What are ETFs and should you invest in them?
ETFs are traded like stocks but offer even more diversity. Here’s what you need to know.
There are many ways to invest your money in building your wealth. From stocks to bonds to index funds, there are many investment instruments for every type of investor depending on their goals.
A common option for new investors who want to expose themselves to the general stock market is to put money in an exchange-traded fund. You’ve probably seen the acronym: ETF.
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What are ETFs?
Think of ETFs as stocks with a collection of securities such as stocks and bonds. Because ETFs consist of these many assets, they provide investors with direct diversification. When an investor buys shares in an ETF, his money is spread over various investments. This is different from stocks, where you only buy stocks from one company.
ETFs typically mimic a market index, such as the S&P 500. Because ETF performance is often based on a single index – meaning they track the ups and downs of that index – mostly passively manage stocks, investments, and therefore are likely to have lower fees. mutual funds. Mutual funds, on the other hand, want to beat the market performance and are thus managed by a fund manager who actively selects investments.
Like stocks, ETFs can be bought and sold on a single exchange all day, and investors can even earn dividends depending on the type of index the fund monitors.
Do you need to invest in ETFs?
Because ETFs offer built-in diversification and do not require large amounts of capital to invest in different stocks, they are a good way to start. You can sell them like stocks and enjoy a different portfolio at the same time.
How to start investing in ETFs
You must first create an online account through a broker or trading platform. After funding the account, you can buy ETFs with their ticker symbol and you will be shown how much you want. The decision on how much to buy a share depends on the current share price and your own financial situation. ETFs are great for beginners because they provide access at a basic level: You can only buy stocks and at some brokers, such as Robinhood, you can also buy for fractional stocks.
Mediation costs vary, but it is best to look for options that have very low or no transaction costs. Today, many traditional brokers do not offer ETF commission trading.
Some of the best $0 commission trading platforms include the following:
Although the ETFs that follow the S&P 500 are some of the most popular, keep in mind that very few ETFs follow the S&P 500 as a whole, not just the index components.
The Vanguard S&P 500 ETF (VOO) tracks the full index and has a low management fee. The current cost ratio is 0.03%, which means you pay only 30 cents a year for every $1,000 you invest. For every $10,000 invested, that’s $3 a year.
You don’t have to be handy to invest in ETFs and investing in them is a quick way to start in the market.
If you are unsure about choosing an ETF, consider opening an account with a robo-advisor who will automatically invest for you. Many robo-advisors, such as Betterment, recommend short-term ETF portfolios so you can take advantage of this investment tool without having to explore all the different options available.