How many ETFs should I start with?
Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification.
The majority of individual investors should, however, seek to hold 5 to 10 ETFs that are diverse in terms of asset classes, regions, and other factors. Investors can diversify their investment portfolio across several industries and asset classes while maintaining simplicity by buying 5 to 10 ETFs.
SPY, VOO and IVV are among the most popular S&P 500 ETFs. These three S&P 500 ETFs are quite similar, but may sometimes diverge in terms of costs or daily returns. Investors generally only need one S&P 500 ETF.
ETFs don't have minimum investment requirements -- at least not in the same sense that mutual funds do. However, ETFs trade on a per-share basis, so unless your broker offers the ability to buy fractional shares of stock, you'll need at least the current price of one share to get started.
You can put $500 in a stock ETF and $500 in a bond ETF to achieve a diversified two-asset-class portfolio which, though simple, can be a great start toward building a portfolio appropriate for your goals. ETFs can be a simple way to build incrementally toward your long-term plan.
Generally speaking, fewer than 10 ETFs are likely enough to diversify your portfolio, but this will vary depending on your financial goals, ranging from retirement savings to income generation.
For most personal investors, an optimal number of ETFs to hold would be 5 to 10 across asset classes, geographies, and other characteristics.
Think About This: $10,000 invested in the S&P 500 at the beginning of 2000 would have grown to $32,527 over 20 years — an average return of 6.07% per year.
Key Takeaways
For most ETFs, selling after less than a year is taxed as a short-term capital gain. ETFs held for longer than a year are taxed as long-term gains. If you sell an ETF, and buy the same (or a substantially similar) ETF after less than 30 days, you may be subject to the wash sale rule.
Market risk
The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.
What is the 30 day rule on ETFs?
If you buy substantially identical security within 30 days before or after a sale at a loss, you are subject to the wash sale rule. This prevents you from claiming the loss at this time.
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.
Exchange-traded funds (ETFs) can be an excellent entry point into the stock market for new investors. They're cheap and typically carry lower risk than individual stocks since a single fund holds a diversified collection of investments.
To make $1,000 per month on T-bills, you would need to invest $240,000 at a 5% rate. This is a solid return — and probably one of the safest investments available today. But do you have $240,000 sitting around? That's the hard part.
Investing in the stock market is one of the most effective ways to generate long-term wealth, and you don't need to be an experienced investor to make a lot of money. In fact, it's possible to retire a millionaire with next to no effort through exchange-traded funds (ETFs).
ETF | Assets Under Management | Expense Ratio |
---|---|---|
Vanguard Information Technology ETF (VGT) | $70 billion | 0.10% |
VanEck Semiconductor ETF (SMH) | $16.3 billion | 0.35% |
Invesco S&P MidCap Momentum ETF (XMMO) | $1.6 billion | 0.34% |
SPDR S&P Homebuilders ETF (XHB) | $1.8 billion | 0.35% |
You don't have to choose just one. Once you know the basics of ETFs, you can consider building an all-ETF portfolio that meets your tolerance for risk and your financial goals while retaining the low investing fees that made ETFs so popular in the first place.
Is Investing in the S&P 500 Less Risky Than Buying a Single Stock? Generally, yes. The S&P 500 is considered well-diversified by sector, which means it includes stocks in all major areas, including technology and consumer discretionary—meaning declines in some sectors may be offset by gains in other sectors.
Under the Investment Company Act, private investment funds (e.g. hedge funds) are generally prohibited from acquiring more than 3% of an ETF's shares (the 3% Limit).
Known as the 4% rule, Bengen argued that investors could safely set their annual withdrawal rate to 4% of their initial retirement pot and adjust it for inflation without running out of money over a 30-year time horizon.
Should I buy one share of VOO?
The Vanguard S&P 500 ETF (VOO -0.51%) is a top choice for most index fund investors. Even Warren Buffett recommends it above any other investment. There's a good reason for that. Its low expense ratio and tight index tracking make it a top choice for anyone looking to match the returns of the S&P 500.
Investing doesn't need to be complicated or expensive. Build a dirt-cheap portfolio that can last a lifetime with just one stock ETF and one bond ETF.
According to our calculations, a $1000 investment made in February 2014 would be worth $5,971.20, or a gain of 497.12%, as of February 5, 2024, and this return excludes dividends but includes price increases. Compare this to the S&P 500's rally of 178.17% and gold's return of 55.50% over the same time frame.
Discount Rate | Present Value | Future Value |
---|---|---|
20% | $1,000 | $38,337.60 |
21% | $1,000 | $45,259.26 |
22% | $1,000 | $53,357.64 |
23% | $1,000 | $62,820.62 |
If you can invest $200 each and every month and achieve a 10% annual return, in 20 years you'll have more than $150,000 and, after another 20 years, more than $1.2 million. Your actual rate of return may vary, and you'll also be affected by taxes, fees and other influences.
References
- https://www.investopedia.com/terms/e/etf.asp
- https://www.fool.com/investing/2024/03/17/before-you-buy-the-vanguards-sp-500-etf-here-are-3/
- https://www.bankrate.com/investing/best-s-p-500-index-funds/
- https://finance.yahoo.com/news/much-savings-70-140006145.html
- https://www.titan.com/articles/etf-drawbacks
- https://www.investopedia.com/financial-edge/0113/7-easy-to-understand-etfs-to-replace-a-savings-account.aspx
- https://www.investopedia.com/articles/exchangetradedfunds/11/building-an-etf-portfolio.asp
- https://www.investopedia.com/articles/stocks/09/buying-stock-or-etf.asp
- https://www.fpmarkets.com/education/trading-tips/how-many-etfs-should-i-own-as-a-beginner-in-2023/
- https://www.canstar.com.au/investor-hub/buy-sell-hold-etfs/
- https://www.stash.com/learn/how-much-should-i-be-investing/
- https://www.bloomberg.com/news/articles/2024-02-22/this-exchange-traded-fund-mimics-t-bill-returns-without-tax-bills
- https://money.usnews.com/investing/articles/best-etfs-to-buy
- https://www.schwab.com/learn/story/etfs-and-taxes-what-you-need-to-know
- https://medium.com/@Levente22/14-proven-ways-to-make-2-000-3-000-per-month-in-passive-income-2107fea2ee03
- https://investor.vanguard.com/investment-products/etfs/profile/voo
- https://www.kiplinger.com/article/investing/t047-c007-s001-two-vanguard-index-funds-you-need-for-retirement.html
- https://www.lgim.com/en-uk/adviser-wealth/insights/investment-foresight/Is-it-time-to-retire-the-4-percent-rule/
- https://www.fidelity.com/learning-center/investment-products/etf/etfs-tax-efficiency
- https://www.nasdaq.com/articles/passive-income:-7-ways-to-make-an-extra-$1000-a-month
- https://finance.yahoo.com/news/vanguard-p-500-etf-voo-112006029.html
- https://investor.vanguard.com/investor-resources-education/taxes/how-mutual-funds-etfs-are-taxed
- https://finance.yahoo.com/news/rich-heres-americans-think-considered-182847861.html
- https://www.nerdwallet.com/article/investing/high-dividend-etfs
- https://corporate.vanguard.com/content/dam/corp/research/pdf/Fuel-for-the-F.I.R.E.-Updating-the-4-rule-for-early-retirees-US-ISGFIRE_062021_Online.pdf
- https://www.fool.com/investing/how-to-invest/etfs/
- https://tools.carboncollective.co/future-value/1000-in-20-years/
- https://www.fidelity.com/learning-center/investment-products/etf/risks-with-etfs
- https://divvydiary.com/en/vanguard-s-and-p-500-ucits-etf-IE00B3XXRP09
- https://www.etfcentral.com/etf-u/guides/how-many-etfs-should-i-own
- https://www.investopedia.com/articles/exchangetradedfunds/08/etf-taxes-introduction.asp
- https://www.nasdaq.com/articles/1-time-tested-warren-buffett-index-fund-could-turn-$300-per-month-into-$618900
- https://www.investopedia.com/articles/investing/121515/why-3x-etfs-are-riskier-you-think.asp
- https://www.nerdwallet.com/article/investing/how-to-invest-in-sp500
- https://www.joshuakennon.com/1821745-households-in-the-united-states-have-investment-portfolios-worth-3000000-or-more/
- https://www.investopedia.com/articles/personal-finance/022216/put-10000-sp-500-etf-and-wait-20-years.asp
- https://www.investmentfundlawblog.com/resources/investments-by-funds/investments-investment-companies/
- https://www.investopedia.com/articles/mutualfund/07/etf_downside.asp
- https://advisors.vanguard.com/investments/products/voo/vanguard-sp-500-etf
- https://www.nerdwallet.com/article/investing/sp-500-etfs
- https://fastercapital.com/topics/can-you-withdraw-your-money-from-an-investment-fund-at-any-time.html
- https://www.nerdwallet.com/article/investing/vanguard-index-funds
- https://www.quora.com/What-percentage-of-the-US-population-has-2-million-dollars
- https://www.fool.com/investing/how-to-invest/index-funds/safest-index-funds/
- https://money.usnews.com/money/retirement/articles/what-is-a-good-monthly-retirement-income
- https://www.fpmarkets.com/education/trading-tips/when-should-i-sell-an-etf-read-these-signs/
- https://www.investopedia.com/articles/investing/020916/etfs-can-be-safe-investments-if-used-correctly.asp
- https://www.unbiased.com/discover/retirement/retire-on-900k
- https://www.investopedia.com/why-bond-etfs-go-down-8303231
- https://www.nerdwallet.com/article/investing/exchange-traded-fund-closure
- https://www.fool.com/investing/2023/12/24/index-fund-turn-300-to-164100-pay-college-tuition/
- https://www.unbiased.com/discover/retirement/can-you-retire-on-4-million
- https://www.fidelity.com/learning-center/investment-products/etf/drawbacks-of-etfs
- https://finance.yahoo.com/news/passive-income-7-ways-extra-130052593.html
- https://www.dummies.com/article/business-careers-money/personal-finance/investing/investment-vehicles/etfs/investing-in-etfs-for-dummies-cheat-sheet-207441/
- https://www.startribune.com/4-rule-for-retirees-has-serious-drawbacks/600322322/
- https://www.nasdaq.com/articles/2-growth-stocks-that-turned-$10000-into-more-than-$100000-in-just-10-years
- https://www.fidelity.com/learning-center/investment-products/etf/dividends-on-etfs
- https://www.fool.com/the-ascent/buying-stocks/articles/heres-what-happens-when-you-only-invest-in-sp-500-etfs/
- https://www.nasdaq.com/articles/can-you-actually-retire-a-millionaire-with-etfs-alone-5
- https://finance.yahoo.com/news/invested-1000-p-global-decade-133005715.html
- https://www.investopedia.com/vanguard-vs-fidelity-4587961
- https://lakshmishree.com/blog/15-best-etfs-in-india-to-invest-in-2024/
- https://www.fidelity.com/learning-center/investment-products/etf/tax-basics-etfs
- https://www.pillsburylaw.com/images/content/3/2/v2/3201/C-S-Advisory-07-22-2010-II.pdf
- https://finance.yahoo.com/news/retire-62-400-000-401-154948217.html
- https://www.bankrate.com/retirement/average-monthly-social-security-check/
- https://www.investopedia.com/articles/investing/090115/7-best-etf-trading-strategies-beginners.asp
- https://www.investopedia.com/articles/exchangetradedfunds/09/etf-out-of-business.asp
- https://www.cbsnews.com/news/retirement-savings-million-dollars-stretch-money-analysis-gobankingrates-years/
- https://finance.yahoo.com/news/many-americans-retire-million-dollars-140019814.html
- https://www.nerdwallet.com/article/investing/social-security/how-long-will-your-retirement-savings-last
- https://objectivefinancialpartners.com/are-mutual-fund-fees-tax-deductible/
- https://www.nerdwallet.com/article/investing/how-to-invest-in-etf-exchange-traded-fund
- https://smartasset.com/investing/investing-200-a-month-how-much-will-you-make
- https://www.investopedia.com/ask/answers/102815/can-you-buy-vanguard-funds-through-another-brokerage.asp
- https://www.trackinsight.com/en/education/how-many-etfs-should-you-own
- https://www.franklintempleton.com/planning-and-learning/learn-about-investing/investing-principles/cost-of-timing-the-market
- https://www.unbiased.com/discover/retirement/can-you-retire-on-500k
- https://www.schwab.com/etfs/mutual-funds-vs-etfs
- https://finance.yahoo.com/news/40-30-20-10-rule-132128106.html
- https://fortune.com/recommends/investing/how-much-of-your-income-should-go-toward-investing/
- https://finance.yahoo.com/news/genius-ways-1-000-month-105500970.html
- https://www.approachfp.com/retire-on-500k/
- https://www.vanguard.com.au/personal/learn/smart-investing/etfs/etfs-how-to-get-started
- https://finance.yahoo.com/news/4-million-enough-retire-55-140032539.html
- https://www.usatoday.com/money/blueprint/investing/best-sp-500-etfs/
- https://www.thestreet.com/etffocus/trade-ideas/the-only-leveraged-etf-that-i-would-buy-hold-long-term
- https://www.wsj.com/articles/heres-what-a-5-million-retirement-looks-like-in-america-1abc76d9
- https://www.prudential.com/financial-education/4-percent-rule-retirement
- https://www.fool.com/the-ascent/buying-stocks/articles/heres-what-happens-when-you-invest-500-a-month/
- https://www.quora.com/What-happens-to-your-ETFs-if-your-ETF-invested-company-goes-bankrupt-Do-you-lose-all-your-money-invested-in-your-ETFs-to-the-company-s-bankruptcy
- https://www.fidelity.com/learning-center/investment-products/etf/tax-rules-for-losses-etfs
- https://www.investopedia.com/terms/r/ruleof72.asp
- https://www.visionretirement.com/articles/largestexpensesretirees
- https://www.fool.com/investing/general/2013/09/21/the-best-performing-stock-on-the-sp-500-since-1980.aspx
- https://www.schwab.com/learn/story/primer-on-wash-sales
- https://foolwealth.com/insights/are-you-in-the-top-3-of-retirees
- https://www.dividendmax.com/united-states/nyse-arca/financial-services/vanguard-sandp-500-etf/dividends
- https://www.nerdwallet.com/article/investing/vanguard-etfs
- https://businesslawreview.uchicago.edu/print-archive/unplugging-heartbeat-trades-and-reforming-taxation-etfs
- https://www.barrons.com/articles/why-investors-are-pulling-money-from-vanguards-index-funds-51603390832
- https://www.investopedia.com/articles/retirement/080516/retire-45-500k-it-possible.asp
- https://finance.yahoo.com/news/big-average-social-security-check-165807455.html
- https://www.bankrate.com/retirement/what-is-the-4-percent-rule/
- https://www.investopedia.com/articles/investing/040516/10-cheapest-vanguard-etfs-voo-vti.asp
- https://www.investopedia.com/how-to-retire-with-no-money-7505220