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
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.
Is investing in ETFs a good idea? ›
If you're looking for an easy solution to investing, ETFs can be an excellent choice. ETFs typically offer a diversified allocation to whatever you're investing in (stocks, bonds or both). You want to beat most investors, even the pros, with little effort.
What is the downside of ETFs? ›
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.
Which ETF is best to invest in? ›
Schwab U.S. Dividend Equity ETF (SCHD 1.84%) and Vanguard Real Estate ETF (VNQ 1.87%) are great options. These ETFs each hold over 100 higher-yielding dividend-paying stocks, providing instant diversification.
Are ETFs best for beginners? ›
Exchange-traded funds (ETFs) are ideal for beginning investors due to their many benefits, which include low expense ratios, instant diversification, and a multitude of investment choices. Unlike some mutual funds, they also tend to have low investing thresholds, so you don't have to be ultra-rich to get started.
How long should you hold an ETF? ›
Holding an ETF for longer than a year may get you a more favorable capital gains tax rate when you sell your investment.
Why are my ETFs losing money? ›
Interest rate changes are the primary culprit when bond exchange-traded funds (ETFs) lose value. As interest rates rise, the prices of existing bonds fall, which impacts the value of the ETFs holding these assets.
Why shouldn't you invest in ETFs? ›
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 happens if ETF shuts down? ›
Because the ETF is a separate legal entity from the issuer that manages it, the ETF will control all the assets in its portfolio up until the date set for its liquidation, at which point the manager will sell the assets and distribute the proceeds to investors.
Which is better ETF or mutual fund? ›
ETFs can be more tax-efficient than actively managed funds due to their lower turnover and fewer transactions that produce capital gains. ETFs are bought and sold on an exchange throughout the day while mutual funds can be bought or sold only once a day at the latest closing price.
Top U.S. market-cap index ETFs
| Fund (ticker) | YTD performance | 5-year performance |
|---|
| Vanguard S&P 500 ETF (VOO) | 11.1 percent | 15.5 percent |
| SPDR S&P 500 ETF Trust (SPY) | 11.0 percent | 15.4 percent |
| iShares Core S&P 500 ETF (IVV) | 10.3 percent | 15.3 percent |
| Invesco QQQ Trust (QQQ) | 11.6 percent | 21.8 percent |
ETFs have a low hurdle to invest
You can put $500 in a shares ETF and $500 in a bonds ETF to achieve a diversified two-asset-class portfolio. Although simple, this 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.
Is buying ETF better than stock? ›
Investing in ETFs is the better choice if you want to diversify your holdings to reduce risk. Perhaps you're not interested in poring through company quarterly reports and investing newsletters and would rather have someone else pick and manage your holdings.
How much money do you need for ETF? ›
Starting an exchange-traded fund requires significant startup capital and financial expertise. You can hire a firm to help create, market, and manage your fund. The startup costs include about $2.5 million to purchase shares of the assets in the fund in order to launch it.
How many ETFs should I own as a beginner? ›
Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification.
How do you make money on ETFs? ›
Traders and investors can make money from an ETF by selling it at a higher price than what they bought it for. Investors could also receive dividends if they own an ETF that tracks dividend stocks. ETF providers make money mainly from the expense ratio of the funds they manage, as well as through transaction costs.
Is it better to invest in ETFs than stocks? ›
Investing in ETFs is the better choice if you want to diversify your holdings to reduce risk. Perhaps you're not interested in poring through company quarterly reports and investing newsletters and would rather have someone else pick and manage your holdings.
How much of your money should be in ETFs? ›
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. Consider the two funds below.
Which ETF has the best 10 year return? ›
1. VanEck Semiconductor ETF
- 10-year return: 24.37%
- Assets under management: $10.9B.
- Expense ratio: 0.35%
- As of date: November 30, 2023.
