What "The Graduate" teaches you about ETFs

Matthew Partridge looks at what investors can learn about exchange-traded funds from the film "The Graduate".

927_MW_P32_Profile_Bottom

PM7N43

The Graduate is a film based on the 1963 novella by Charles Webb. Benjamin Braddock (Dustin Hoffman, pictured) is a recent graduate who begins an affair with his older neighbour Mrs Robinson (Anne Bancroft). Meanwhile, Benjamin's parents and Mrs Robinson's husband encourage him to date Mrs Robinson's daughter Elaine (Katharine Ross). Although things initially go well, Benjamin is forced to tell Elaine the truth about his affair with her mother. Elaine seems willing to give the relationship another go but the Robinsons try to blackmail him into abandoning their daughter while trying to get her married off.

The key moment

Near the start of the film, Benjamin's parents throw a party, attended by friends and neighbours, to celebrate their son's graduation from a respected liberal-arts college. The partygoers congratulate an increasingly uncomfortable Benjamin, and try to give him advice about what to do next. One guest approaches Benjamin and says, "I want to say one word to you. Just one word Plastics". He adds "There's a great future in plastics. Think about it. Will you think about it?"

Lessons for investors

Many investors would like to place a bet on a particular sector or industry (such as plastics). Until fairly recently, the only way to do this would be to buy individual shares in the industry or find a fund with large exposure to this area. Both options involved a lot of research (and high transaction costs). However, in the past two decades exchange-traded funds (ETFs) have emerged as a third option. ETFs are specialised funds tracking an index that in turn covers a market, a segment of a market, or a particular sector. ETFs are traded on the stockmarket just like shares. In this sense they resemble investment trusts (or closed-end funds) in the US.

Other financial wisdom

Just because an ETF's title says that it covers a particular sector or market, it doesn't necessarily follow that its portfolio will actually do what it says on the tin. This is especially important to keep in mind when it comes to ETFs focusing on a specific sector. For example, an ETF might claim to be following energy companies, but may only hold shares in utilities or gas firms, even though you may want to invest in new clean energy technologies.

Recommended

Too embarrassed to ask: what is short selling?
Too embarrassed to ask

Too embarrassed to ask: what is short selling?

Short sellers are often accused of unfairly driving share prices down to make a quick buck. But short selling is a perfectly legitimate – if risky – t…
26 Jan 2021
Forget rebalancing – ditch your losers, not your winners
Sponsored

Forget rebalancing – ditch your losers, not your winners

Investors are often told to regularly rebalance their portfolio and take profits from their winning holdings. But that can be a mistake, says Max King…
26 Jan 2021
A lesson for value investors from investor Howard Marks
Investment strategy

A lesson for value investors from investor Howard Marks

Value investors need to open their minds, says US investor Howard Marks. But why is he saying it now?
25 Jan 2021
The MoneyWeek Podcast: let's talk about bubbles
Stockmarkets

The MoneyWeek Podcast: let's talk about bubbles

Merryn and John talk about the many obvious signs of a bubble in certain assets, including tech stocks, TikTok, and stock-trading 12-year olds. It's c…
22 Jan 2021

Most Popular

The FTSE 100 is set for a makeover with an influx of new tech stocks
UK stockmarkets

The FTSE 100 is set for a makeover with an influx of new tech stocks

The FTSE 100 – the dullest index in the world – is about to reinvent itself as a host of new firms list on the market. The change is long overdue, say…
24 Jan 2021
Think Tesla is a bubble? This might be the best way to bet on it bursting
Oil

Think Tesla is a bubble? This might be the best way to bet on it bursting

The huge rise in Tesla’s share price means that, by market value, it’s now the sixth-largest company in the US and and the world’s biggest car-maker. …
25 Jan 2021
Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021