Exchange traded funds
The ideal investment product for low-cost, passive investing.
Where can we find investment products that are passive, represent entire asset class markets, and are low cost? It may seem a lot to ask, but fortunately such products exist and are called Exchange Traded Funds or ETFs.
ETFs are products sold by financial investment firms such as Vanguard and Blackrock that are bought and sold on stock markets around the world. Just as easily as you can buy a share of Apple Inc. stock (AAPL), you can buy a share of the Vanguard Total Stock Market ETF (VTI) or a share of the iShares 20+ Year US Government Bonds ETF (TLT).
Not only are such ETFs convenient to buy, they are also cheap. For example, at the time of this writing, the iShares TLT ETF charges an annual fee of only 0.15%, while the Vanguard VTI ETF charges only 0.03% per year.
Given what we know about the tyranny of costs and the futility of trying to beat markets, why would anyone pay a manager 2% per year to pick stocks when you can buy the entire American stock market as an ETF for fifty times less?
Key takeaway
ETFs are the convenient and economical building blocks of successful long-term investing.