ETF Investing Guide (2024): From 6 Major Types to a Complete VOO/QQQ Comparison

summary: “A must-read ETF guide for beginners! This article takes a deep dive into what ETFs are, how they differ from index funds, and the difference between active and passive ETFs. From equity to bond ETFs, we’ll walk you through the diverse world of ETFs and help you find the investment tool that suits you best.”

Next up, we’re going to talk about what ETFs really are, how they differ from index funds, what makes active ETFs different from passive ETFs, and what types of ETFs are out there. Then I’ll teach you how to invest in ETFs.

What Is an ETF? Is an ETF the Same as an Index Fund?

ETF stands for Exchange Traded Fund. In the U.S., ETFs can track major indices, stocks, bonds, and commodities — think S&P 500, NASDAQ, DJ30, USD futures, oil, corporate bonds, specific sector stocks, and more.

As for Taiwan’s stock market, the most well-known ETFs are 0050 and 0056 (Taiwan’s equivalent of flagship ETFs). In recent years, the market has seen even more dividend-focused ETFs offering quarterly or monthly distributions.

If we break down the letters in ETF, we get:

So an ETF can also be called an “exchange-traded fund” — meaning you can buy and sell this type of fund on a stock exchange.

Since it’s a fund, you know an ETF isn’t made up of a single stock. Instead, it’s a basket of investment holdings. So investing in an ETF is like investing in that whole basket.

For example, investing in SPY or VOO — ETFs that track the S&P 500 — means you can own all the S&P 500 component stocks with just a small amount of money.

Similarly, Taiwan’s 0050 tracks the top 50 companies by market cap in Taiwan.

How Are ETFs Different from Index Funds?

Index ETFs and index funds are similar but have subtle differences. An index fund is an open-ended mutual fund that selects its components based on an index to keep management fees low. An ETF is a trading method derived from index funds, with the key feature being that it can be bought and sold on a stock exchange — no need to trade through a fund company.

What’s the Difference Between Active and Passive ETFs?

Before we dive into active and passive ETFs, let’s clarify two investment styles: active investing means picking your own stocks with the goal of beating the market; passive investing means following the market, hoping to match its performance.

So ETFs can be divided into active and passive, built on these two investment approaches:

Active ETFs

Active ETFs are managed by fund managers whose goal is to beat the market — success depends entirely on the manager. Management fees are higher than passive ETFs because more time and effort goes into monitoring and adjusting. ARK has been one of the hottest active ETFs in recent years, founded by Catherine D. Wood, investing in various innovative companies. While ARK outperformed the S&P 500 in 2020, by 2022 some ARK funds were performing far worse than the broader market — highlighting the risks of active ETFs.

Passive ETFs

Passive ETFs track broad market indices — by country, globally, by sector, or by bonds. Their price rises and falls with the index (leveraged ETFs may amplify these moves). Trading costs are low, with no adjustments or fund manager intervention needed, saving on management fees. Famous examples include SPY and VOO (tracking the S&P 500) and QQQ (tracking the NASDAQ), all of which mirror their respective index performance.

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• Affordable ETF vs Luxury ETF: Which Is Better for Long-Term Investing?

Here’s a table summarizing the differences between active and passive ETFs:

Why Are There So Many Types of ETFs?

The variety of ETFs available today is truly dizzying — they exist all around the world. Here are the main reasons:

1. Diverse investment needs: Everyone has their own investment goals and risk tolerance. Different people prefer different approaches, and ETFs can satisfy all these needs.
2. Rich asset classes: From stocks, bonds, and commodities to real estate — ETFs can track them all. Through ETFs, investors can easily allocate their assets.
3. The passive investing trend: As passive investing grows more popular, more people choose ETFs to track various market indices rather than picking individual stocks.
4. Innovation and competition: Asset management companies keep launching new ETF products to attract more investors and stand out in the competitive landscape.
5. Convenient cross-border investing: Want to invest in foreign markets? ETFs make it easy without directly buying foreign securities.
6. Supportive regulatory environment: Regulators worldwide have increasingly refined their oversight of ETFs, creating a favorable environment for growth.
7. Trading convenience: ETFs are listed on exchanges just like stocks, so investors can buy and sell anytime during trading hours — super convenient.

As the ETF market continues to develop, the number and variety of ETFs worldwide are expected to keep growing, giving investors even more choices.

What Types of ETFs Exist? (I Won’t Be Covering Specific U.S. or Taiwan ETFs)

There are so many types of ETFs that anything investable can become one — equity ETFs, bond ETFs, futures/commodity ETFs, leveraged ETFs, inverse ETFs, currency ETFs, and more.

Equity ETFs alone branch into several sub-categories: market-cap ETFs, value ETFs, growth ETFs, sector ETFs, regional ETFs, dividend ETFs, and more. Honestly, there are even more types out there. But I won’t be covering the most common specific ETFs here.

Every country has its own ETFs, and Taiwan is no exception. The most famous Taiwan ETFs are 0050 and 0056, tracking the top 50 and top 150 companies by market cap, respectively. Investing in these ETFs is pretty much like investing directly in Taiwan’s major stocks.

As for all those categories I just listed — for someone as lazy as me at “Lazy to Be Rich”… I honestly don’t want to dive too deep! With that many types, you really don’t need to buy them all (yes, I wrote this article without deeply understanding them all 😆). It’s like having hundreds of contacts on your phone, but you really only keep in touch with a handful.

How to Invest in ETFs?

Investing in ETFs is actually quite simple — you just need a brokerage trading platform. But before you invest, there are a few things to understand:

1. Choose the right ETF: Different ETFs have different characteristics — the index they track, the investment region, the sector, etc. Choose based on your own investment goals and risk tolerance.
2. Understand the ETF’s structure: An ETF may contain stocks, bonds, commodities, and other holdings, so you need to understand their characteristics and risks.
3. Watch out for fees: Investing in ETFs involves trading commissions and management fees, which vary across different ETFs. Do the math before investing.
4. Dollar-cost averaging (DCA): For long-term investors, DCA is a great strategy. By investing a fixed amount regularly, you can reduce the risk of market volatility and maintain steady contributions.
5. I personally invest through a sub-brokerage (複委託, a Taiwan-specific service where local brokers execute trades on foreign exchanges). As long as you hold long-term, transaction fees and exchange rate fluctuations average out.
6. Of course, if you have enough capital, a lump-sum investment will generally yield higher returns than DCA. We’ll talk about that another time.

Further Reading

The Lazy Conclusion

懶大

金融科技新創 CEO | 獨立財務顧問

ETFs are the best starting point for investing. They eliminate the high risk of individual stocks and spare you the hassle of stock picking. Passive ETFs, in particular, simply track an index — you can enjoy all the benefits without overthinking. Of course, the most important thing is knowing why you’re buying — and why you might sell.

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