WTF is an ETF?

IPO & CHILL

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Feb 25, 2017 · 9 min read

WTF is an ETF is a multi-part series that shows you how to get your wealth-building game on point with your smartphone. We’ve filtered the mumbo-jumbo on these internets to serve you that A1 — all you gotta do is stay woke.

Nothing was the same — now is the easiest time to invest

Bruh/babe, those $100 bar tabs add up — think of all the “amazing times” you’ve have with the same exact people every two weeks. After the euphoria dissolves, do you still get sentimental when you gaze underwhelmingly at your cash balance and face the frigid reality that your future will likely depend on a Kickstarter campaign?

Investing is like exercise: keep it simple

Play the long game. There is no fast way to lose 20% of your body weight or add two basketballs’ worth of muscle to your arms without slicing your lifespan in half. Investing be similar — put this playbook on autopilot and your 40-year old self will look back and say “bless up, I should buy that guy/girl a Patron shot.” (note: even if you’re 40, this still applies. Life expectancy be like 75 nowadays right?)

Temper your expectations. Risk and reward have the same relationship as drug potency and happiness. A few Bud Lights will have you feeling moderately lit like a suburban Christmas tree — worst case, you “work from home” the next day. A dollop of heroin or meth, however, will have you Ubering directly to heaven. You get the idea — if you tryna sit between Bill Gates and Warren Buffett on the jet, you’ll need a side hustle with tremendous potential — this right here is for my practical hustlers.

There is some initial awkwardness. Stick with it. Remember that feeling during your first working when, mid-movement, your mind blurted, “wow bruh/girl, I can’t believe we’re actually doing this. Whatever, just keep thinking about all the Margaritas you’re earning.” Heed your conscience and remember, over time, you’ll be able to buy pitchers instead of glasses.

Saying “investing” is only for rich people is like saying brunch is only for white people

While it looks that way, it’s like totally not that way. White, black or fuchsia — we all love Bloody Mary’s, Eggs Benedict and “some bread for the table.”

Investing is a habit that enables you to increase your future net worth with minimal effort. Here’s a list of things you’re already familiar with that are exponentially harder than long term investing:

1. Understanding the rules of your favorite sport (why is a safety worth 2 points?)
2. Navigating Tinder/OKCupid/Grindr/Hinge (people still using Hinge tho?)
3. Getting Apple to STFU about upgrading iCloud storage (GOD)

Note: the last example is highly debatable

We know why you’re shook, clueless or both.

There’s basically a million “experts” blabbing about “here’s where the Dow Jones is headed” (who dat?), “the top 3 asset classes poised for a correction” (lol wut?) or “the three stocks you need to buy RIGHT NOW” (um, help?).

Ignore the noise. Speculation isn’t relevant for them boys & girls looking to stack some bills every month (at a reasonable growth rate) before getting back to craft beer tasting, SoulCycle classes or whatever else it is they’d rather be doing than stalking public companies on Yahoo! Finance.

“But bruh, you don’t have a million followers. Why shouldn’t I take my investment advice from Kylie Kardashian or, even worse, CNBC?”

We ain’t trying to help you pick stocks fam — this is strictly for my “I ain’t tryna see my cash grow at a portly 0% per year and I’m aite w/ taking some sensible risk over the next few Olympics” family. No quick flips or get-rich-quick schemes ‘round here.

We’re presenting conclusions rooted in proven moves pioneered by Burton Malkiel (authored A Random Walk Down Wall Street) (1) and championed by Warren Buffet. If you ain’t know, these are two super senior nerdy white dudes who’ve spent their entire lives in the investing game — Malkiel is fancy academic who talks about growth rates in coffeeshops while Buffet is a filthy rich billionaire and talks about growth rates in jets (that he owns).

To be clear tho: we’re talking about the best long term strategy.

To be clearer tho: long term don’t mean 20+ hours, it mean 20+ years. If your man hasn’t texted you back in a day, then yes, he’s probably cuddling with that 20-something he’s been DMing on the low. But alas, investing isn’t about your man, it’s about your independence — just ask Queen Beyonce.

Note: technically as of this writing, she still married to Jay but lesbehonest, do she really need him doe?

Long story mad short — You need to be comfortable putting a handful of dollars away for years at a time and trusting that, over time, the market will produce healthy returns (as is currently the case).

Enough foreplay. WTF is an ETF?

ETF stands for “exchange traded fund”. “Exchanged traded” means they’re readily available — in 5 clicks or less, you can buy them using any brokerage. Vanguard and Fidelity are the two original gangsta (“OG’s”) ETF providers — both got apps.

Ok. What do ETFs do tho?

Remember when your mommy or daddy gave you a globe and said,

“This is a mini Earth. While you’ll never see it in it’s entirety due to its gargantuan size (and because you’re probably not becoming an astronaut), trust that this blue basketball is an accurate representation.”

Now, let’s say it was a magic globe that reflected every change in the actual Earth. Sea levels rise? Your globe gets bluer. Ice caps melt? The white bottom disappears. This is what an ETF does. It reflects every underlying change in the market and, more importantly, you can hold it.

But why should I buy an ETF tho?

There’s no way to know which companies will perform excellently, every time. Some companies be winning like Lebron James and others be losing like Hillary Clinton. Over time tho, the whole market tends to do aite.

Case in point: the long term return on the S&P 500 (Google it — this represents the US stock market) is ~11% per year (2). For comparative purposes, your savings account probably gives you 0% and these Tinder dates often return -25 to -100%.

The goal is to earn the long-term rate of return because:

Dough that returns ~8–10% year doubles every ~7–9 years. Year-to-year ish can happen in the real world (as any thug knows) and stocks could nosedive —after decades, things tend to be more Ski Lodge Sky Lift than Kingda Ka.

ETFs have mad benefits versus Mutual Funds and other garbage

1. Easy to buy. You can wake up on Tuesday at 11am, post “rise and grind” on Facebook and buy ETF shares directly afterwards (as long as this isn’t a public holiday and the market be open). They behave just like stocks do.
2. Easy on the wallet. Every year, the ETF will charge a small fee as an “expense”. ETFs are basically robots — they are not managed by some 45-year old caucasian male “Portfolio Manager” who claims to predict future returns, “see the market’s trajectory” and turn bread into fish. ETFs are “passively managed” (no caucasian white male getting rich off of you) vs. “actively managed” (Harold goes skiing in Aspen thanks to you) so their expense ratios are mad low. Vanguard has the cheapest ETFs in the game — check this out for more details.
3. Easily diversified. Let’s use Vanguard’s Total Stock Market ETF as our muse. Aside from the low “the Titanic is chillin’ right there” expense ratio level (0.05% per $1 invested, which is a nickel for every Benjamin), buying just one share of this ETF gives you access to 3,500+ of the world’s largest businesses. If one fails, you won’t go broke. Hell, if even if a handful go under, you can still order a few appetizers for the table as long as your squad splits the check. No weeks of research or hours of button-clicking required — one ‘tap’ gives total exposure.

But I heard ‘xyz’ stock is finna fly through the roof like Clark Kent and continue on dat trajectory forever. Why shouldn’t I buy?

Let the streets blab. If you buy an ETF that holds the broad market, you’ll partially benefit from one-off increases anyway because, guess what girl: many stocks be part of the broad market. You can still be a savage and buy the stock separately but remember, if that ‘stock market guru’ was wrong, you’ll get the full impact of that loss, too.

Generally speaking, here are some reasons why buying ‘single-name stocks’ (separate, specific companies) is a bad look:

Them commissions: This depends on the broker you be using, but usually you pay brick-heavy commissions when you buy stocks. There are some exceptions, but make sure you fully up-to-speed on your broker’s policies. Many brokerage houses (Vanguard & Fidelity are two good examples) don’t charge commissions on ETFs tho.

Them swings: Individual stocks can be described by the sexy ‘v’ word: you guessed it, volatile. If the market moves up a ton, the stock may triple in value, rise in step with the market, appreciate slightly, stay the same or even decrease in value — it all depends on the company. Are you ready to thoroughly research them stocks the same way you Facebook/Google stalk a potential bae? If you ain’t ready to treat stocks like baes, you ain’t ready to own single names.

But fam, what are dividends? And do ETFs be paying them?

“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.” — John D. Rockefeller (dude was savage af)

While Mr. Rockefeller wasn’t real enough to start Rocafella records, when it came to getting this cake, he was the OG of OGs.

If he was alive today, he could walk into a room filled with every billionaire on the Forbes 500 list and say “why did they put me in a room with all these poor people?”

Sometimes companies who make money like to give some of it back to their investors. Imagine you took a job at Chipotle and at the end of the day, after all them customers peaced out, the manager looked at you and said “aite, feel free to make yourself a burrito but don’t get carried away nah mean. Also, I aint specifically saying you can’t have guac, but I didn’t weigh the tray and I’m about to leave. One love.”

Dividends build wealth

Non-wealthy folks tend rely on a job or single business as the primary (and often only) source of income. The wealthy be blind to that approach. They believe that by owning stocks of different dividend-paying businesses, they’ll “earn a living” over time — the trick is to find companies that won’t disappear. CHEAT CODE ALERT: If you buy ETFs, you won’t have to worry about identifying the magical horse.

Think like John D. Rockefeller. Get them dividends.

If you own the market, you’ll get a piece of all dividends that are paid by the underlying companies. You can choose to either receive dividends in cash or have them reinvested. If you prefer cash (e.g. to pay dem taxes), let your brokerage know know. If you want to keep the wheels rolling, reinvest. (3)

Fam, for now, get comfortable with this easy gameplan:

Pick a cheap, colossally diversified ETF (like ‘VTI’, Vanguard’s Total Stock Market) and buy a fixed dollar amount every month. Worst case — you’ll never do worse than the entire market. Hopefully, this’ll stack at 7–10% per year, over time.

So now you woke. What else?

You about to open up dat Vanguard account and start buying every 2 weeks. We’ll discuss the following ‘top-of-mind’ questions in part 2:

1. I done heard about “compound interest” — they some indie Metal band?
2. I ain’t tryna focus on America 24/7. Do ETFs track other markets?
3. Vanguard aite. Anything else out there in these streets?

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Them Footnotes

(1)https://www.bloomberg.com/news/articles/2016-09-22/the-professor-who-was-right-about-index-funds-all-along [Burton Malkiel has been reppin’ ETFs and Index Funds for a minute — he real, not fake]

(2)http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html [we quoted the arithmetic average from 1928–2016]

(3)Dividends are taxed because Uncle Sam and the feds ain’t trying to let you have income without strings. We’ll discuss taxation (with representation) in a future installment.