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.
Are ETFs better than stocks? ›
Since ETFs are more diversified, they tend to have a lower risk level than stocks. Similar to stocks, ETFs can be bought and traded at any time and they are also taxed at short-term or long-term capital gains rates.
Which ETF is best to invest in? ›
List of 15 Best ETFs in India
- Nippon India ETF Nifty 50 BeES. ₹ 241.63.
- Nippon India ETF PSU Bank BeES. ₹ 76.03.
- BHARAT 22 ETF. ₹ 96.10.
- Mirae Asset NYSE FANG+ ETF. ₹ 84.5.
- UTI S&P BSE Sensex ETF. ₹ 781.
- Nippon India ETF Gold BeES. ₹ 55.5.
- Nippon India Etf Nifty Bank Bees. ₹ 471.9.
- HDFC Nifty50 Value 20 ETF. ₹ 123.2.
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? ›
The share prices of exchange-traded funds (ETFs) that invest in bonds typically go lower when interest rates rise. When market interest rates rise, the fixed rate paid by existing bonds becomes less attractive, sinking these bonds' prices.
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.
Has an ETF ever failed? ›
There are a few reasons why ETFs generally die. Low assets under management, high fees, poor performance, and short track records are closely associated with the probability of closure. In 2023, there were 244 ETF closures with an average age of 5.4 years and average assets under management of only $54 million.
100 Highest 5 Year ETF Returns
| Symbol | Name | 5-Year Return |
|---|
| FNGO | MicroSectors FANG+ Index 2X Leveraged ETNs | 50.00% |
| TECL | Direxion Daily Technology Bull 3X Shares | 42.20% |
| GBTC | Grayscale Bitcoin Trust | 40.63% |
| SOXL | Direxion Daily Semiconductor Bull 3x Shares | 36.15% |
93 more rowsExperts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification.
Do you get dividends from ETFs? ›
ETF issuers collect any dividends paid by the companies whose stocks are held in the fund, and they then pay those dividends to their shareholders. They may pay the money directly to the shareholders, or reinvest it in the fund.
What is the safest ETF to buy? ›
- Vanguard S&P 500 ETF (VOO)
- Schwab U.S. Small-Cap ETF (SCHA)
- iShares Core S&P Mid-Cap ETF (IJH)
- Invesco QQQ Trust (QQQ)
- Vanguard High Dividend Yield ETF (VYM)
- Vanguard Total International Stock ETF (VXUS)
- Vanguard Total World Stock ETF (VT)
Top U.S. market-cap index ETFs
| Fund (ticker) | YTD performance | Expense ratio |
|---|
| Vanguard S&P 500 ETF (VOO) | 7.7 percent | 0.03 percent |
| SPDR S&P 500 ETF Trust (SPY) | 7.6 percent | 0.095 percent |
| iShares Core S&P 500 ETF (IVV) | 7.7 percent | 0.03 percent |
| Invesco QQQ Trust (QQQ) | 5.8 percent | 0.20 percent |
ETFs have a low hurdle to invest
Also, it doesn't take much to construct a balanced portfolio. 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.
Is ETF good for beginners? ›
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.
Can ETFs make you money? ›
Some exchange-traded funds, or ETFs, can provide a potential income stream that may offer more diversification than investing in just one stock. Whether you're reorganizing your portfolio for your golden years or just starting to research income-oriented funds, you might want to consider this investment type.
Do you pay taxes on ETFs if you don't sell? ›
At least once a year, funds must pass on any net gains they've realized. As a fund shareholder, you could be on the hook for taxes on gains even if you haven't sold any of your shares.
