What You Need to Know About Exchange-Traded Funds and How They Work

I never thought I’d be standing in front of a group of eager young professionals, teaching them about investing. My name is Funmi, and five years ago, I knew next to nothing about exchange-traded funds (ETFs). But today, I’m leading a financial literacy class in Lagos, explaining to others how these simple investment tools have changed the way I build wealth.

Let me start by telling you my story. I wasn’t always a savvy investor. In fact, for a long time, the idea of investing scared me. I had heard stories of people losing fortunes in the stock market and, like many Nigerians, I was cautious. I didn’t have much to spare, and I didn’t know where to start. That’s when I stumbled upon ETFs—an investment tool that would open up a whole new world for me.

Discovering ETFs: A Beginner's Path

The first time I heard about ETFs was during a random YouTube binge. The financial expert on the screen explained that ETFs are like baskets of different assets—stocks, bonds, or commodities—that you can buy and sell just like individual stocks. What fascinated me was the fact that by buying just one ETF, I could own a piece of multiple companies at once. It was like buying a diversified portfolio in one go. For a beginner like me, it was a game-changer.

With this new knowledge, I started doing my research. I came across various types of ETFs—equity ETFs, bond ETFs, commodity ETFs, and more. I learned that ETFs are traded on stock exchanges just like individual stocks, and their price fluctuates throughout the day. I liked the idea of diversification, but I was still unsure how to apply this to my situation as a Nigerian.

My First Investment: A Step-by-Step Process

After days of research, I decided to take the plunge. My first stop was setting up a brokerage account. In Nigeria, this might seem tricky at first, but with platforms like Chaka and Risevest, it became easier to gain access to international markets. These platforms allow Nigerians to invest in foreign assets, including ETFs, with relative ease.

Once I had my account, I selected an ETF that focused on tech stocks. It was called Invesco QQQ—an ETF that tracks the performance of major tech companies like Apple, Microsoft, and Google. Since tech stocks were booming, I thought it was a safe bet. I also knew that the risk was lower compared to buying individual tech stocks because if one company in the ETF underperformed, the others could balance it out.

I started small, investing just N50,000. It felt good knowing that I was participating in the global financial market from my home in Lagos. The process was surprisingly simple:

1. I deposited money into my account.
2. I searched for the ETF I wanted (Invesco QQQ).
3. I clicked "buy" and, just like that, I became an ETF investor.

What You Need to Know About ETFs

As I explained to my students, ETFs are not all created equal. You need to consider several factors when choosing the right one for you:

1. Type of ETF: Is it an equity ETF (focused on stocks), a bond ETF, or a commodity ETF? Your choice depends on your risk tolerance and investment goals.
2. Expense Ratio: ETFs charge a small fee for managing your investment, called the expense ratio. Lower is better because it means more of your money goes into the investment itself.
3. Liquidity: How easily can you buy or sell the ETF? High liquidity means you can easily trade it whenever you need to.
4. Performance: Look at the ETF's track record. How has it performed over the years, and does it align with your expectations?

In my case, Invesco QQQ was an equity ETF, focused on tech stocks. It had a low expense ratio and a strong performance record, making it a great option for me as a beginner.

Navigating the Nigerian Market

At this point, one of my students raised a hand. “But Funmi,” he asked, “How does this apply to us in Nigeria? Can we invest in Nigerian ETFs?”

Great question, and one I wish I had asked earlier. Yes, there are Nigerian ETFs available. The NewGold ETF, for example, tracks the price of gold and is listed on the Nigerian Stock Exchange. It’s an excellent option for those who want to hedge against inflation or diversify away from the stock market. Other ETFs available on the Nigerian Exchange include the STANBIC IBTC ETF 30, which tracks the top 30 companies on the NSE, giving local investors a diversified portfolio of Nigerian stocks.

But as I discovered, you don’t have to limit yourself to the Nigerian market. With digital platforms like Chaka and Risevest, Nigerian investors can invest in ETFs listed on international markets, providing greater diversification and potentially higher returns.

The Pros and Cons of ETFs

ETFs have a lot of benefits. First, they provide instant diversification. Instead of betting on one stock, you’re betting on several, which spreads your risk. They are also cost-effective. Most ETFs have low fees compared to mutual funds, making them a more affordable option for small investors.

On the downside, ETFs are still subject to market risk. While they spread out the risk, if the entire market or sector they track goes down, your investment will follow. Another potential con, especially for Nigerian investors, is currency risk. When you invest in international ETFs, the value of your returns is tied to the Naira’s exchange rate against foreign currencies.

My Journey: From Learner to Teacher

Looking back, ETFs have been one of the most crucial tools in my journey to financial independence. They provided a low-cost, low-risk way to enter the world of investing and taught me valuable lessons about diversification and long-term growth. Today, as I stand here teaching others about ETFs, I can’t help but feel grateful for that random YouTube video that introduced me to this world.

If you're new to investing, ETFs are an excellent way to start. Do your research, start small, and diversify your portfolio. With the right knowledge and tools, you can take control of your financial future, just like I did.