How Do ETF’s Work?

The world's not short on articles about the benefits of investing in ETFs (aka prepackaged fruit). Google "ETF benefits" and you'll find countless publications about:

1. Diversification

2. Low costs

3. Tax efficiency

4. Passive investments

5. Transparency

But the benefit that's most important to your financial success is never written about…


How are ETFs predictable? They take out the human factor. By buying all the stocks in the S&P 500, you remove the portfolio manager who's trying to pick the "best" stocks (or worse, a financial advisor (or you) picking the "best" stocks. Eeek!).

When you take out the humans, you no longer rely on a crystal ball for your success. Instead, you hitch your wagon to the ongoing (but faltering) forward progress of humankind.

When you invest in an ETF, you aren't investing in a few hand-selected companies. You are investing in ALL of the companies.

And buying all of the companies gives you a looooong history with a MASSIVE sample size to forecast your long-term returns. No, it's not guaranteed. Even if you do the smart thing and stick with it through thick and thin, you may get a little less or a little more. But the key word is "LITTLE".

The variance your target long-term return will be small. So you can safely rely upon it in your financial plan to predict your long-term investment returns.

Only if you can predict your long-term returns, will you know if you're on track to your achieve financial goals.

ETFs are wonderful for all sorts of reasons. But the most important to your financial success is their predictability.

DISCLAIMER:  This publication is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.