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Some of the most memorable moments—outside of planned events like marriage, kids, etc.— often stem from liquor-fueled get-togethers with friends and family. They can be spontaneous happy hours that escalate too fast or a planned birthday party with endless rounds of shots. Either way, it happens. Yet, getting there typically varies from person to person. Many appreciate the niceties of a carefully crafted cocktail where others enjoy cracking open a cold one. And for those who don’t want to remember, there is a long island iced tea—the classic drink combines five different liquors with a splash of soda just for color. It’s a means to an end for any twentysomething; cheap and efficient just like an exchange-traded-fund (ETF) for investors. Each part works together to produce a final product that serves various investment goals.

Let’s unpack the two and see where they might relate.

First a definition

Exchange-traded-funds (ETF), by definition, is a collection of many stocks or bonds in a single investable asset. Much like a mutual fund, ETFs offer the same built-in benefits like diversification and simplicity at a fraction of the cost. The most popular funds—by assets under management—include SPY, which tracks the well-known S&P 500 Index, and AGG, a broad basket of US investment grade bonds.

Breakdown of ETF Benefits

Tequila (Tax Efficiency): Tequila’s knack for bringing out the best, and sometimes worst, in people remains undefeated throughout history. It’s efficient in the same way an ETF delivers more efficient savings for investors. What happens is the funds create less taxable events than a comparable mutual fund with potential turnover rates north of 100%. In short, ETFs are passive investments with fewer transactions and individual capital gains compared to an actively managed fund.

 Vodka (Lower Costs): Costs are a major factor in any decision, from buying liquor to making an investment. We all remember buying a plastic bottle of vodka to save money in our early 20s (over 21 of course). Why shouldn’t the same apply to investing? For the most part, ETFs are cost-effective instruments that track an index, sector or different thematic factor. This means investors avoid expenses like 12B-1 or management fees charged by traditional mutual funds.

 Rum (Flexibility): Rum and Coke. Mojito. Pina Colada. You get the picture; some liquors mix well with anything. Having flexible investments can be equally rewarding. Investors can buy and sell ETFs through normal trading hours where traditional open-ended funds trade once per day.

Triple Sec (Diversification): Not enough can be said about diversification. It is the cornerstone of modern finance and most solid investment plans. A well-diversified portfolio consists of various investments in different sectors (tech, energy, etc.) or asset classes (stocks, bonds, etc.) that work together to reduce risk and maximize returns. For that reason, many people invest in ETFs over an individual stock. They provide instant diversification by tracking an index, specific sector or basket of assets. Of course, that means investors may have exposure to a mix of popular and lesser-known names. Likewise, triple sec may not make a cocktail but it’s certainly a necessary ingredient.

 Gin (Transparency): Gin, besides being clear, is the most transparent liquor. Each sip leads to one of two possible outcomes; joy or disgust. The same can’t be said for an ETF but they still provide more transparency than other funds. Investors know what stocks enter and exit the ETF each day, unlike a mutual fund, which is not required to disclose individual holdings.

 Soda (Simple): ETFs attempt to make investing simple with a robust list of features including diversification, transparency, and tax savings, among more. Much like the investment vehicle, Soda is simple, a classic beverage we enjoy occasionally.

Check out these additional resources to learn more

https://personal.vanguard.com/us/insights/article/ETFs-work-092016?lang=en

https://www.fidelity.com/learning-center/investment-products/etf/benefits-of-etfs

https://www.investopedia.com/articles/mutualfund/07/etf_downside.asp

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