We here at abroaden are self-proclaimed finance nerds.
We’re also people living abroad.
So when we look to help our fellow expats and remote workers build solid and portable investment portfolios that cross borders almost as well as you do, ETFs are our first stop.
Chances are that you’ve heard of ETFs.
They’re one of the most popular investments around.
But just because you’ve heard of ETFs doesn’t mean you know what they are.
Or how they work.
Or even what they look like.
If that’s you, then don’t worry.
Read on; we got you covered.
What’s an ETF?
Before going any further, let’s break down the acronym “ETF.”
ETF stands for:
We’ll go in reverse.
A fund is what we finance people call a “collective investment.”
Collective investments are where a group of individual investors pools all of their money together.
That way, they can make much bigger and diversified investments than they could alone.
The second part is crucial for successful investing since diversification is the number one way to reduce risk.
Funds come in all shapes and sizes.
You’ve probably heard of an index, mutual, or pension fund at some point in your life.
Funds will track what we call an index.
An index lists different individual investments like stocks, bonds (loans to companies), real estate, and more.
Each investment acts as a component in the index.
Fund managers try to at least match the performance of an index, giving their investors an identical return.
They do so through buying and selling all or parts of the index components.
Like their cousins, ETFs do the same.
What makes them different from other types is that they trade on a stock exchange.
What’s the benefit of a fund trading on an exchange?
If you want to invest in mutual or index funds, the process is complicated.
You’ll generally need to talk to your bank, broker, or old-fashioned adviser and tell them what fund you want.
They’ll then go out to a fund company that goes through a multistep process, taking a couple of days for your investment to go through.
You can’t see the real-time value of your investment since the fund manager only calculates this price at the end of the day.
When you want to sell your shares, you do the same process but in reverse.
In other words, investing in mutual funds is time-consuming and expensive.
ETFs radically simplify this process (at least as far as investors are concerned).
By trading on a stock exchange, the ETF acts like a stock.
That means anyone can buy and sell the fund directly through a broker.
As it’s on an exchange, investors can both buy and sell the ETF and see its price in real-time – there’s no need to wait until the end of the day.
With ETFs, the fees are not only transparent, but they’re also effortless:
- The price you pay to your brokerage for buying and selling.
- The “expense ratio” that the fund manager charges for its services.
We’re huge fans of transparency, and you can get more transparent than an ETF.
Of course, there are some great mutual funds out there.
Like ETFs, many of them are affordable, and it’s easy to see what’s inside.
For most people, mutual funds are a perfectly acceptable investment.
Expats, digital nomads, and remote workers aren’t most people.
Why people living abroad should make ETFs their first choice for investing.
ETFs have little known secret weapon that people living abroad will totally relate to:
They have passports.
That’s right. Passports.
ETFs need to trade on an exchange for them to…be ETFs.
The beauty of stocks is their near-universal setup.
Stock trading is not only transparent, but the standards behind creating stocks are near-universal.
ETFs follow these standards.
In turn, the companies that issue exchange-traded funds can offer them to retail investors (aka you) in many countries at once.
For people living abroad, this “passport” is enormous.
It means that if you move to a different country, there’s a decent chance your ETF is coming with you.
You might be thinking, “well, that doesn’t sound like such a big deal.”
Let’s do a little compare and contrast to see why we at abroaden are in love with ETFs.
Remember our friendly mutual fund from above?
Mutual funds aren’t stocks.
Instead, they’re companies.
Companies need to register in one country.
Mutual fund investors buy shares not in the index but into that company.
For expats, this setup creates a few issues:
- If the fund doesn’t have a company where you move to, you might own a foreign investment (which comes with costly tax reporting).
- If the fund doesn’t register with the local market authority, then there’s a good chance you can’t buy more or even touch your investment.
- The mutual fund optimizes itself for local laws. Those rules and customs don’t translate across borders.
In other words, mutual funds might appear compelling on the surface. But if you’re a person living abroad, they’ll create more headaches for you than they’re worth.
ETFs, but their very nature, solve all of these problems at once.
Do you see now why we’re a bit obsessed with them? 🙂
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Why getting the right combination of ETFs matters for people living abroad.
You’ve made it this far, and we can hear your excitement about investing in ETFs.
(You should be excited – investing in your future is a guaranteed way to do what you want later in life).
But before you get carried away, fire up 20 new tabs, dive into the internets and buy a bunch of ETFs, there’s something you should know:
Just because ETFs are easy and have diversification built into the box doesn’t mean that you can just pick whichever ones you want, and you’re done.
Unfortunately, it doesn’t quite work that way.
Instead, if you’re living abroad, you need to consider some parameters before diving in.
First, you need to know your risk tolerance.
From there, you can select funds that will grow your wealth without keeping you up all night stressing.
Second, you’ll want to make sure you’re getting proper diversification.
All too often, we see folks who have great intentions but accidentally get double or even tripled-exposed to currencies, companies, or even entire markets.
When the markets go down (and they do), these people see more losses than they otherwise would’ve.
Even worse, when markets go up (and they do), they don’t make as much as they could’ve if they got the right mix of ETFs.
Third, once you invest, you’ll need to periodically manage your portfolio.
All investors need to keep their goals in check through what we call ‘rebalancing.’
When you’re living abroad, you’ll need to do that on top of dealing with your investments scattered across different countries.
It’s definitely not easy, at least not in our experience.
If you’re living abroad and want to get into ETF investing but don’t want to worry about it, we’re here to help.
Abroaden is the first all-in-one platform to help people living abroad like yourself make awesome investment portfolios and do all the heavy lifting.
Investing is one of the best things expats, digital nomads, and remote workers can do to make their future brighter.
ETFs are a fantastic start.
(High-five to you for getting started).