Ep 49: Better w/ My Finance-Sis, Pt 2: Funds

Jess: You're listening to the Better With My Finances, get it, finances, finances, mini series on the Market MakeHer podcast, still demystifying investing from her perspective.

Jessie: But this time, I'm letting Jessie teach back some of the foundational investing concepts to our Gen Z protege, JC Sage.

Jess: And JC will be the one stopping Jessie to ask all the questions.

Jessie: I'll still be here as Fin Mom, making sure everything is stated correctly.

Jess: Do not worry.

Jessie: Yes, we're glad to have you here, Fin Mom.

Jess: We're glad you are all here listening and learning with us today.

Jessie: It's time to get fundamental in our investing journey.

Jess: Oh, yeah.

Jessie: I love that.

Jess: And there are many different types of funds and investing, and we won't be able to go over all of them today.

Jessie: But we'll cover the most common and refer you to some episodes we have for a few of them.

Jess: So a good place to start would be episode 4, where we cover mutual funds and ETFs, but we'll go over them again today.

Jessie: We also have episode 40 about bond funds, which we will get into later.

Jess: All right, let's talk about funds.

Jessie: JC, do you invest in any funds? Yeah, I'm in a target date fund, actually.

Jess: Funny story about my target date fund is that the brokerage firm that I'm in didn't actually have one for when I should retire, because I started it, I think, when I was like 16 or really young when I bought it.

Jessie: It's for a sooner date than my retirement age, which is kind of funny.

Jess: I'm so curious, JC, do you have a mutual fund or an ETF? That's a target date fund.

Jessie: It's a mutual fund.

Jess: That's a target date fund, yeah.

Jessie: Nice.

Jess: Let's start with defining investment funds.

Jessie: JC, I know you invest in funds, but do you know what they actually are? And you can totally feel free to read the Investopedia definition if you'd like.

Jess: So an investment fund is a financial product that pools capital from multiple investors to purchase a portfolio of securities.

Jessie: So what I like to say on my channel is it's kind of like a basket.

Jess: It's a basket of securities, and securities are like stocks, bonds, other things of that sort.

Jessie: It depends on the fund, what is in your actual basket.

Jess: Since the basket has so many securities and bonds, it's like a lot of money.

Jessie: So we all put our money in to buy this fund.

Jess: So that's the perfect definition.

Jessie: So there's many different types.

Jess: So now that we have defined what a fund is, I want to, for a second, talk about what a passive fund is versus an active fund.

Jessie: So ETFs and index funds are types of passive funds.

Jess: ETFs can also be actively managed, but we'll get into that later.

Jessie: Passive funds usually have lower expense ratios with a more simplified investment strategy and less involvement of fund managers.

Jess: And I've read that they can also be managed by computers.

Jessie: Is that right, Jess? They absolutely can be, yeah.

Jess: If you just got like a benchmark, it rebalances like it would a portfolio.

Jessie: They do still follow a benchmark and aim to deliver the returns within that benchmark and are still subject to two important items that I want to cover called expense ratio and tracking error.

Jess: Well, Jacey, have you ever heard of the tracking error before? I have not.

Jessie: I also don't think I've officially learned passive versus active funds.

Jess: Ooh, good.

Jessie: Got it.

Jess: Okay, so you're probably more familiar with the passive.

Jessie: You own an active fund because your target date.

Jess: That's what I was assuming.

Jessie: Technically active.

Jess: Yep, and it's in the name passive.

Jessie: It's trying to mirror something that already exists.

Jess: Like when you pull up a stock and you can see all the information there.

Jessie: You can do the same with funds.

Jess: And you might see something called a tracking error, which you want probably something closer to zero, right, Jess? Yeah, well, because when you have ETFs, so they're an exchange traded fund.

Jessie: So they act like a stock.

Jess: They trade on the exchange.

Jessie: And honestly, it's because mutual funds have been around forever.

Jess: The first one was made, I think, in like the late 1800s, early 1900s.

Jessie: Whereas the ETF, the first one was introduced was actually SPY in 1993, S-P-Y.

Jess: So it acts like a stock.

Jessie: It's technology allowed that to happen.

Jess: But because there's this supply and demand feature, the way that they create shares are very, very different.

Jessie: So meaning, if you have something that's supposed to mirror the S&P 500, and you're trying to compare which ETF or mutual fund is better, you'd say, okay, who does the best job? Or who is the biggest deviation or error? Who actually does mirror it? And they do have tracking errors because of the way that they create the share process.

Jess: Is that right to say it's like the loading, like it's trying to keep up with the thing it's mirroring, but it's kind of slow? Yeah, it's like it's loading time.

Jessie: All of them have it.

Jess: It's okay to have one.

Jessie: But you just don't want it to be too high because then the fund's a liar, basically.

Jess: Not doing what it says it's going to.

Jessie: So if I'm looking at two S&P 500 funds and one has like a tracking error of, say, two, and then one has a tracking error of like 10, it means that the one with the tracking error of 10 is slower to catch up? Yeah, it means it deviates away from the S&P 500 like 10% of the time.

Jess: I would stay away from something with a tracking error of 10.

Jessie: If it's being passively managed, then that means someone's not in there keeping up with the times.

Jess: Companies go in and out of the S&P 500.

Jessie: We talked about if they don't meet that criteria, they get kicked out.

Jess: And if someone is like passively managing a fund that's mirroring the S&P 500, then they might not be keeping up with what's supposed to be in and out of there, right? What is an acceptable tracker error number? And then what is like the average, Jess? So you want something super low.

Jessie: I just pulled up IVV, VOO, and SPY, which are the three most common index funds that track the S&P 500.

Jess: Those three though have a tracking error of 0.01 and SPY has the highest at 0.02.

Jessie: That is acceptable because it's so minimal.

Jess: Okay, so I'm looking for something less than one.

Jessie: A lot less than, less than like a fraction because it's 0.02.

Jess: Good to know.

Jessie: The other thing you might want to look at when you're comparing is the expense ratio.

Jess: So the expense ratio is how much of a fund's assets are used towards administrative operating expenses because an expense ratio reduces a fund's assets.

Jessie: It reduces like your returns.

Jess: You want to look at tracking error, but you also want to look at expense ratio.

Jessie: Since there are multiple you can choose from, you can pull them all up and say like, okay, well this one has a lower tracking error by a little bit, but this other one has a lower expense ratio.

Jess: The money it costs me to like keep this fund going or to own it.

Jessie: Correct.

Jess: Yes.

Jessie: And you expect that to be higher for active funds because someone's doing work.

Jess: But then I would want to compare them to a benchmark, say, okay, are you doing better than the market? What's the point of view? If I'm just looking up VOO and right, I just like Google VOO, is on here, can I see the tracking error on the expense ratio or do I have to go somewhere else? I looked into Fidelity and just compared it because you can just put them all side by side.

Jessie: Yeah, so this is where having a brokerage account comes in very handy because they all have tools for you.

Jess: You can pull them all up side by side and every brokerage firm has different ways of displaying information to you.

Jessie: But it's a good question.

Jess: I just did it on Google just to see if they'd have that data point and they don't.

Jessie: They have the same data points that they would for a stock, which is not helpful, to be honest.

Jess: But your brokerage firm attracts you by having really cool tools and features and Compare Tools is definitely one of them.

Jessie: Okay.

Jess: Yeah.

Jessie: Everyone should probably have a brokerage firm.

Jess: I mean, if you need help, we have an episode on it.

Jessie: You can go to stockbrokers.com or anywhere that will help you find one based on tools and features.

Jess: Once you have that, you can actually do a little bit better research than you would just going on Google.

Jessie: And at the time of that recording, I did not work for stockbrokers.com, but I do now.

Jess: So I feel like I need to disclose that.

Jessie: So that was our very first guest, Blaine from Stockbrokers.

Jess: That was our very first guest on this podcast, so.

Jessie: And now my boss.

Jess: If you don't know which one to have, I kind of just picked one based off of something someone told me.

Jessie: They're like, oh, just open the Vanguard account.

Jess: I was like, okay.

Jessie: Before I knew that I had many options.

Jess: And you can have more than one.

Jessie: You can open up an account on every one.

Jess: Yeah.

Jessie: Actually, what would you say the benchmark or ballpark average for expense ratios for ETFs? I would compare.

Jess: For example, we just did the most popular.

Jessie: But if you were looking for a targeted ETF, because ETFs are a basket full of securities, so it could be in a specific sector.

Jess: Maybe I was looking to add exposure to biotechnology and I was comparing a bunch of them.

Jessie: I would compare that way.

Jess: But it really comes down to, is it active or is it passive? What's the benchmark? Because even passive has a benchmark, as does active.

Jessie: So the passive benchmark is an index or an indice.

Jess: Even if it's a sector, there's an indice for that.

Jessie: They'd wanna beat that.

Jess: And if they beat that, then to me it's worth a higher expense ratio.

Jessie: Yeah.

Jess: You beat the market, cool, I'll pay for it.

Jessie: If you don't, no, I won't.

Jess: And when we talk about beating the market, I guess it's like we're talking about how the S&P 500 right now gives you what, like seven to 10% return.

Jessie: So you're kind of looking for a fund that's doing the same thing without getting into beta.

Jess: Yeah, that's a really, really, really good question.

Jessie: So if I were looking at XLK, for example, that is the spider technology ETF.

Jess: And I would wanna look at its total return versus the market.

Jessie: And if it is more, it's total return, then that's beating the market, as in beating the S&P 500.

Jess: It's total return for year to date or what? All of them.

Jessie: As in what, year to date? And then like looking at different timelines? Yeah, year to date, one year, three year.

Jess: And it's good to look at the different timelines.

Jessie: This year, the market has been a little wild.

Jess: Then it went down, then it went back up.

Jessie: And the last few years, there's been a lot going on.

Jess: There's been a pandemic.

Jessie: Zoom out and look at all the historical data you can.

Jess: We talk here on this podcast about more long-term investing.

Jessie: It depends on what you're doing with your portfolio and where you're adding it to, what kind of account you're adding it to.

Jess: Yeah, different timeframes will paint a different picture.

Jessie: Yeah, okay.

Jess: So let's talk about what an active fund is.

Jessie: So active funds have higher expense ratios attributed to the fund manager's in-depth research analysis and management efforts.

Jess: Basically that means somebody is actively managing this fund and you're gonna be paying a little bit more.

Jessie: There's pros and cons to all of it.

Jess: Some pros for an active fund, you have probably a better opportunity for outperforming the market, like we just talked about.

Jessie: Not that passive funds can't, but you would think that an active fund, if there's someone actually looking at it all the time, it has a little better of a chance because someone's like in there.

Jess: You might have some more defensive measures.

Jessie: You know, these managers that are managing these funds have the ability to respond to market opportunities.

Jess: Sometimes the market fluctuates or does intense things, depending on what's going on in the world.

Jessie: And that person can kind of be on top of that.

Jess: And then you have tax, like tax management.

Jessie: So active managers typically try to buy low and sell high, which can generate taxable gains.

Jess: Think about the tax management.

Jessie: Yeah, ETFs can be used for tax efficiency and tax strategies.

Jess: And there's also specific ETFs that are intended to help you tax-wise.

Jessie: If you're a tax-sensitive person, you have different types of investments because you strategically wanna take a loss at a right time.

Jess: So that's why when we talked about market rotation when you were on that episode, Jacy, if I have a lot of gains in Nvidia, probably I'm gonna go ahead and take those gains, but I might take losses at the same time to offset that.

Jessie: That's a tax-efficient way to do that.

Jess: So I personally had a lot of gains in Nvidia, had some losses in Alibaba.

Jessie: So if I'm selling and closing out Nvidia, I gotta pay taxes on that.

Jess: But if I have losses on Alibaba, I might as well just take that now at that time too to reduce my tax consequences.

Jessie: I'm personally in a tax-sensitive situation.

Jess: Not everybody is, but that's something where an ETF would do something similar to make sure that they're tax-sensitive.

Jessie: If you're in a tax-sensitive situation or not, is it like income level or what? Yeah, you're writing checks to the IRS, you are in a tax-sensitive situation.

Jess: Okay.

Jessie: So you are not getting refunds.

Jess: You are the other way around.

Jessie: So I'm thinking for me with my target date fund that's actively managed, my securities in there are being bought and sold.

Jess: So someone needs to keep track of those taxes.

Jessie: Who is that? The fund manager.

Jess: They take care of that.

Jessie: You are not subject to all of that.

Jess: They're taking care of that.

Jessie: That's them managing the tax situation.

Jess: To Jessie's point, actually.

Jessie: And then they tell me, come tax season, they tell me how much taxes I owe.

Jess: Well, if it's not a tax-sensitive thing, you're not subject to that.

Jessie: You're gonna be more of the gains and losses.

Jess: So you buy into the target date fund, you sell the target date fund.

Jessie: That's a taxable situation, meaning the inside of it, that's taken care of.

Jess: Okay, so I don't need to worry about the taxes inside of my target date fund if I'm not selling it myself.

Jessie: So maybe some cons of having an active fund is that they can be a little more expensive.

Jess: The fees might be a little bit higher because it's actively managed by that manager.

Jessie: So someone's gotta pay those managers salaries.

Jess: It's not just the funds, but whatever, it's part of it.

Jessie: And yeah, there's research costs.

Jess: So I mean, since a person is actively managing and the idea is for that fund to outperform the market or just make you a lot of money in return, then you gotta pay for that a little bit.

Jessie: And there's a little bit more active risk.

Jess: So active managers are usually trying to earn you higher returns, but there's risks that they could choose poorly, which could hurt the fund's performance, hopefully not.

Jessie: And then there can always be underperformance.

Jess: I think that's such an interesting statistic that I hear financial influencers say all the time.

Jessie: It's really hard to beat the market when it's going up all the time like it has.

Jess: But now that we're in a different environment where the market has had some interesting downturns, it's been paying to be a stock picker.

Jessie: Active funds have been doing so much better now because of that reason, because it's a different type of market.

Jess: If you have seven securities leading the market, you create concentration risk, which we've talked about.

Jessie: And now that we are in this more volatile timeframe, active funds and hedge funds are having their moments to shine.

Jess: Except for the hedge funds that participated in that carry trade, right? I mean, I wish we knew what they were, who they were, but we do not, alas, anyway.

Jessie: Another question that came up for me while I was pulling all this together is what is the difference between active funds and index funds? So actively managed funds are, like we said, funds with portfolio managers that select investments.

Jess: Index funds are funds where managers aim to mimic or mirror a specific index like the S&P 500 or any of the other ones, mirroring everything that's in that index as well that's performance.

Jessie: Yep, so an index fund and a passive fund are the same.

Jess: Right.

Jessie: They are the same.

Jess: Oh, wait, an index fund and a passive, so index funds are passive funds.

Jessie: Correct.

Jess: Okay.

Jessie: They are the same.

Jess: Active funds have people clicking away on their computer actively trading.

Jessie: That's right.

Jess: Like mutual funds or target date funds.

Jessie: Gotcha.

Jess: Yeah, let's go through all of the different types of funds or as many as we can get through today.

Jessie: We'll start with money market funds.

Jess: These funds generally are considered low risk.

Jessie: They invest in cash equivalents like U.S.

Jess: treasury bills or CDs, and they tend to offer better returns than savings accounts, but they are not FDIC insured.

Jessie: Now don't confuse a money market fund with a money market account.

Jess: Those are two different things.

Jessie: Your money market account is FDIC insured.

Jess: This is a fund.

Jessie: This is something you're like buying a share of.

Jess: That's the difference.

Jessie: Yep.

Jess: So when you deposit your funds into your brokerage account, you do nothing, it goes into a money market.

Jessie: There are some brokers that will put it in a fund and there's others that will not.

Jess: I always, I guess I assumed that when you open a brokerage account and you deposit money, it just always went into a money market account, but I guess not because not all brokerage accounts are banks, right? They have to legally separate bank and brokerage, even if they're connected to a bank.

Jessie: So for example, embarrassingly enough, I forgot that I rolled over a portion of my old 401k into Charles Schwab until I started my new job.

Jess: And then I had to open a Charles Schwab account and I'm like, oh my God, I already have one.

Jessie: Well, look at all this.

Jess: But thankfully it went into a money market fund by default.

Jessie: So it was still getting 5%.

Jess: No, and that money market was insured? Yes.

Jessie: So if it's not insured by FDIC, it's insured by CIPIC.

Jess: Do you know the difference? I've never heard of that.

Jessie: Don't.

Jess: I'd never heard of that.

Jessie: So CIPIC, Securities Investors Protection Corporation, that's through your brokerage firm and it's by person.

Jess: So CIPIC is 500,000 and that includes 250,000, a limit for cash.

Jessie: That's what it is.

Jess: But it's per person, so it's not per account, meaning you deposit 500,000 in your brokerage account and then you have another account that has 500,000.

Jessie: Technically that 500,000 is the only thing that's insured.

Jess: But brokerage firms do what's called like a cash sweep and they do it into 10 banks.

Jessie: So if you ever have just a ton of money, you would see 10 different cash positions up to the limit because they'll put it in different banks for you to keep that insurance.

Jess: It's called the Brokerage Cash Sweep Program, FDIC.

Jessie: Insurance, like it's insurance in case something happens to your money.

Jess: Like if that bank goes under, you are insured.

Jessie: Like your money is safe, basically protected.

Jess: So my money is most likely insured but my investments are not.

Jessie: Well, your investments are, but what it means is, so you buy shares of whatever in your brokerage account, you are covered by SIPC up to $500,000.

Jess: But if those investments go down in value, that's not covered.

Jessie: But if the brokerage firm was to go out of business, then you'd have another brokerage firm very quickly.

Jess: That's what's covered.

Jessie: Oh, okay.

Jess: Okay, so mutual funds are probably the one that we've all heard.

Jessie: And you see this in your retirement accounts pretty often, but a mutual fund pulls money from many investors to buy securities such as stocks, bonds, short-term debt.

Jess: So remember it's in the name.

Jessie: We're all mutually pulling our money together like you would if you're going in on a group gift, except the money is then professionally managed by fund managers who decide which securities to buy and when to sell them.

Jess: So that's why it's an actively managed fund.

Jessie: Investors can purchase shares in the fund.

Jess: Okay, so wait, so index funds are following indices.

Jessie: They're passive.

Jess: And mutual funds are being actively managed by people.

Jessie: Well, mutual funds can be passive too.

Jess: Okay, wait, explain.

Jessie: Their only major difference is the way that they're traded and the way that they create shares, which is just the anatomy and wiring of it on the backend.

Jess: So mutual fund, it trades only once a day.

Jessie: You can buy or sell once a day.

Jess: That is it.

Jessie: And they create shares differently.

Jess: Like they have to physically sell and physically buy.

Jessie: An ETF trades on the exchange.

Jess: So it's an exchange-traded fund.

Jessie: Like it's literally in the name.

Jess: Why are we talking about ETFs? Because that's the difference is the difference you got to get in your head is ETF, mutual fund.

Jessie: So you have funds, ETF, or mutual fund.

Jess: So can it trade on the exchange or those trade once a day type of things? If it trades on the exchange, it acts like a stock.

Jessie: If it's a trade once a day, it does not act like a stock.

Jess: Like you pull up a quote for a mutual fund, it's not going to move.

Jessie: It has its net asset value that's determined at the end of the day.

Jess: You might see NAV for short because it only trades literally once a day.

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Jess: We'll be right back.

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Jessie: That is it.

Jess: So if you're looking at ETFs like VOO, VTI, you'll see that the value, like the price is constantly changing throughout the day where a mutual fund will just be the same for the whole day.

Jessie: Now that's saying, I mean, yeah, you could like buy an ETF this morning and then sell it tonight.

Jess: And a mutual fund, you cannot.

Jessie: You can buy it today and you can't sell it tomorrow.

Jess: So mutual funds can be active and passive? That's right.

Jessie: And so can ETFs.

Jess: So funds can be active or passive and they come in two flavors, which are trading like a stock, more accessible, more liquid, meaning you can buy and sell it same day a hundred times that day if you want.

Jessie: Whereas a mutual fund is less accessible, more for the long-term.

Jess: They discourage turnover, which means you selling that constantly because it hurts the long-term investors and creates tax implications.

Jessie: So there are two different flavors of the same thing basically.

Jess: And an index fund is a mutual fund? Yeah, or it can be an exchange traded fund.

Jessie: An index fund just means it's a fund that mirrors the index and it can have two flavors like ice cream.

Jess: Either it's going to, I guess it's going to be soft serve or it's going to be the one that you got to make for like ever, but it tastes good.

Jessie: I don't know if that was a good analogy.

Jess: I tried the flavors though.

Jessie: I'm going to write out a diagram after this.

Jess: But it's like, think of it as fund.

Jessie: And then how do I want to get into that fund? Okay, I could be the mutual fund route or I can be the exchange traded fund route.

Jess: And mutual funds were born first.

Jessie: ETFs are like the innovation mutual funds.

Jess: Technology made ETFs.

Jessie: It's like it evolved like a Pokemon.

Jess: And yeah, so like you're discouraged from buying and selling mutual funds so quickly.

Jessie: Things have changed.

Jess: We have ETFs now.

Jessie: Mutual funds, since they're fund companies, they negotiate their fees.

Jess: So you may have a different fee at Fidelity than you do at Vanguard versus where you do at Charles Schwab.

Jessie: That's why it's really important to look at your brokerage firm when you're checking those fees, not just Google it.

Jess: I honestly like at this point in my life, I'm like, why do we have mutual funds outside? I personally don't own any.

Jessie: I don't own one mutual fund.

Jess: I don't have to have mutual funds.

Jessie: But they have their purpose.

Jess: Let's talk about target date funds.

Jessie: We've mentioned this earlier in the episode.

Jess: That's what I have.

Jessie: Yes, exactly.

Jess: This is basically your retirement fund.

Jessie: It's actually a type of mutual fund.

Jess: Right, Jess? Am I saying that wrong? Yeah, it's a mutual fund.

Jessie: It can be an ETF now because of the recent launch by HighShare.

Jess: I was like, I said that.

Jessie: I was like, wait a minute.

Jess: We literally just said that.

Jessie: So, okay.

Jess: Covered in two flavors.

Jessie: Can be a mutual fund or an ETF now.

Jess: Technology.

Jessie: Okay, so basically a target date fund, you're figuring out the year you want to retire.

Jess: An example, I have VFFVX, which is the Vanguard Target Retirement 2055 Fund, which is the one I bought into initially because that's what I thought my target retirement date was.

Jessie: But what I didn't realize, something we were talking about earlier, is that you do not have to pick a target date fund that matches your target retirement date.

Jess: For me, I kind of got started a little late in my retirement journey.

Jessie: And so, if I pick a 2055 fund, it's gonna be a little less aggressive, meaning probably more fixed income securities and less stocks.

Jess: If you have one that's further away, so if I pick a retirement fund that's way further out or maybe one that JC has, that's gonna be more aggressive now and trade more stocks and things and then less aggressive later.

Jessie: Does that make sense? So, do you know what's in your target date fund, JC? I know that I'm 90% stocks and 10% bonds.

Jess: So, you probably have a year that's super far out.

Jessie: Yeah.

Jess: The furthest out there is, right? Yeah, that's what I chose.

Jessie: Okay.

Jess: So, the way that they work, there's an inverse correlation with bonds and the stock market.

Jessie: So, the stock market goes up, bond prices go down, inverse.

Jess: And that is a way that you rebalance and we still have to have that episode on portfolio allocation.

Jessie: When you are earlier in your growing wealth journey, like you are, JC, so blessedly so.

Jess: Yep.

Jessie: You should be more aggressive, right? So, that stocks are considered more aggressive.

Jess: You have more time to recover.

Jessie: And when you get less aggressive, you shift more into bonds.

Jess: So, the target date fund is actually a fund of funds.

Jessie: So, it is a fund full of mutual funds.

Jess: Yes.

Jessie: That's why we called it an Easter egg basket.

Jess: So, think about your target date fund as your Easter egg basket and then each little Easter egg is a fund and then inside the Easter egg is your candy or your jelly beans and those are individual securities.

Jessie: Yeah.

Jess: Because it is a fund of funds.

Jessie: That's what makes it, gives you so much diverse, like ridiculous amount of diversification, why it's the default when you're in a 401k because you could be ridiculously diversified with $100 invested in one of those.

Jess: You could have a thousand stocks.

Jessie: Meaning, so what it does is it starts super aggressive and then as you get closer to that retirement, it gets more conservative and the way it gets more conservative is it slowly moves your asset allocation to bonds and then eventually to cash.

Jess: Because bonds are less risky or low risk.

Jessie: Yeah.

Jess: They're less volatile.

Jessie: So, when you're closer to retirement, you want that money to, you're going to need to get your hands on that money sooner, but you'd want an income stream though.

Jess: Instead of growth, you want income.

Jessie: Get the money out.

Jess: And you're not worried about that right now.

Jessie: So, you can invest in more things like stocks that some of them might perform really well and give you a lot of money over time.

Jess: Some of them might not and that's okay because you have time to recoup the loss.

Jessie: That's right.

Jess: Target date funds are your set it and forget it, I could walk away from it and not do a thing and it's fine.

Jessie: That's what they are.

Jess: Because someone's actively managing them.

Jessie: They are.

Jess: And so, that is a type of active fund.

Jessie: Yes.

Jess: That can be a mutual fund or an ETF now.

Jessie: Right.

Jess: Okay, speaking of ETFs, let's talk about them.

Jessie: Yes.

Jess: We've already talked about it a little bit, but let's go into detail.

Jessie: ETFs are exchange traded funds.

Jess: It's a collection of securities that can be bought and sold on an exchange throughout the day.

Jessie: It's in the name.

Jess: Similar to how stocks are traded, which we've basically already covered.

Jessie: So, they can be actively or passively managed by fund managers, which we talked about.

Jess: Most ETFs are passive investments and they're usually, you know, like trying to mirror the performance of a particular index, like we talked about.

Jessie: And so, these are the ones you probably hear all the finfluencers, financial gurus, everyone talk about the most.

Jess: And I mean, I think it's for good reason.

Jessie: ETFs do attempt to mirror the major indices like the S&P 500.

Jess: So, you have your VOO, your SPY, which was the first ETF ever created.

Jessie: And you have things like IVV, right? So, those are all exchange traded funds that attempt to mirror the S&P 500.

Jess: You can also have exchange traded funds that mirror other indices like the NASDAQ 100, so QQQ.

Jessie: You don't just have to put your money in ETFs that mirror the S&P 500.

Jess: There's ETFs that mirror all kinds of indices and there are hundreds of indices.

Jessie: The point in saying that, again, is diversification.

Jess: Make sure you're not putting all of your eggs or Easter eggs in just one basket.

Jessie: You want to have multiple baskets with different types of eggs.

Jess: There are over 2,500 ETFs you can choose from.

Jessie: So many.

Jess: That's a lot.

Jessie: But that's why we talked about the three major indices.

Jess: It pays to do your homework and your research and make sure you know what you're investing in and not just throwing your money into things blindly.

Jessie: Like, you want to have some good, solid foundational knowledge, which is what we're doing on this podcast.

Jess: Yeah.

Jessie: So, have you ever seen an ETF screener before, Jacy? No.

Jess: Okay.

Jessie: So, ETFs are your portfolio that you can buy into, right? You got to get your prospectus.

Jess: You can understand what's in your portfolio.

Jessie: So, if you want to have a theme or you want to go beyond passive investing, beyond SPY, VOO, VTI, or even QQQ, you could search through that.

Jess: So, you could have socially responsible ETFs.

Jessie: You could say, I really believe in clean energy.

Jess: You can find a clean energy ETF.

Jessie: So, it's where you've got a concept, you can invest in it through an ETF and someone picks those stocks for you.

Jess: And then you could look at a rating to help you understand if it's a good investment.

Jessie: Oh.

Jess: There's so many.

Jessie: There's 2,500.

Jess: Yeah.

Jessie: Even the Bitcoin ETFs, digital assets.

Jess: There's so many.

Jessie: I forgot about those.

Jess: I bought them when they first came in.

Jessie: Yeah, I remember that.

Jess: You told me that and I was like, I'm gonna look into that.

Jessie: I never did.

Jess: I just did it for, because it was there.

Jessie: Yeah.

Jess: I wanted to see it for educational purposes.

Jessie: Do you have questions on that though, Jacy? I feel like that opens up a whole world when you go through a screener for the first time.

Jess: Yeah.

Jessie: I mean, I've never even heard.

Jess: I can't think of any questions, but that's awesome.

Jessie: Yeah, they're like, what was our analogy for a screener, Jacy? Oh, it's like going on Revolve.

Jess: Revolve is one of my favorite.

Jessie: Have you been on Revolve before? Yeah.

Jess: Yeah.

Jessie: If you're shopping period, right? So you would say, okay, I want to dress.

Jess: Like it helps you narrow things down.

Jessie: So you would say, dress, blue.

Jess: I want a sweetheart top.

Jessie: And then you get, it starts narrowing.

Jess: Yeah.

Jessie: That's what a screener is.

Jess: It just helps you filter.

Jessie: Interesting.

Jess: And then the ratings, like once you filter, then the ratings are like the reviews.

Jessie: And you're like, okay.

Jess: Exactly.

Jessie: People, this is given an A plus grade.

Jess: That's right.

Jessie: And they will give a grade based on performance, risk, and expenses.

Jess: And that's the easy way.

Jessie: And it's usually like a five-star thing.

Jess: So it's literally like a review.

Jessie: It's so easy to read.

Jess: Nice.

Jessie: Literally just go to your brokerage firm and all of them have a screener.

Jess: If they don't, find a different brokerage firm or open another account.

Jessie: Yeah.

Jess: So you can have multiple.

Jessie: Then you can't.

Jess: Well, okay.

Jessie: Next.

Jess: Okay, and then let's talk about fixed income funds.

Jessie: So these funds buy investments that pay a fixed rate of return in the name, like government bonds, investment grade corporate bonds, and they give your portfolio the chance to earn income.

Jess: So episode 40, we talked about bond funds in depth.

Jessie: You can go to your brokerage firm.

Jess: Are bond funds passive or active? Could be either.

Jessie: So you could look for something that is mirroring an indice of some sort, or you could look for one that's actively managed.

Jess: You could do either one.

Jessie: You can buy treasuries or bonds themselves, or you can buy a fund of bonds.

Jess: You sure can.

Jessie: And that's the difference.

Jess: Just like we were saying, there's money market accounts, there's money market funds.

Jessie: There's bonds you can buy, or there's bond funds you can buy that comprise of multiple fixed income securities.

Jess: That's right.

Jessie: Does that make sense? Yes.

Jess: And that's another way to diversify your portfolio.

Jessie: You don't just have to have a index fund that's mirroring the stocks that are in an index.

Jess: You can also have a bond fund that's comprised of multiple different types of bonds that are getting interest, right? And we've talked about, with the Fed and the interest rate cuts, how, I don't want to get too in-depth, the yield curve, whatever.

Jessie: We have episodes on all that too.

Jess: But sometimes bonds and treasuries and fixed income securities have a high interest rate, and then sometimes they're lower.

Jessie: So they're less risk usually, and that's just why it's safer to have it in your portfolio.

Jess: A target date fund, you're gonna have more of those bonds in it when you get closer to retirement because they're just low risk.

Jessie: That should bring everything together.

Jess: A target date fund literally is your set it and forget it because someone is determining an asset allocation of what type of stocks should go in there, what type of bonds.

Jessie: If you want to take more of a hands-on approach, even with funds, you could say, okay, I'm gonna have ETF funds that have bonds in them, and maybe I want to increase my exposure because I'm taking..