What is an ETF?

Money rules everything around you, and yet we largely neglect money-related discussions. We don't talk about how to save it, how to spend it, or even how to make it.

At EarlyBird, we aim to make life easier for parents. We want to help you save for your child's financial future, without any of the guesswork of buying individual stocks or assets.

That's why EarlyBird builds its portfolios from tried-and-true, time-tested bundles of stocks called exchange-traded funds, or ETFs for short. You've probably heard of ETFs in passing. They’re the backbone of most retirement accounts and a mainstay in American investing culture.

However, you might be wondering how ETFs power investment platforms like EarlyBird (and why they're a preferable way to invest for your child.)

Let's dive in to what ETFs are and why they're a great way to put your money to work:

What is an ETF?

An ETF is like a stock for stocks. You can purchase an ETF on the stock exchange, and when you do so, you're effectively buying a diversified basket of stocks. The value of the ETF rises as the basket increases in value, and it falls when the stocks in the basket fall. This can help you eliminate most of the guesswork and difficulty that comes with investing.

However, not all ETFs are created equally:

• Some ETFs aim to track market benchmarks and indexes like the S&P 500 or Nasdaq-100, which have criteria for the stocks they buy.
• Other ETFs aim to “beat the market” by using active management or other novel techniques. (This does not always work out for the investors, nor the fund managers.)

It's crucial to research ETFs before buying. Investing in diversified ETFs has advantages, so pick ones with low fees, clear selection criteria, and high popularity.

{{cta-1}}

How do ETFs work?

Each ETF has its own set of rules for choosing stocks and allocating its funds. These rules may be based on indexes, which are collections of stocks or bonds chosen by algorithms or selection committees. You can think of indexes as an investing strategy upon which most ETFs are built.

If you have any familiarity with mutual funds or stocks, you can think of an ETF as falling squarely between the two.

‍

Source: Freetrade

The popular ETFs track renowned, generation-spanning indexes like the S&P 500—one of America's most valuable indexes. Each share of an S&P 500 ETF represents fractional ownership of all 500 companies, weighted by market value.

Some indexes mimic the S&P 500's value-based approach, which gives weight to large, dependable companies like Apple, Meta and Facebook. Others prefer more emphasis on selection committees and human judgment, rather than a rules-based investment strategy or criteria. For instance, the Dow Jones Industrial Average is a price-weighted index with 30 stocks chosen by finance experts.

Ultimately, ETFs can be created to track any number of indexes, and the wide range of options available to investors make it effortless to diversify your portfolio without having to buy hundreds of individual stocks.

So what kinds of ETFs should you be buying?

What ETFs should I buy?

Hopefully by now, you can see that ETFs can offer benefits over stock picking or other forms of speculation. However, selecting the right ETF for your investment goals is not as simple as just picking the one with the highest returns.

Investors must consider their risk tolerance, investment timeline, and account type:

• A more aggressive investor might build a portfolio of "higher-risk, higher-reward" ETFs that focus on growth stocks and emerging markets.
• Conversely, a conservative investor may opt for "lower-risk, lower-reward" ETFs featuring blue chip stocks and bonds.
• The period of time that you plan to invest is also a factor to how aggressive your portfolio should be. Investors going long term (10+ years) can afford to be more aggressive, while shorter-term investors tend to play it safe with more conservative investments.

Weighing these considerations is not simple, especially for parents with a full-time job and many responsibilities. This is one reason why parents tend to turn to a financial advisor for help crafting a financial plan, which might include guidance on preparing for retirement, saving for college, leaving a legacy, and more.

Not all people can access financial advice, though. Many financial advisors require high minimums for their services. And even high net worth clients are starting to turn away from advisors because of high fees and rates. This is at least one reason why robo advisors and fintech advisors like EarlyBird are becoming more popular.

How does EarlyBird use ETFs to help you build a portfolio?

When parents sign up for EarlyBird, they'll complete an onboarding process that asks about their risk tolerance and investment timeline. Afterward, EarlyBird will build a portfolio for the child. 

This portfolio is made up of high-quality, handpicked ETFs based on your preferences. We’ve partnered with BlackRock to offer iShares ETFs, which are some of the most popular and low-cost funds available to investors. 

Using iShares funds like the iShares Core S&P 500 ETF and iShares Core MSCI Total International Stock ETF, we can help allocate your deposits and gift contributions made by friends and family into thousands of high-quality companies or bonds. 

Then, as money is deposited to your child's account, we dole out these deposits according to that plan. Over time, the value of these high-quality ETFs should rise—a reflection of the success of the market.

You’ll also receive dividends which arise from owning the ETF over the lifespan of your investment, which ultimately boils down to more money (which we reinvest automatically) for your child.

{{cta-1}}

Why are ETFs preferable to individual stocks?

You've probably heard the saying: "Don't put all your marbles in one basket." That saying can be applied to investing.

Instead of betting on black, ETFs offer Americans an easy way to gain exposure to the stock market without putting all their eggs in one basket.

And while you could try your hand at beating the market—you probably shouldn't. Just ask the Robinhood crowd. While everybody made easy money before the Dotcom Collapse and during the COVID-19 pandemic, many traders ultimately ended up underwater, and blindsided by the downturn in the market.

In summary, investors should invest in high-quality ETFs instead of speculating and seeking short-term gains. Consider the years of growth and income that your child's portfolio will benefit from with these time-tested strategies.

{{cta-1}}