This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.
ETFs don’t have to be confusing.
Image source: Getty Images
Exchange-traded funds (ETFs) can be a confusing topic for those who are new to investing. But it doesn’t have to be! Wall Street guru Vivian Tu, who uses the handle @YourRichBFF, recently compared ETFs to a charcuterie board. With this analogy in mind, let’s take a closer look at how ETFs work and why they are so popular with investors.
What are exchange-traded funds?
Put simply, an exchange-traded fund is a type of investment that tracks an index. It consists of a basket of securities, like stocks or bonds. ETFs trade on major exchanges and their prices constantly change, just like shares of stock. They offer investors diversification benefits and cost savings since they allow investors to buy into many different investments all at once. This means you are more insulated when it comes to risk, because if one company in the bunch doesn’t do well, you’re still invested in others that should help things balance out. Exchange traded funds also typically have fewer fees when compared to actively managed funds.
The charcuterie analogy explained
Charcuterie boards are a popular way to serve items like meats, cheeses, fresh and dried fruits and vegetables, olives, and nuts at a social gathering. Vivian Tu believes that the best way for novice investors to understand ETFs is by comparing them to a charcuterie board. Your favorite cheese may be brie, but you probably don’t want to eat an entire wheel in one sitting. However, if you can bring out the charcuterie board to add a variety of different foods, then you can still enjoy your brie among bites of other cheeses.
Like a charcuterie board, an ETF has a variety of different stocks, bonds, or investments all included. All these elements come together to create a more diversified mix of investments that can meet your specific needs as an investor. An ETF portfolio is not unlike building a charcuterie board — you want each component to bring something unique and interesting to the table while still working well with all the other elements.
For example, you are more insulated from risk with an ETF if something bad happens to one company. It’s a similar idea with a charcuterie board; if there’s one bad cheese that you don’t like, it’s okay because there are still plenty of other bites to enjoy on the board. And as with any good charcuterie board (or investment portfolio!), there’s no single “right” combination — it all depends on your individual goals as an investor and what types of risk you are comfortable taking on.
This analogy from @YourRichBFF makes it easier to understand how ETFs work in practice by comparing them to a charcuterie board. Each component contributes something unique, yet is different from other elements in the portfolio, so an ETF can insulate you from unnecessary risk. Building an investment portfolio can seem daunting, but using ETFs can help you confidently take your first steps towards investing success.
Our best stock brokers
We pored over the data and user reviews to find the select rare picks that landed a spot on our list of the best stock brokers. Some of these best-in-class picks pack in valuable perks, including $0 stock and ETF commissions. Get started and review our best stock brokers.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.
