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 best 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.
Should I put all my money into 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.
Is an ETF better than a stock? ›
Passive, or index, ETFs generally track and aim to outperform a benchmark index. They provide access to many companies or investments in one trade, whereas individual stocks provide exposure to a single firm. As such, ETFs remove single-stock risk, or the risk inherent in being exposed to just one company.
Is buying an ETF better than stock? ›
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.
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? ›
When an ETF liquidates, investors generally receive cash distributions equal to NAV, so even if you fall asleep at the wheel, you will receive the fair value of your shares—most of the time. It's worth noting, however, that there have been instances where the process wasn't smooth.
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.
Exchange-traded funds (ETFs) are a low-cost and easy way to invest. These pooled investment vehicles allow investors to own a diversified portfolio of different types of publicly traded securities and are a great way for beginners to start investing.
Can an ETF go to zero? ›
Yes, an inverse ETF can reach zero, particularly over long periods. Market volatility, compounding effects, and fund management concerns can exacerbate losses. To successfully manage possible risks, investors should be aware of the short-term nature of these securities and carefully monitor their holdings.
Is my money safe in an ETF? ›
Summary. ETFs are not less safe than other types of investments, like stocks or bonds. In many ways, ETFs are actually safer, for instance thanks to their inherent diversification. And by choosing the right mix of ETFs, you can control the market risk to match your needs.
Why buy ETFs instead of mutual funds? ›
Key Takeaways. ETFs offer easy access to a diversified portfolio of assets. They're traded on stock exchanges throughout the trading day, providing you with the flexibility to buy or sell shares at market prices. ETFs typically have lower expense ratios than mutual funds because more of them are passively managed.
