There are so many ways to invest your money to build your wealth. From stocks to bonds to index funds, there's a wide range of investment vehicles for every kind of investor depending on their goals.
A common choice for beginner investors who want exposure to the overall stock market is to put money into an exchange-traded fund or ETF.
What are ETFs?
Think of ETFs as buckets that hold a collection of securities, like stocks and bonds. Because ETFs are made up of these multiple assets, they provide investors with instant diversification. When an investor purchases a share of an ETF, their money is spread across different investments. This differs from stocks where you buy shares of just a single company.
ETFs typically mimic a market index like the S&P 500. Since ETF performance is usually based on an index — meaning they follow the ups and downs of said index — most are passively managed investments and thus likely have lower fees than mutual funds. Mutual funds, on the other hand, want to beat the market's performance and are thus managed by a fund manager, who's actively choosing the investments.
Similar to stocks, ETFs can be bought and sold on an exchange throughout the day, and investors can even earn dividends depending on the type of index the fund tracks.
Should you invest in ETFs?
Since ETFs offer built-in diversification and don't require large amounts of capital in order to invest in a range of stocks, they are a good way to get started. You can trade them like stocks while also enjoying a diversified portfolio.
How to get started investing in ETFs
First, you'll need to set up an online account through a broker or trading platform. After funding the account, you can purchase ETFs using their ticker symbol and indicating how many shares you want.
Deciding on how many shares to buy largely depends on the current pricing of a share and your own financial situation. ETFs are good for beginners because they offer entry-level access: You can buy as little as a single share, and with some brokers, like Robinhood, you can even buy fractional shares.
Fees vary by broker, but it's best to look for options with very low or no transaction costs. These days, many of the traditional brokerages offer commission-free trading on ETFs. Some of the best $0 commission trading platforms include the below:
Though ETFs tracking the S&P 500 are some of the most popular, be aware that very few ETFs track the S&P 500 as a whole, rather just components of the index.
The Vanguard S&P 500 ETF (VOO) tracks the entire index, and it has low management fees. Its current expense ratio is 0.03%, which means you pay just 30 cents per year for every $1,000 invested. For every $10,000 invested, that would equate to $3 per year.
Bottom line
You don't have to be so hands-on in order to invest with ETFs, and investing in them is an easy way to get started in the market.
If you don't feel confident choosing ETFs, consider opening an account with a robo-advisor that automatically invests on your behalf. Many robo-advisors, like Betterment, recommend low-cost ETF portfolios so you can take advantage of this investing vehicle without having to do your research on all the different options available.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
FAQs
Exchange-traded funds are similar to mutual funds in that they hold a collection of stocks and bonds in a single fund. Unlike mutual funds, they are bought and sold on stock exchanges, can be traded anytime the exchange is open, and you can start your ETF investing even if all you have to invest is $50.
What is an ETF and why should I invest? ›
ETFs or "exchange-traded funds" are exactly as the name implies: funds that trade on exchanges, generally tracking a specific index. When you invest in an ETF, you get a bundle of assets you can buy and sell during market hours—potentially lowering your risk and exposure, while helping to diversify your portfolio.
What is the best way to explain ETF? ›
An exchange-traded fund, or ETF, is a basket of investments like stocks or bonds. Exchange-traded funds let you invest in lots of securities all at once, and ETFs often have lower fees than other types of funds. ETFs are traded more easily too. But like any financial product, ETFs aren't a one-size-fits-all solution.
What do I need to invest in ETF? ›
You'll need a brokerage account to buy and sell securities like ETFs. If you don't already have one, see our resource on brokerage accounts and how to open one. This can be done online, and many brokerages have no account minimums, transaction fees or inactivity fees.
Should I invest all my money in an ETF? ›
You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all.
What are ETFs for dummies? ›
A cross between an index fund and a stock, they're transparent, easy to trade, and tax-efficient. They're also enticing because they consist of a bundle of assets (such as an index, sector, or commodity), so diversifying your portfolio is easy. You might have even seen them offered in your 401(k) or 529 college plan.
Should I own ETFs or stocks? ›
ETFs offer advantages over stocks in two situations. First, when the return from stocks in the sector has a narrow dispersion around the mean, an ETF might be the best choice. Second, if you are unable to gain an advantage through knowledge of the company, an ETF is your best choice.
How does my money grow in a ETF? ›
Though ETFs allow investors to gain as stock prices rise and fall, they also benefit from companies that pay dividends. Dividends are a portion of earnings allocated or paid by companies to investors for holding their stock.
What are the most popular ETFs? ›
Most Popular ETFs by AUM
| Ticker | Fund | AUM |
|---|
| VTI | Vanguard Total Stock Market ETF | $288.78B |
| VOO | Vanguard S&P 500 ETF | $286.59B |
| QQQ | Invesco QQQ Trust | $161.33B |
| VEA | Vanguard FTSE Developed Markets ETF | $108.44B |
6 more rowsHow do ETFs make money for investors?
- Interest distributions if the ETF invests in bonds.
- Dividend. + read full definition distributions if the ETF invests in stocks that pay dividends.
- Capital gains distributions if the ETF sells an investment. + read full definition for more than it paid.
The low investment threshold for most ETFs makes it easy for a beginner to implement a basic asset allocation strategy that matches their investment time horizon and risk tolerance. For example, young investors might be 100% invested in equity ETFs when they are in their 20s.
How do beginners buy ETFs? ›
In general, the process is like buying a stock.
- Fund your account. ...
- Search for the ETF ticker symbol: If you're using one of your brokerage's research tools, you may be able to purchase shares directly from the ETF's entry. ...
- Enter the number of shares you want to buy: Next, indicate the number of shares you want to buy.
Hold ETFs throughout your working life. Hold ETFs as long as you can, give compound interest time to work for you. Sell ETFs to fund your retirement. Don't sell ETFs during a market crash.
What is the downside to an ETF? ›
For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.
Can you pull money out of an ETF? ›
In order to withdraw from an exchange traded fund, you need to give your online broker or ETF platform an instruction to sell. ETFs offer guaranteed liquidity – you don't have to wait for a buyer or a seller.
Is my money safe in an ETF? ›
Key Takeaways. ETFs can be safe investments if used correctly, offering diversification and flexibility. Indexed ETFs, tracking specific indexes like the S&P 500, are generally safe and tend to gain value over time. Leveraged ETFs can be used to amplify returns, but they can be riskier due to increased volatility.
How do you make money from ETFs? ›
How do ETFs make money for investors?
- Interest distributions if the ETF invests in bonds.
- Dividend. + read full definition distributions if the ETF invests in stocks that pay dividends.
- Capital gains distributions if the ETF sells an investment. + read full definition for more than it paid.
Related Tickers
| TICKER | NAME | % Change |
|---|
| IVV | iShares Core S&P 500 ETF | 0.3% |
| BND | Vanguard Total Bond Market ETF | 0.339% |
| SCHD | Schwab U.S. Dividend Equity ETF | 0.468% |
| VTI | Vanguard Total Stock Market ETF | 0.338% |
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