7 Easy To Understand ETFs To Replace A Savings Account (2024)

Investing can be a complicated process. But the main goal for anyone who socks their money away is to make as much money as possible. Some of the safest avenues to save and earn interest are traditional accounts, such as a savings account or a certificate of deposit (CD).

One thing you'll want to remember if you put the bulk of your money in these vehicles is that you won't make much more than 1% in interest each year. That's better than spending the money, but in order for it to truly grow in value, it has to perform better than the rate of inflation.

According to the Bureau of Labor Statistics (BLS), the average rate of inflation for the first half of 2023 was 5.4%. Most financial planners, though, use 3.0% as the historical average. Regardless of which rate you prefer to use, you may need help to guide you toward the best vehicles out there. We've devised a list of seven exchange-traded funds (ETFs) you may want to consider if you decide to move from a savings account to a higher-earning investment.

Key Takeaways

  • Investing in savings accounts and certificates of deposit won't help you grow your money.
  • Consider investing in ETFs in lieu of low-yielding investment vehicles.
  • Index ETFs try to mirror the returns of their underlying index, such as the S&P 500.
  • Bond ETFs allow investors to spread their money across hundreds or thousands of bonds at the same time.
  • With sector ETFs, you add more weight to a part of the economy that you think will outperform.

Using Exchange-Traded Funds (ETFs) to Save

Investing in ETFs is the hottest trend since the mutual fund. As of the third quarter of 2022, there were 3,030 ETFs listed in the United States. These investments represented $5.928 trillion in assets. The average trading volume for U.S.-listed ETFs was 2.30 billion.

There are many easy-to-understand ETFs within this group that have the potential to outperform inflation. To yield better results, you have to take on more risk, but some ETFs offer much lower risk than individual stocks. For investors with a longer-term time horizon, these ETFs can build long-term savings better than a savings account or CD. We've divided them up between index, bond, and sector ETFs.

You can lose money when investing in an ETF. Consider the timing of when you need money, and consider the low-risk savings account if a major purchase such as a house is in your horizon.

ETFs vs. Savings Accounts

Before you dump your entire savings account into an ETF, let's cover the differences between the two. An ETF is an investment vehicle that holds stocks, bonds, commodities, or other securities. A savings account is a basic banking product where you deposit your money, and the bank pays you interest on those deposits.

The most important thing to be mindful of is the potential for loss. ETFs carry various levels of risk, depending on the underlying assets. You can make more money than you would with a savings account, but you're also exposed to losing money. Savings accounts are low-risk, as there is very little risk of losing your principal investment in a savings account. This is because of Federal Deposit Insurance Corporation (FDIC) coverage which provides protection up to $250,000 per depositor per bank.

ETFs are traded on stock exchanges throughout the trading day, and their prices can fluctuate. You can buy and sell shares at market prices at any time during market hours. On the other hand, a savings account just holds currency. You can get fancy and have different savings accounts for different currencies, but savings accounts do not hold securities.

Another big difference between the two is the potential for taxable income. Depending on the vehicle in which you hold the ETF, your gains may or may not be taxable. Alternatively, in some vehicles, you may not be able to withdraw your original principal (i.e. traditional IRA), though you can in others (i.e. Roth IRA).

Index ETFs

Index ETFs follow a large market index. When developing an investment portfolio, remember to take a balanced approach. Some financial planners recommend that younger investors should have a heavier weighting in stock market index ETFs in their portfolios.

If you need some ideas, here are three index ETFs you may want to consider.

The SPDR S&P 500

The SPDR S&P 500 (SPY) mirrors the performance of the S&P 500. Not only is it the largest ETF in the world, but it's also the oldest. Launched in 1993, the fund has more than $394 billion in assets under management (AUM). The fund's fees are only 0.0945%, which is far below the category average of 0.35%.

The fund had 504 holdings as of October 19, 2023. The top five companies were Apple (7.19%), Microsoft (6.86%), Amazon (3.25%), Nvidia Corp (2.90%), and Alphabet Class A (2.28%). The top three sector weightings were:

  • Information Technology (27.97%)
  • Healthcare (13.30%)
  • Financials (12.66%)

This fund eclipsed the performance of most savings accounts over the five-year period ending September 30, 2023, yielding 9.77%.

The iShares Russell 2000 Value Index

If you want to capture the performance of smaller companies, you need the iShares Russell 2000 Value Index ETF (IWM). Established in 2000, IWM has $9.8 billion in AUM as of October 20, 2023. With an expense ratio of 0.24%, its cost is still below the industry average, and this fund is a favorite among small-cap investors.

IWM is heavily weighted in financials (25.68%), industrials (14.09%), and energy (11.56%). Its top five holdings were Chord Energy Corp, Murphy Oil Corp, Matador Resources, PBF Energy Inc Class A, and Civitas Resources Inc. IWM returned 2.40% to investors over a five-year period as of September 30, 2023.

The Vanguard Total Stock Market ETF

If you want the broadest representation of the U.S. stock market, consider the Vanguard Total Stock Market ETF (VTI). The fund follows an index that invests in a sample of stocks from the New York Stock Exchange (NYSE) and the Nasdaq. This fund was launched in 2001 and, like any Vanguard product, is fairly inexpensive with an expense ratio of just 0.03%. Assets under management were $1.3 trillion.

There were 3,824 stocks in the fund as of the end of September 2023, with a focus on technology (29.80%), consumer discretionary (14.40%), and industrials (12.80%). Apple, Microsoft, Amazon, Nvidia, and Alphabet Class A were the top five holdings. VTI returned 9.06% in a five-year period as of September 30, 2023.

Investors often use index ETFs as core holdings along with a mixture of bond ETFs in their portfolios.

Bond ETFs

Bond ETFs allow you to invest in the safety of bonds without the risk of holding individual bonds. These funds invest in hundreds or thousands of bonds at the same time, making your money relatively safe.

That said, don't expect to see big price gains in these ETFs. It's the dividend yield that should interest you. The older you are, the more your investment dollars should be in bonds. Here are two bond ETFs to consider.

The iShares iBoxx $ High Yield Corporate Bond ETF

This fund (HYG) gives investors exposure to the higher-yielding corporate bonds on the market. The fund was launched in 2007 and had $11 billion in AUM as of October 20, 2023. The expense ratio was 0.49%.

HYG's sector breakdown was heavily weighted in consumer cyclical (21.01%), communications (16.94%), and consumer non-cyclical (12.97%). As of October 19, 2023, its top five holdings were CCO Holdings, Ford Motor Credit, Tenet Healthcare, Transdigm Inc, and CSC Holdings. The total return for this ETF was 1.95% after five years. Its dividend yield was 5.97%.

The iShares iBoxx $ Investment Grade Corporate Bond ETF

Higher yields come with higher risk. To capture the returns of higher-rated bonds, look at the iShares iBoxx $ Investment Grade Corp Bond Fund (LQD). This ETF not only gives you the safety of investing in a large basket of bonds, but all are highly rated with little chance of default.

LQD began trading in 2002. It reported a total AUM of more than $27.3 billion as of October 20, 2023. The expense ratio is only 0.14%.

Banking, consumer non-cyclical, and communications were the top three sectors in the fund. Top holdings as of October 19, 2023, were JPMorgan Chase, Bank of America, Morgan Stanley, Wells Fargo, and Goldman Sachs. The fund returned 0.77% after five years and its dividend yield was 4.49%.

ETFs come with lower average costs because it would be expensive for an investor to buy all the stocks held in an ETF portfolio individually.

Sector ETFs

Sector ETFs are riskier than the index ETFs discussed previously. Investors use these securities to add more weight to an area of the economy they believe may outperform the rest of the economy in the coming years.

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.

The Financial Select Sector SPDR

The Financial Select Sector SPDR (XLF) is one of the most popular sector ETFs. The fund invests in a basket of stocks that represent the financial sector. It began trading in 1998 and has an expense ratio of 0.10%. Total assets under management as of October 19, 2023, were $29.89 billion.

Financial services, banks, and capital markets, were the three largest sectors that made up the fund. The ETF's largest holdings as of October 19, 2023, were Berkshire Hathaway, JPMorgan Chase, Visa Inc Class A, Mastercard Inc, and Bank of America. Its five-year return was 5.93%. The fund's dividend yield was 1.87%.

The Invesco QQQ Trust Series 1

Although not technically a sector ETF, the Invesco QQQ (QQQ) is the ETF of choice for investors who want to capture the performance of the technology sector. This ETF was launched in 1999 and reported assets under management of $152.73 billion. The fund has an expense ratio of 0.2%.

Information technology, communication services, and consumer discretionary were the top three sectors. The ETF had 101 holdings, of which the top five were Apple, Microsoft, Amazon, Nvidia, and Meta Platforms A. The fund returned 14.84% to investors after five years as of September 30, 2023. It has no yield.

Can I Lose Money by Investing in ETFs, Whereas Savings Accounts Are Safe?

Yes, it's possible to lose money when investing in ETFs. If the underlying assets in the ETF portfolio decrease in value, the ETF's share price will also decline, resulting in potential losses for investors. Savings accounts are generally considered safe, as they are insured by government agencies (e.g., FDIC in the United States) up to a specific limit, providing protection against the loss of the principal amount.

Are ETFs a Suitable Option for Short-Term Savings?

ETFs are generally better suited for long-term investments. Their value can fluctuate due to market movements, and they are exposed to market volatility. For short-term savings goals or emergency funds, savings accounts are considered a safer option due to their stability and liquidity.

Are ETFs as Liquid as a Savings Account?

TFs are highly liquid. They can be bought or sold during market hours at prevailing market prices. This provides quick access to your investment capital. Savings accounts are equally liquid, allowing you to withdraw or transfer funds as needed. However, there may be limits on the number of withdrawals or transfers per month due to regulations like Reg D in the United States. In addition, be careful if you invest in an ETF within a retirement account, as you may not be able to withdraw funds until retirement without penalty.

Do ETFs Provide Any Form of Insurance or Protection?

ETFs do not provide deposit insurance. You can lose your money when investing in an ETF.

The Bottom Line

Keeping money in a savings account might feel safe, but its value is eroding due to inflation. That might change in future years as interest rates rise, but for now, a relatively safe way to put your money to work is through ETFs.

Take a look at each fund's website and learn all you can about each security you are interested in adding to your portfolio. You should be able to talk to your friends or family about the details of the fund before investing real money. If you can't do that, you're not ready to invest.

7 Easy To Understand ETFs To Replace A Savings Account (2024)


7 Easy To Understand ETFs To Replace A Savings Account? ›

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.

What is a simple way to explain ETF? ›

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.

Why does Dave Ramsey not like ETFs? ›

Constantly Trading

One of the biggest reasons Ramsey cautions investors about ETFs is that they are so easy to move in and out of. Unlike traditional mutual funds, which can only be bought or sold once per day, you can buy or sell an ETF on the open market just like an individual stock at any time the market is open.

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.

What is an ETF savings account? ›

The ETF invests their assets in deposit accounts at major banks, which offer interest rates that are similar to high-interest savings accounts. Liquidity. Generally speaking, much like a stock, a high-interest savings ETF can be bought and sold fairly quickly on a stock exchange.

How does ETF work for dummies? ›

A cross between an index fund and a stock, they're transparent, easy to trade, and tax-efficient. They're also enticing because they consist of a bundle of assets (such as an index, sector, or commodity), so diversifying your portfolio is easy. You might have even seen them offered in your 401(k) or 529 college plan.

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 my savings in ETFs? ›

ETFs carry various levels of risk, depending on the underlying assets. You can make more money than you would with a savings account, but you're also exposed to losing money. Savings accounts are low-risk, as there is very little risk of losing your principal investment in a savings account.

Why should we avoid 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.

Can you retire a millionaire with ETFs alone? ›

Investing in the stock market is one of the most effective ways to generate long-term wealth, and you don't need to be an experienced investor to make a lot of money. In fact, it's possible to retire a millionaire with next to no effort through exchange-traded funds (ETFs).

What happens if ETF shuts down? ›

ETFs may close due to lack of investor interest or poor returns. For investors, the easiest way to exit an ETF investment is to sell it on the open market. Liquidation of ETFs is strictly regulated; when an ETF closes, any remaining shareholders will receive a payout based on what they had invested in the ETF.

Has an ETF ever failed? ›

ETF closures are rare, but they do happen. Here's what to do in case it happens to a fund you own. Anna-Louise is a former investing and retirement writer for NerdWallet.

Can an ETF go to zero? ›

For most standard, unleveraged ETFs that track an index, the maximum you can theoretically lose is the amount you invested, driving your investment value to zero. However, it's rare for broad-market ETFs to go to zero unless the entire market or sector it tracks collapses entirely.

What ETF is like a savings account? ›

iShares Trust - iShares 0-3 Month Treasury Bond ETF

With high-yield savings accounts offering interest rates of 5% or more, you're earning a solid real return on your cash savings these days.

How safe are high interest savings ETFs? ›

Very Low Risk: These ETFs have virtually no market or credit risk because they do not invest in stocks or bonds, which are subject to market fluctuations and credit risk. Instead, the funds are held in cash, making them a much safer investment.

What is the US high interest savings account ETF? ›

The US High Interest Savings Account Fund seeks to maximize monthly income while preserving capital and liquidity by investing primarily in high US dollar interest deposit accounts.. Based on 0.00 analysts, US High Interest Savings Account Fnd ETF gets an average recommendation of "Strong Sell" according to Zacks.

How is ETF different from stocks for beginners? ›

stocks. The biggest difference between ETFs and stocks is that a stock represents ownership in a single company, whereas an exchange-traded fund is a collection of investable assets and securities, including stocks and bonds.

How is an ETF different from 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.

What is the difference between a mutual fund and an ETF for dummies? ›

Mutual funds are usually actively managed, although passively-managed index funds have become more popular. ETFs are usually passively managed and track a market index or sector sub-index. ETFs can be bought and sold just like stocks, while mutual funds can only be purchased at the end of each trading day.

What is the difference between a mutual fund and an ETF? ›

Both can track indexes, but ETFs tend to be more cost-effective and liquid since they trade on exchanges like shares of stock. Mutual funds can offer active management and greater regulatory oversight at a higher cost and only allow transactions once daily.

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