What are ETFs and should you invest in them?
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There are so many ways to invest your money to build your wealth. From stocks to bonds to index funds, there is a wide range of investment vehicles for all types of investors depending on their goals.
A common choice for first-time investors who want to gain exposure to the wider stock market is to invest money in an exchange-traded fund. You’ve probably already come across its acronym: ETF.
What are ETFs?
Think of ETFs as compartments containing a collection of securities, such as stocks and bonds. Since ETFs are made up of these multiple assets, they offer investors instant diversification. When an investor buys a unit of an ETF, their money is divided among different investments. This differs from stocks where you buy stocks of a single company.
ETFs typically mimic a market index like the S&P 500. Since ETFs’ performance is usually index-based – meaning they follow the highs and lows of that index – most are passively managed investments. and therefore probably have lower fees than mutual funds. Mutual funds, on the other hand, want to beat the performance of the market and therefore are managed by a fund manager, who actively chooses the investments.
Much like 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 followed by the fund.
Should you invest in ETFs?
Since ETFs offer built-in diversification and don’t require large amounts of capital to invest in a range of stocks, they’re a good place to start. You can trade them like stocks while still benefiting from a diversified portfolio.
How to start investing in ETFs
First of all, you will need to create an account online through a broker or trading platform. After you fund the account, you can buy ETFs using their ticker symbol and indicating the number of shares you want.
Deciding how many stocks to buy depends largely on the current price of a stock and your own financial situation. ETFs are good for beginners because they offer entry-level access: you can buy as little as a single stock, and with some brokers, like Robinhood, you can even buy fractional shares.
The fees vary by broker, but it is best to look for options with very low or no transaction costs. Nowadays, many traditional brokerage houses offer commission-free transactions on ETFs. Some of the best $ 0 commission trading platforms are as follows:
While ETFs that track 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 than components of the index.
The Vanguard S&P 500 ETF (VOO) tracks the entire index and has low management fees. Its current expense ratio is 0.03%, which means you only pay 30 cents a year for every $ 1,000 you invest. For every $ 10,000 invested, this would equal $ 3 per year.
At the end of the line
You don’t have to be that practical in investing with ETFs, and investing in them is an easy way to get started in the market.
If you don’t feel comfortable choosing ETFs, consider opening an account with a robotic advisor who automatically invests on your behalf. Many robot advisers, like Betterment, recommend low-cost ETF portfolios so that you can take advantage of this investment vehicle without having to do your research on all of the different options available.
Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.