5 min read

What the ETF!?!

Forwarded this email by a friend? Subscribe here.

Hi,

FWIW is still very young, but we continue to be inspired by the wide variety of passion and interest that we are seeing and hearing from our readers. We love the anecdotes, insights, and feedback on stories you have read, actions you have taken because of what you read in FWIW, and notes about content you want us to include. In fact, the launch of today’s FWIW quiz and the lead story in Dipping Your Toe In Crypto were inspired by emails from readers like you. Keep the messages coming.

To help you as you navigate aligning your values to your investments, we’ve developed a number of resources designed to be helpful, including: Unpacking the ESG Alphabet Soup (including a link to our ever-growing glossary of common terms), How to Research ESG Stocks and Funds, Investing in Women: a Gender Lens Guide and How to Practice Faith-Based Investing. A bit further down in this week’s newsletter, we will break down ETFs and mutual funds for you. Our hope is that as you continue to read FWIW, you will start feeling as comfortable making investing decisions as you do when making all the other value and purpose-based consumer choices you make on a regular basis.

News you can use

Graphic of newspaper with magnifying glass

Mastercard announced that all employee bonuses will be linked to the company’s ESG goals. Mastercard had previously tied a significant portion of C-suite bonuses to these metrics, but this announcement marks an unprecedented alignment of ESG results to employee compensation.
1st quarter returns for sustainable funds were down sharply as energy stocks rose sharply and tech stocks dropped. This news was tempered by the recognition that “a quarter of underperformance doesn’t a story tell,” as longer-term results remained strong. In fact, Morningstar reported that 71.2% of the sustainability indexes they watch have outperformed their traditional market equivalents over the past five years.
Netflix announced they had lost 200,000 subscribers in the last three months and projected the loss of another 2 million in the next quarter, causing the widely-held stock to deflate. While much of the news coverage focused on whether Netflix will welcome ads in the future to make up for lost revenue, families, group chats, and many exes and distant relatives are on the lookout for a crackdown on password-sharing.

Drumroll please. Our inaugural (short) FWIW quiz

A few weeks ago, we featured a link to an investing quiz on the SEC’s website. The feedback was so positive that we are launching our own (very short) quiz so FWIW readers like you can gauge what subjects you know well and what areas you need to learn more about. Take a look (and test your knowledge) on the inaugural FWIW Investing Quiz.

Then, tell us how you did and where you were tripped up, so we can take a deeper dive into some of the areas where you would like to learn more.

The fund-amentals of investing

When you begin your investing journey, often one of the first concepts you’ll learn about are stocks and bonds (click here for our intro to bonds). These are the main ingredients of every portfolio, but they also need to be balanced and diversified to minimize risks. The best, most convenient way to do this is through funds.

Funds are baskets of stocks and bonds bought with money pooled together from investors like you. Buying a single fund can get you exposure to a vast array of securities in one place and (often) with lower fees. Maybe it is because we still have bunnies on our brains from last weekend, but we can’t help saying that these funds are designed to be sure you avoid “putting all your eggs in one basket,” and are often a great place to start when thinking about diversifying your holdings.

The two main types of funds you’ll come across are exchange-traded funds (hence, the acronym ETF) and mutual funds. You may buy them on your brokerage account, directly from the fund company, as part of your 401(k), or add them to any retirement accounts you have. Their risk level and income (from dividends/interest) will depend on what they contain.

To help you get a sense of real funds that fall into these categories, here are lists of the largest ESG or sustainability focused ETFs and mutual funds based on the total assets under management. As good FWIW readers know, just using the term “ESG” does not guarantee investors anything specific, and every fund should be examined closely to see if it really aligns with your values. For those looking to dig in deeper, a great comparison of many sustainability focused funds and ETFs was just released by Carbon Collective and ETFs and Mutual Funds in other sectors that may be important to you are widespread, including: Renewable energy, Biblically-responsible, Gender-focused, DEI-focused and the water industry.

Below are some key differences between ETFs and Mutual Funds, so you have the information you need to choose the option that is the best match for your needs and risk tolerance.

Trading: Mutual funds are traded only once each day: when the market closes at 4 p.m. ET and its net asset value (NAV) or price per share is calculated. ETFs can be freely bought and sold on exchanges like stocks. The price of an ETF can change throughout trading hours and may not always reflect the underlying assets. Experts recommend avoiding the first and last 30 minutes of trading.

Barriers to entry: Mutual funds tend to require a minimum investment from each investor and they may also decide to stay closed to new investors. ETFs have no minimum buy — you can buy a single share or a fraction of a single share.

Fees: All funds charge operating fees called expense ratios, which should be carefully considered and compared since they impact the growth of your money over time (as seen here). Mutual funds fees tend to be higher since most are actively managed and curated by an expert doing the research, while most ETFs passively track an index like the S&P 500. In 2020, the average expense ratio for active funds and passive funds was 0.62% and 0.12%, respectively. Sustainable funds had a higher-than-average expense ratio of 0.61%, but many attribute this to the extra curation and time it takes to create and manage these funds. Your broker may also charge commission fees each time you trade ETFs.

Taxes: ETFs are typically more tax-efficient than mutual funds since they distribute less in capital gains. This is because of how they are structured and because passive funds have lower turnover of holdings.

We know that investing can sometimes be complicated, and while there’s always a lot of pressure to get it right to reach your goals, the volatility in the market and the changing landscape can make investing seem right now particularly daunting. Whichever you choose, ETFs and mutual funds can be tools to take some of the tasks associated with managing your money off your plate and gain the benefits of diversifying your holdings across a wider range of assets. As always, before investing it is important to do your homework whenever you invest and to understand the risks, fees, costs, and focus of any investment you are considering. We hope that we’ve been able to break down ETFs and mutual funds for you so you have a bit more confidence when someone drops these terms casually into a conversation.