Exchange-Traded Funds (ETFs) have become increasingly popular as long-term investment vehicles, similar to stocks. They offer diversification, low expense ratios, and the flexibility of trading like individual stocks. However, whether ETFs are suitable for long-term investments like stocks depends on various factors including investment goals, risk tolerance, and market conditions.

Exchange-traded funds (ETFs) are investment funds that trade on stock exchanges, and can be bought and sold like common stock. ETFs can contain financial assets such as stocks, bonds, currencies, debts, futures contracts, and/or commodities such as gold bars. They can be a way to access a wide variety of asset classes, including domestic and international stocks, bonds, and commodities. ETFs can also be tax efficient and have lower operating expense ratios (OERs) than actively managed mutual funds. ETFs combine aspects of mutual funds and conventional stocks. They can be bought or sold intraday at different prices, and can help to diversify your investments.

Before diving deeper into ETFs, let’s address a common question: What is a mutual fund? A mutual fund is an investment vehicle made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments, and other assets.

Mutual funds are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.

Diversification is one of the key advantages of ETFs. Unlike individual stocks, which expose investors to the performance of a single company, ETFs typically track an index or a basket of assets, spreading out the risk. This makes them an attractive option for long-term investors looking to mitigate volatility.

Another aspect to consider is the cost-efficiency of ETFs. They generally have lower expense ratios compared to mutual funds due to their passive management structure. This means that over the long term, the cost savings can compound and potentially lead to higher returns.

Liquidity is also a significant factor. ETFs can be bought and sold throughout the trading day at market price, which can be beneficial for investors who may need to quickly adjust their portfolios in response to market movements.

However, it’s important to note that not all ETFs are created equal. Some may focus on niche markets or employ complex strategies that may not be suitable for all long-term investors. Therefore, it’s crucial to conduct thorough research or consult with a financial advisor before incorporating ETFs into a long-term investment strategy.

While ETFs offer several benefits that can make them good for long-term investments like stocks, they are not without their nuances. Investors should carefully consider their individual circumstances and perform due diligence to ensure that ETFs align with their long-term investment objectives.

For instance, the liquidity of an ETF can vary significantly depending on the underlying assets and the market conditions. Additionally, while ETFs generally have lower fees than actively managed mutual funds, they can still incur trading costs that can add up over time.

Another nuance of ETF investing is the potential for tracking error. This occurs when there is a discrepancy between the performance of the ETF and the index it is supposed to replicate. Factors such as fund management style and transaction costs can contribute to this issue.

Investors should also be aware of the tax implications associated with ETFs. While they are often touted for their tax efficiency, certain types of ETFs can generate unexpected tax bills. For example, commodity ETFs may be structured as partnerships, which can result in K-1 tax forms and unrelated business taxable income (UBTI).

While ETFs can be a valuable addition to a long-term investment strategy, it’s essential to understand their nuances before incorporating them into your portfolio. By doing so, you can make informed decisions that align with your financial goals and risk tolerance.

Legends – anywhere they go, they find how to extract value. Today, Donald Trump is about to be rewarded with $3 billion for Truth Social: “Shareholders voted to approve Trump Media’s merger with a blank-check company, following years of legal and regulatory obstacles. Trump will own a dominant stake in a public company, with shares worth more than $3 billion at current market prices.”

We rant here, post day and night, but one businessman with deal sagacity has created a $3 billion fortune in less than 4 years from social media! 

Do not be jealous, just try to understand how they create this value. Because if you are in that virtuous circle of value capture and acceleration, you will always be rolling, whether in real estate, fashion, social media, etc. 

In the greatest Igbo novel ever written (by my call),  Tony Ubesie’s “Isi Akwu Dara N’ala” explained the transformation of Chike, the husband of Ada, in the context of “osisi na ami ego” [literally, a tree which produces money as the leaves]. Heavens opened for Chike, and he harvested money from  trees – and those trees were factories, and industries.  Ubesie was at his finest, producing a trilogy of James Hadley Chase (There’s Always a Price Tag), Thomas Hardy (The Mayor of Casterbridge) and Bertha M Clay (Beyond Pardon) all lumped together. 

Legends – they win at night, they win at day; they always find how to make money in anything, even though we the people may not understand. Post, share, hate, and like, Trump adds $3 billion for the same thing!

Legends – anywhere they go, they find how to extract value. Today, Donald Trump is about to be rewarded with $3 billion for Truth Social: “Shareholders voted to approve Trump Media’s merger with a blank-check company, following years of legal and regulatory obstacles. Trump will… pic.twitter.com/LlqhLHj0Ri

— Ndubuisi Ekekwe (@ndekekwe) March 22, 2024

Join me tomorrow at Tekedia Mini-MBA Live where I will teach “Fundamental Investing Principles and Philosophies”. Who are you as an investor?

-Growth Maker: you buy low and wait for the value of the company to grow quickly. Say, you came in at N4 per share, and hope it rises to N20.

-Value Picker: they focus on extremely beaten down equities. Think of people who bought some airline stocks at the peak of the covid-19 knowing that everything will be fine one day. Think of John Templeton who bought valueless stocks as World War 11 heated up, holding them, and then became the stock picker of the 20th century.

– Income Chaser: these people do not necessarily care if the value of the stocks they hold go up or not, their major focus is the company’s ability to pay dividends. Most are retired people and they focus on fixed income since they’re no longer working. So, getting dividends will be the only way to run their lives. To do that, they buy companies which pay dividends because they need cash once in a while to operate.

Join us as we examine the physics of investing tomorrow.