Learning the Basics of ETFs

In this excerpt from Motley Fool's Industry Focus: Consumer Goods podcast, Vincent Shen and Asit Sharma break down the essential details behind exchange-traded funds, or ETFs, and the role they play in the world of investing. 

A full transcript follows the video.

This podcast was recorded on Nov. 29, 2016.

Vincent Shen: We'll be talking a little bit about some consumer and retail-focused ETFs, not only as investment options or vehicles themselves, but how they can serve as a source of inspiration to find other high-quality companies within the industry. Asit, for anyone who is not as familiar with exchange-traded funds, with a 10,000-foot view, can you give us a quick description of what an ETF is?

Asit Sharma: Sure. Exchange-traded funds are very similar to mutual funds. They enable you as an investor to dive into an investment idea. Someone else that is the fund manager will buy and sell stocks are other instruments in a basket, and allow you to purchase into this investment as you would a stock. So, unlike mutual funds, you can buy and sell an ETF in the same day. They are managed instruments, so they do assess a fee each year. We'll get into some of those details as we go along with the ETFs we're going to talk about today. That's one thing you do have to watch when investing in an exchange-traded fund -- how much you paying for the management of that vehicle. But, to sum it up, very similar to stocks, share some characteristics with mutual funds and equities.

Shen: Yep. On the Fool.com website, they have a breakdown of exchange-traded funds, and they ultimately look at it in terms of what it's called -- exchange-traded -- the key thing here, like a fund, but it trades like a stock, it has a ticker symbol, but it is ultimately an investment vehicle where it holds some batch of tens, hundreds, if not thousands of underlying shares. These have actually been around since the 1990s, but I think they've really grown in popularity in the past decade. I did a quick search as a proxy for that, in terms of Google search activity for the terms "ETF" or "exchange-traded fund," and popularity on Google searches peaked in October 2008, and they have remained relatively consistent since then. Otherwise, some big perks behind ETF investing, as you mentioned, Asit, they're easy to trade straight from your standard brokerage account, they're an easy way to diversify your holdings, they can give you exposure to a certain region or a sector, as we'll discuss here.

Whereas with a mutual fund there might be some kind of minimum investment, ranging from $500 to $3,000, here, you can buy a single share of an ETF if you want. For the two funds we're looking at, it might be around $50 or $80. Generally, lower expenses than a mutual fund, and some tax advantages that you can learn more about. But, let's dive specifically into the two funds we're going to talk about. Can you explain how, specifically, with the S&P 500, how it's broken down into sectors, and how that can help us if we're looking specifically at consumer and retail companies?

Sharma: Sure. Listeners, this is your piece of trivia for today -- every single stock that's in the S&P 500 is broken down into one of eleven different sectors. We're going to talk about two ETFs, one in the discretionary consumer sector of the S&P 500, and the other in the consumer staples sector of the S&P 500. What Vince and I love about this topic is these two ETFs give you a way of viewing the consumer goods world. It's a very broad universe of stocks, that covers everything from gaming to retail to travel and leisure. If you're looking for a way to further understand this sector, these two ETFs are a great way to dive in and learn, as Vince mentioned.