth IRA, 401k, SEP IRA, Traditional IRA

Over 2,700 ETFs currently traded
Narrow down ETFs based on:
- Long-term goals (e.g., retirement)
- Specific objectives (e.g., aggressive growth, dividends)
Resources: ETF Database website for sorting and searching suitable ETFs

ETF Database: Offers categories such as asset class, sector, industry, region, etc.
- Allows filtering for specific objectives like high dividend yield

ETF Profile: Key Sections to Analyze
- Summary: Overview of what the ETF invests in
- Expense Ratio: Management fee (e.g., 0.03% for $1000 = $0.30/year)
- Performance: Long-term returns (look at 10-year or since inception)
- Market Sectors: Composition of ETF by sector
- Largest Holdings: Top assets held by the ETF
- Distributions: Dividend payments received

Fund Overlap: When stocks in multiple ETFs are the same, reducing diversification
Example: VOO and VTI have significant overlap
Diversification:
- Spread investments across multiple assets to reduce risk
- Avoid concentrated exposure to any one sector or stock
Portfolio Tilt: Deliberate concentration in a specific sector
Fund Overlap Tools: ETF Research Center’s fund overlap tool to check ETF overlap
General Advice: Avoid over 50% overlap by weight

Correlations: Measures movement relation between different securities
- Positive correlation: Assets move in the same direction
- Negative correlation: Assets move in opposite directions
- No correlation: Movement is independent

Seek assets with low/no correlation for diversification
Example correlation with VTI:
- ITOT (high correlation)
- VNQ (medium correlation, real estate)

Dividends: Payments for holding shares in ETFs
DRIP: Automatically reinvests dividends into more ETF shares
- Promotes compound growth