January 28, 2024 • 16 mins
Dive deep into the complex world of Exchange Traded Funds (ETFs) with Ken from Capital Advantage Tutoring. Explore the foundational premises and workings of ETFs, a type of pooled investment vehicle, as regulated by the Investment Company Act of 1940. Understand the correlation between the value of an ETF and the securities it owns, and simplify the processes involved in buying and selling ETF shares.
Get clarity on how ETFs differ from mutual funds in terms of management, taxable income, and their amazing flexibility to track indices, commodities and various securities. Understand why ETFs are known as passive investments and how their quarter-end rebalancing activities contribute to this categorisation.
Ken dissects the impacts of expense ratios and tracking errors on ETF performance compared to the tracked index. Learn about the multiple types of ETFs, their characteristics, and risks involved when investing in leveraged and inverse ETFs and Exchange Traded Notes (ETNs).
This episode also starkly highlights the difference between ETFs and ETNs, shedding light on the debt-nature of ETNs and why they may be less appealing to investors due to default risk. Walk through real-life scenarios to better understand market fluctuations and their effects on the value of your investment. If you're seeking to understand ETFs and ETNs in the current investment landscape, this podcast is for you.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
Hey, this is Ken at Capital Advantage Tutoring, and it's my job to get you through the- What?
No, no, no. Sorry about that. Sorry about that. I didn't mean to do that.
I'm sorry about that. Why did you interrupt?
I'm just looking for some help with ETFs. That's all I want.
Not letting you do a video on ETFs. Okay. So fine.
You want to know what an ETF is? I can work on that. So let's get into it. Okay. So what is an ETF?
An ETF is a pooled investment, okay?
(00:22):
An ETF is a pooled investment that you buy into.
So it's a pooled investment, I'm going to say that a million times,
that is registered registered with the SEC.
It is registered under the Investment Company Act of 40. And what they do is
think of this as a pooled investment.
I have this right here. This is my capital abundance tutoring cup.
You can't see it because I have the background.
If this cup by itself is worth nothing, I think it's worth a lot, but that's me.
(00:44):
But this cup by itself isn't really worth a whole lot, right?
So it's really just worth a couple of 20 bucks.
What if I filled it with a bunch of securities, right? So I filled this thing with securities, okay?
So what happens is i fill this up with securities i'm going
to say it a million times and then the value of this cup goes
up and down because of the assets inside of
(01:04):
it right so again empty worth nothing okay can't
see it look at a weird thing okay it's empty it's worth nothing but once i fill
with securities the actual value of the shell of this cup is based on what's
inside of it okay now the thing now if you've seen my other videos and i'll
link it here you've seen my mutual fund videos where people buy and sell from
(01:25):
the company. But here's what happens.
They fill this up and then they issue shares for it. Now, these shares trade on an exchange.
So if you want to buy them, if you want to buy shares on the exchange, okay?
If you want to buy shares of this ETF, if you're going to buy the shares,
you're going to buy them on the exchange at the last price. So if you buy it, you buy it at the ask.
And if you sell them, you sell them at the bid. Remember, mutual funds,
(01:47):
you sell it back to the company, right?
So mutual funds, you buy them at NAV plus a
sales charge and you redeem them back to the company at nav
that's not the case with an etf they're not going to
buy it back from you so once you buy it you're going to buy it
from another investor you're going to pay a commission or a sales not
a sales charge or mark up or mark down
if it's done principally and you're going to buy the shares now the good thing
(02:10):
is they're very liquid so mutual funds right so mutual funds you buy it at 10
in the morning or two in the afternoon you don't find out the price till oh
like f to the bell an etf you can buy it at 10 in the morning and then sell
it out a minute later or two hours later and get a different price because it's based on the market.
Now, again, an ETF is tracking an index. It can track commodities, an index, a style.
(02:30):
It can be very specific, like 20 securities, or it could be a whole,
you know, the S&P 500 or the Russell 2000.
Now, that's really cool. But here's the thing about it. So the mutual fund, what?
Yo, I'm getting to that, okay? I'm getting to that. Now.
In a mutual fund, it's actively managed, where there's an active manager,
a portfolio manager, trying to beat the market, add alpha and all that stuff
(02:52):
that you're paying for that. A lot of expenses.
Also, mutual funds have to kick out 90% of the income, which is taxable,
because everything about a mutual fund is taxable.
ETFs don't really have either of that. It's passively managed,
okay? So an ETF is passively managed. What does that mean?
An ETF passively managed means they're not trying to beat the market.
And what they do is, here's your securities. They have a very transparent, let me show you.
(03:15):
But look, the first thing I'm going to show you is, look, you can be very specific, right?
Alternatives, bonds, commodities, there's six more asset classes,
currency, equity, all this stuff, right?
Also, you can do sector, consumer discretionary, consumer staples,
energy, financials, industrials, materials, all this stuff. And here's some
of the top issuers, okay?
They go by industry, aerospace, aggregate. Look, 77.
(03:38):
Look at all these industries. you can find ETFs on each of these indices.
So if you just like the one with broker-dealers, well, there's one.
But if you want like broad technology, there's a hundred different ones, okay?
Banks, community banks, food, gaming, global warming. You can literally buy
an ETF on almost anything.
Look, I'm almost running a region. Look at this, all the regions,
(03:58):
Africa, broad Asia, developed, developed Europe, emerging Asia, emerging Europe.
Those are the ones that are just the economies that are getting bigger.
So all this stuff, okay? You can do a country, You can do bond ones,
long-term bonds versus short-term bonds, different types of commodities,
natural resources. If you think, look at this.
So if you like, I have precious metals. If you think the metals are going up,
(04:21):
a lot of inflation, maybe that's the way to go. Okay.
I bought an ETN on like, it's same thing, all of these different ones,
real estate by the region, alternatives, all these different things.
Very cool that you can literally, and you can buy it on any industry.
Now, the reason you do this, instead of you trying to buy shares of like one
share of each thing, this, you just buy the ETF that matches it and you're instantly
(04:45):
diversified within that sector or whatever you want.
You can also do broad to whole S&P, stuff like that. Look, aggressive,
conservative, dynamic, very volatile, big, large cap, mega cap, all this stuff.
It's crazy all the stuff you can do. But the thing about a mutual funds,
you really only see once a quarter what they do and you don't see all their holdings.
(05:05):
Here with an ETF, it's very transparent because what it's showing you,
you're going to see all the target percentages. Let me show you this.
Okay, so I just went kind of nuts. And with the global ex-uranium ETF,
it's nuclear power, okay? So look, it says where we are.
It shows you the holdings, and these are the allocations. These are the target.
These are all the companies that it owns. All these, if you all,
(05:28):
you can see all of them. This is, hopefully you can see this.
This is the holdings, okay? Down to the percent, look, all the way down to .07, the dollar, okay?
So they hold all these securities in their percentages. percentages.
Cameco, I guess, is their biggest
and Sprott. And now that's their target percentage. That's what they hold.
Now, they're not going to actively manage it. But what happens is at the end
(05:51):
of the quarter, say Cameco was, I guess, Chemical.
I don't know what the fuck. Let's call it NextGen. Say NextGen because I can say that.
NextGen Energy is 6.76%. That's the target.
But let's say it had a really good quarter and now it's gone up a lot and now
it's like 7% or 8%. What they will do is and all the securities in here will
move a little bit because they move, they don't move together.
(06:11):
So what's going to happen is they're going to rebalance everything to bring
it back to this percentage.
And that's where we are with that. So that's why it's considered passively managed, not actively.
The fees are lower because they only really trade once a quarter when they're
doing this on a massive basis.
They're always tweaking little things, adding more people.
But it's very passive. They're not trying to beat the market,
(06:32):
unlike the mutual funds where they are trying to beat the market.
That's the thing. the mutual funds they have more fees so etfs
in general have lower fees because they're not
actively managed they're passively managing it okay that's
big moving on from that the actual
there's a thing called an expense ratio so that you're going to measure the
(06:52):
some etfs have higher expense ratios some have low so that's
what what it costs to run it adding on to
that there's a thing called tracking error because remember
the etf is tracking an index but remember the etf
actually owns the securities where the index just
lists them so there's no cost there's no margin there's no
commissions no holdings no interest no nothing where
(07:13):
the etf actually has to hold the securities they're paying commissions and they're
paying percentages and interest and margin all that stuff they're paying that
so that's gonna so even if that index goes up like 18.2 percent maybe the etf
only goes up by 18 because it's going to miss a little because it has costs
that the index doesn't have.
So that's some of the good things about the ETF, that it's cheaper.
(07:37):
You can actually go pretty specific, like nuclear energy, where a mutual fund,
it's much more broad, more diversified. Now, if you want to buy a broad ETF, that's fine.
Now, again, I'm doing high level. We're not going into the nitty gritty.
I just want to give you an overarching view so that when somebody asks what
an ETF is, you can have a conversation.
Now, the other part of this is that- What about leveraged or inverse? Yeah.
(07:57):
Again, I'm getting to that leverage, right? Leverage that you're talking about.
Yeah. Shut up. Okay. So now.
There's a, so ETFs are great that they match up with the index,
but you can also increase your return while increasing your risk by doing what
they call leverage ETFs. You have 2X and 3X.
So like if, say we follow the S&P 500 and we're a regular 1X ETF, right?
What happens is if the index was up 10, we should go up about 10.
(08:21):
If it was down four, we should go down about four.
But they have leverage where they use margin and derivatives to increase the return.
Turn so if the market say we do a 2x etf
the end what's going to happen is if the market
goes up 10 we're going to we're going to track we're going
to try to go up 20 because we're using leverage and margin and all that and
then if the but here's the problem if the market goes down 10 we're going to
(08:43):
go down 20 so leverage just means we're moving more so there's 2x and 3x so
2x if the market goes up 10 we'll go up 20 and 3x market goes up 10 we'll go
up 30 which means means we'll triple it.
Keep in mind, leverage are much more for day trading and short-term.
Regular ETFs are fucking awesome. We'll get into that. Regular ETFs are good
(09:06):
for long-term, very tax efficient.
But on this, leverage ETFs, they move more than the market, whatever direction you're doing.
Then we also have inverse, which means they move opposite.
So if you buy an inverse ETF, it goes opposite of the market.
These are things that close-end funds and open end funds on offer
you so there's a lot more things so if you really think the market's
shitting the bed you can buy an inverse spy right and
(09:28):
then as the market goes down you'll go up it goes opposite you
can also do leveraged inverse you can do inverse 2x
inverse 3x or inverse 1x okay so but
again they're really risky because what happens
is they reset every day let me show you the way
we're going to do this is here's the first day they're going
to call this day one okay after day one really i
(09:50):
guess you all bought it on 50 so we'll say day two it's up
10 and then day three it's down 15 okay so that and we're going to show you
how the 1x reacts the 3x and then the inverse so let's start with the 1x market
goes up market's at 50 it's good here's the first day we're at 50 bucks that's
clear we're good with that then the market goes goes up 10%.
(10:11):
We're going to go up 10%. 10% of 50 is 5. So we're now at $55.
Now, the next day, it goes down 15%. But here's the thing. You're going down
15% of that new number, that 55.
Not your original 50, the 55. So we have to do the math on this.
So if the market goes down 15, we're going to go down 15 from 55.
(10:31):
So we're going to go 55 times 0.15. That's 8.25 and subtract it from 55.
We're now going to be at 46.75, okay?
Because it goes down from that higher number. It resets. Now let's try the 3X.
So again, the market goes up 10%. We're going to go 30. So 50 times 30%. Okay.
(10:54):
Is 15. So we're going to go up to 65. That's great.
That's big, right? That means on a good day, we're making more money.
But now the market drops 15. Okay.
So that's going to be times three. So that's 45%. So what's 45% of the higher number?
65 times 0.45 is 29 and a quarter minus 65.
(11:16):
That means we're down at 35.75. We lost a lot of money.
I mean, if you think about it, look at the thing if it
goes up 10 and down 15 you should be close but here you go
up 10 and down 15 you're down a lot it's big
and that's why they're better for day training now the inverse market goes up
10 we're going to go down 10 so we're now at 45 right and now the good thing
(11:40):
is now now we're going to we have 45 now because the market went up 10 we go
down 10 now on this one the market goes down 15.
So that's good for us. We're going to go up 15. 45 times 0.15 is 6.75 plus 45.
So we're now going to be at 51.75. 51.75.
(12:02):
Because that means the market went down 15%. So we're going to go up 15% of
that new number, that 45.
So we go up a little bit. So in reality, the market kind of went our way 5%,
but we didn't make as much because the first day. So that's what resetting is.
And this is why, because they reset, these are not great for long-term investing.
(12:23):
The single X regulative ETF is awesome for long-term investing, low fees.
It doesn't pay a lot of dividends. So you don't really pay any taxes on it to
actually sell it into a long-term investing thing.
It's a long-term, it's tax efficient because you're not paying anything to the end.
And if you hold it long enough, what's going to happen is you're going going
(12:43):
to be paying a long-term capital gain versus a bunch of gains every year, an ordinary income.
And remember, long-term capital gain is capped at like 15% or 20%.
So ETFs are great for long-term investing, and they're tax-efficient,
not tax-free, tax-efficient.
So on the Series 7 of the SAE, if you see the word tax-efficient...
(13:03):
Then you are going to be thinking about ETFs all the time. Okay, good stuff.
Okay, so that's going to be- The ones with debt, I think ETNs or something.
ETNs, you want me to talk about ETNs and compare them?
Okay, I can do that. That's fine. It's what to be doing.
Okay, so now, ETNs, as far as you or I are concerned, an ETN is very,
very similar to an ETF as far as us, we go.
(13:26):
You can buy it on specific industries or stocks or whatever it is, but it's debt.
That's the difference. So you buy an ETN on a day-to-day basis.
I couldn't tell the difference. I own ETNs and ETFs literally look the same, but it's debt.
So in reality, when you buy an ETF, they're actually buying the securities,
packaging it, and you're moving it based on the index.
The ETN just tracks it. So it's actually debt.
(13:49):
So you're going to lend me money. So you lend me $1,000 and I'm going to give
you back your $1,000 in 20 or 30 years.
Sucks, but here's what's going to happen is you're going to get,
you're going to get the interest at the end.
So you're going to get your $1,000 back and whatever the index or whatever we're
tracking over that time, you're going to get that.
(14:09):
So let's say over the next 20 years, the S&P index is up 2,000%, right?
You're going to do 1,000 times 2,000%. So you're going to get 20 grand, right?
You're going to give me 1,000 and in 20 years, you get 20 grand.
That's because remember, you're not getting anything during the life of it
and that's your your interest you don't know what your interest is until the
(14:30):
end but again it trades so people day trade it they buy
in and out of it they do all that stuff because it'll move with
the index so just like an etf it'll move with
the index because the value is there but again it's debt
so if i company the risk here is that
i won't have the 20 grand for you in 20 years okay that's the difference okay
that's the risk is that i won't have that money for you so you have default
(14:51):
risk because it's a debt unsecured debt i don't own the securities i literally
you lend me the money and I just track it and I'll pay you whatever that index
or security list of securities does in 20 years what it's done over that timeframe.
So again, it's unsecured debt. So not only do you have market risk,
you also have default risk, okay?
So really on this exam, ETNs are not really the thing you're going to.
(15:15):
To recommend to people, okay? ETFs are better, ETNs are not really,
because of that default risk, unless they're a sophisticated investor looking
to diversify, looking for, they'll say where it's like, they want debt, stuff like that, okay?
And again, here's a good thing, ETNs, yeah, TNs, okay, also have,
you can have inverse, 2X, 3X, 3X inverse, 2X, I mean, you can,
(15:38):
I'm saying very much like an ETF, except for it has default risk, okay?
Guys, I hope that helped a little bit explain ETFs and ETNs.
Hope my tube pain in the ass has helped you. I help ask questions you have.
If you have any questions, please check me out every Tuesday and Thursday night on YouTube.
Also, leave comments, like, subscribe, share this shit. If it made you laugh
a little bit, that's all good too. Okay.
Everyone, y'all have a good night and you too shut the hell up. I'll see you later.
Hey, this is Ken at Capital Advantage Tutoring, and it's my job to get you through the- What?
No, no, no. Sorry about that. Sorry about that. I didn't mean to do that.
I'm sorry about that. Why did you interrupt?
I'm just looking for some help with ETFs. That's all I want.
Not letting you do a video on ETFs. Okay. So fine.
You want to know what an ETF is? I can work on that. So let's get into it. Okay. So what is an ETF?
An ETF is a pooled investment, okay?
(00:22):
An ETF is a pooled investment that you buy into.
So it's a pooled investment, I'm going to say that a million times,
that is registered registered with the SEC.
It is registered under the Investment Company Act of 40. And what they do is
think of this as a pooled investment.
I have this right here. This is my capital abundance tutoring cup.
You can't see it because I have the background.
If this cup by itself is worth nothing, I think it's worth a lot, but that's me.
(00:44):
But this cup by itself isn't really worth a whole lot, right?
So it's really just worth a couple of 20 bucks.
What if I filled it with a bunch of securities, right? So I filled this thing with securities, okay?
So what happens is i fill this up with securities i'm going
to say it a million times and then the value of this cup goes
up and down because of the assets inside of
(01:04):
it right so again empty worth nothing okay can't
see it look at a weird thing okay it's empty it's worth nothing but once i fill
with securities the actual value of the shell of this cup is based on what's
inside of it okay now the thing now if you've seen my other videos and i'll
link it here you've seen my mutual fund videos where people buy and sell from
(01:25):
the company. But here's what happens.
They fill this up and then they issue shares for it. Now, these shares trade on an exchange.
So if you want to buy them, if you want to buy shares on the exchange, okay?
If you want to buy shares of this ETF, if you're going to buy the shares,
you're going to buy them on the exchange at the last price. So if you buy it, you buy it at the ask.
And if you sell them, you sell them at the bid. Remember, mutual funds,
(01:47):
you sell it back to the company, right?
So mutual funds, you buy them at NAV plus a
sales charge and you redeem them back to the company at nav
that's not the case with an etf they're not going to
buy it back from you so once you buy it you're going to buy it
from another investor you're going to pay a commission or a sales not
a sales charge or mark up or mark down
if it's done principally and you're going to buy the shares now the good thing
(02:10):
is they're very liquid so mutual funds right so mutual funds you buy it at 10
in the morning or two in the afternoon you don't find out the price till oh
like f to the bell an etf you can buy it at 10 in the morning and then sell
it out a minute later or two hours later and get a different price because it's based on the market.
Now, again, an ETF is tracking an index. It can track commodities, an index, a style.
(02:30):
It can be very specific, like 20 securities, or it could be a whole,
you know, the S&P 500 or the Russell 2000.
Now, that's really cool. But here's the thing about it. So the mutual fund, what?
Yo, I'm getting to that, okay? I'm getting to that. Now.
In a mutual fund, it's actively managed, where there's an active manager,
a portfolio manager, trying to beat the market, add alpha and all that stuff
(02:52):
that you're paying for that. A lot of expenses.
Also, mutual funds have to kick out 90% of the income, which is taxable,
because everything about a mutual fund is taxable.
ETFs don't really have either of that. It's passively managed,
okay? So an ETF is passively managed. What does that mean?
An ETF passively managed means they're not trying to beat the market.
And what they do is, here's your securities. They have a very transparent, let me show you.
(03:15):
But look, the first thing I'm going to show you is, look, you can be very specific, right?
Alternatives, bonds, commodities, there's six more asset classes,
currency, equity, all this stuff, right?
Also, you can do sector, consumer discretionary, consumer staples,
energy, financials, industrials, materials, all this stuff. And here's some
of the top issuers, okay?
They go by industry, aerospace, aggregate. Look, 77.
(03:38):
Look at all these industries. you can find ETFs on each of these indices.
So if you just like the one with broker-dealers, well, there's one.
But if you want like broad technology, there's a hundred different ones, okay?
Banks, community banks, food, gaming, global warming. You can literally buy
an ETF on almost anything.
Look, I'm almost running a region. Look at this, all the regions,
(03:58):
Africa, broad Asia, developed, developed Europe, emerging Asia, emerging Europe.
Those are the ones that are just the economies that are getting bigger.
So all this stuff, okay? You can do a country, You can do bond ones,
long-term bonds versus short-term bonds, different types of commodities,
natural resources. If you think, look at this.
So if you like, I have precious metals. If you think the metals are going up,
(04:21):
a lot of inflation, maybe that's the way to go. Okay.
I bought an ETN on like, it's same thing, all of these different ones,
real estate by the region, alternatives, all these different things.
Very cool that you can literally, and you can buy it on any industry.
Now, the reason you do this, instead of you trying to buy shares of like one
share of each thing, this, you just buy the ETF that matches it and you're instantly
(04:45):
diversified within that sector or whatever you want.
You can also do broad to whole S&P, stuff like that. Look, aggressive,
conservative, dynamic, very volatile, big, large cap, mega cap, all this stuff.
It's crazy all the stuff you can do. But the thing about a mutual funds,
you really only see once a quarter what they do and you don't see all their holdings.
(05:05):
Here with an ETF, it's very transparent because what it's showing you,
you're going to see all the target percentages. Let me show you this.
Okay, so I just went kind of nuts. And with the global ex-uranium ETF,
it's nuclear power, okay? So look, it says where we are.
It shows you the holdings, and these are the allocations. These are the target.
These are all the companies that it owns. All these, if you all,
(05:28):
you can see all of them. This is, hopefully you can see this.
This is the holdings, okay? Down to the percent, look, all the way down to .07, the dollar, okay?
So they hold all these securities in their percentages. percentages.
Cameco, I guess, is their biggest
and Sprott. And now that's their target percentage. That's what they hold.
Now, they're not going to actively manage it. But what happens is at the end
(05:51):
of the quarter, say Cameco was, I guess, Chemical.
I don't know what the fuck. Let's call it NextGen. Say NextGen because I can say that.
NextGen Energy is 6.76%. That's the target.
But let's say it had a really good quarter and now it's gone up a lot and now
it's like 7% or 8%. What they will do is and all the securities in here will
move a little bit because they move, they don't move together.
(06:11):
So what's going to happen is they're going to rebalance everything to bring
it back to this percentage.
And that's where we are with that. So that's why it's considered passively managed, not actively.
The fees are lower because they only really trade once a quarter when they're
doing this on a massive basis.
They're always tweaking little things, adding more people.
But it's very passive. They're not trying to beat the market,
(06:32):
unlike the mutual funds where they are trying to beat the market.
That's the thing. the mutual funds they have more fees so etfs
in general have lower fees because they're not
actively managed they're passively managing it okay that's
big moving on from that the actual
there's a thing called an expense ratio so that you're going to measure the
(06:52):
some etfs have higher expense ratios some have low so that's
what what it costs to run it adding on to
that there's a thing called tracking error because remember
the etf is tracking an index but remember the etf
actually owns the securities where the index just
lists them so there's no cost there's no margin there's no
commissions no holdings no interest no nothing where
(07:13):
the etf actually has to hold the securities they're paying commissions and they're
paying percentages and interest and margin all that stuff they're paying that
so that's gonna so even if that index goes up like 18.2 percent maybe the etf
only goes up by 18 because it's going to miss a little because it has costs
that the index doesn't have.
So that's some of the good things about the ETF, that it's cheaper.
(07:37):
You can actually go pretty specific, like nuclear energy, where a mutual fund,
it's much more broad, more diversified. Now, if you want to buy a broad ETF, that's fine.
Now, again, I'm doing high level. We're not going into the nitty gritty.
I just want to give you an overarching view so that when somebody asks what
an ETF is, you can have a conversation.
Now, the other part of this is that- What about leveraged or inverse? Yeah.
(07:57):
Again, I'm getting to that leverage, right? Leverage that you're talking about.
Yeah. Shut up. Okay. So now.
There's a, so ETFs are great that they match up with the index,
but you can also increase your return while increasing your risk by doing what
they call leverage ETFs. You have 2X and 3X.
So like if, say we follow the S&P 500 and we're a regular 1X ETF, right?
What happens is if the index was up 10, we should go up about 10.
(08:21):
If it was down four, we should go down about four.
But they have leverage where they use margin and derivatives to increase the return.
Turn so if the market say we do a 2x etf
the end what's going to happen is if the market
goes up 10 we're going to we're going to track we're going
to try to go up 20 because we're using leverage and margin and all that and
then if the but here's the problem if the market goes down 10 we're going to
(08:43):
go down 20 so leverage just means we're moving more so there's 2x and 3x so
2x if the market goes up 10 we'll go up 20 and 3x market goes up 10 we'll go
up 30 which means means we'll triple it.
Keep in mind, leverage are much more for day trading and short-term.
Regular ETFs are fucking awesome. We'll get into that. Regular ETFs are good
(09:06):
for long-term, very tax efficient.
But on this, leverage ETFs, they move more than the market, whatever direction you're doing.
Then we also have inverse, which means they move opposite.
So if you buy an inverse ETF, it goes opposite of the market.
These are things that close-end funds and open end funds on offer
you so there's a lot more things so if you really think the market's
shitting the bed you can buy an inverse spy right and
(09:28):
then as the market goes down you'll go up it goes opposite you
can also do leveraged inverse you can do inverse 2x
inverse 3x or inverse 1x okay so but
again they're really risky because what happens
is they reset every day let me show you the way
we're going to do this is here's the first day they're going
to call this day one okay after day one really i
(09:50):
guess you all bought it on 50 so we'll say day two it's up
10 and then day three it's down 15 okay so that and we're going to show you
how the 1x reacts the 3x and then the inverse so let's start with the 1x market
goes up market's at 50 it's good here's the first day we're at 50 bucks that's
clear we're good with that then the market goes goes up 10%.
(10:11):
We're going to go up 10%. 10% of 50 is 5. So we're now at $55.
Now, the next day, it goes down 15%. But here's the thing. You're going down
15% of that new number, that 55.
Not your original 50, the 55. So we have to do the math on this.
So if the market goes down 15, we're going to go down 15 from 55.
(10:31):
So we're going to go 55 times 0.15. That's 8.25 and subtract it from 55.
We're now going to be at 46.75, okay?
Because it goes down from that higher number. It resets. Now let's try the 3X.
So again, the market goes up 10%. We're going to go 30. So 50 times 30%. Okay.
(10:54):
Is 15. So we're going to go up to 65. That's great.
That's big, right? That means on a good day, we're making more money.
But now the market drops 15. Okay.
So that's going to be times three. So that's 45%. So what's 45% of the higher number?
65 times 0.45 is 29 and a quarter minus 65.
(11:16):
That means we're down at 35.75. We lost a lot of money.
I mean, if you think about it, look at the thing if it
goes up 10 and down 15 you should be close but here you go
up 10 and down 15 you're down a lot it's big
and that's why they're better for day training now the inverse market goes up
10 we're going to go down 10 so we're now at 45 right and now the good thing
(11:40):
is now now we're going to we have 45 now because the market went up 10 we go
down 10 now on this one the market goes down 15.
So that's good for us. We're going to go up 15. 45 times 0.15 is 6.75 plus 45.
So we're now going to be at 51.75. 51.75.
(12:02):
Because that means the market went down 15%. So we're going to go up 15% of
that new number, that 45.
So we go up a little bit. So in reality, the market kind of went our way 5%,
but we didn't make as much because the first day. So that's what resetting is.
And this is why, because they reset, these are not great for long-term investing.
(12:23):
The single X regulative ETF is awesome for long-term investing, low fees.
It doesn't pay a lot of dividends. So you don't really pay any taxes on it to
actually sell it into a long-term investing thing.
It's a long-term, it's tax efficient because you're not paying anything to the end.
And if you hold it long enough, what's going to happen is you're going going
(12:43):
to be paying a long-term capital gain versus a bunch of gains every year, an ordinary income.
And remember, long-term capital gain is capped at like 15% or 20%.
So ETFs are great for long-term investing, and they're tax-efficient,
not tax-free, tax-efficient.
So on the Series 7 of the SAE, if you see the word tax-efficient...
(13:03):
Then you are going to be thinking about ETFs all the time. Okay, good stuff.
Okay, so that's going to be- The ones with debt, I think ETNs or something.
ETNs, you want me to talk about ETNs and compare them?
Okay, I can do that. That's fine. It's what to be doing.
Okay, so now, ETNs, as far as you or I are concerned, an ETN is very,
very similar to an ETF as far as us, we go.
(13:26):
You can buy it on specific industries or stocks or whatever it is, but it's debt.
That's the difference. So you buy an ETN on a day-to-day basis.
I couldn't tell the difference. I own ETNs and ETFs literally look the same, but it's debt.
So in reality, when you buy an ETF, they're actually buying the securities,
packaging it, and you're moving it based on the index.
The ETN just tracks it. So it's actually debt.
(13:49):
So you're going to lend me money. So you lend me $1,000 and I'm going to give
you back your $1,000 in 20 or 30 years.
Sucks, but here's what's going to happen is you're going to get,
you're going to get the interest at the end.
So you're going to get your $1,000 back and whatever the index or whatever we're
tracking over that time, you're going to get that.
(14:09):
So let's say over the next 20 years, the S&P index is up 2,000%, right?
You're going to do 1,000 times 2,000%. So you're going to get 20 grand, right?
You're going to give me 1,000 and in 20 years, you get 20 grand.
That's because remember, you're not getting anything during the life of it
and that's your your interest you don't know what your interest is until the
(14:30):
end but again it trades so people day trade it they buy
in and out of it they do all that stuff because it'll move with
the index so just like an etf it'll move with
the index because the value is there but again it's debt
so if i company the risk here is that
i won't have the 20 grand for you in 20 years okay that's the difference okay
that's the risk is that i won't have that money for you so you have default
(14:51):
risk because it's a debt unsecured debt i don't own the securities i literally
you lend me the money and I just track it and I'll pay you whatever that index
or security list of securities does in 20 years what it's done over that timeframe.
So again, it's unsecured debt. So not only do you have market risk,
you also have default risk, okay?
So really on this exam, ETNs are not really the thing you're going to.
(15:15):
To recommend to people, okay? ETFs are better, ETNs are not really,
because of that default risk, unless they're a sophisticated investor looking
to diversify, looking for, they'll say where it's like, they want debt, stuff like that, okay?
And again, here's a good thing, ETNs, yeah, TNs, okay, also have,
you can have inverse, 2X, 3X, 3X inverse, 2X, I mean, you can,
(15:38):
I'm saying very much like an ETF, except for it has default risk, okay?
Guys, I hope that helped a little bit explain ETFs and ETNs.
Hope my tube pain in the ass has helped you. I help ask questions you have.
If you have any questions, please check me out every Tuesday and Thursday night on YouTube.
Also, leave comments, like, subscribe, share this shit. If it made you laugh
a little bit, that's all good too. Okay.
Everyone, y'all have a good night and you too shut the hell up. I'll see you later.
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