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Exchange-traded funds (ETFs) can be an excellent entry point into the stock market for new investors. They’re cheap and typically carry lower risk than individual stocks since a single fund holds a diversified collection of investments.
ETFs for beginners
One way for beginner investors to get started is to buy ETFs that track broad market indexes, such as the . In doing so, you’re investing in some of the largest companies in the country, with the goal of long-term returns.
» More: See the best in terms of historical performance.
Other factors to consider include risk and the fund’s expense ratio, which is the amount you’ll pay in fees every year to own the fund — the lower the expense ratio, the less it will eat into your returns.
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Types of ETFs
There are many types of ETFs that can expose your portfolio to different assets and markets. These include:
Stock ETFs.
Bond ETFs.
Specialty ETFs.
Sustainable ETFs.
Commodity ETFs.
Factor ETFs.
Currency ETFs.
By including other sectors and types of investments within your investment portfolio, you're diversifying your assets. Diversification brings down risk. In the event that one company or sector does not perform well, you have many others that may support the performance of your portfolio as a whole. You should evaluate your financial plan to decide if any of these types of ETFs are right to include in your portfolio. You'll need to consider your investment goals and risk tolerance.
How to buy an ETF
Here’s how to find and buy ETFs in just a few steps.
1. Open a brokerage account
You’ll need a brokerage account to buy and sell securities like ETFs. If you don’t already have one, see our resource on brokerage accounts and how to open one. This can be done online, and many brokerages have no account minimums, transaction fees or inactivity fees. Opening a brokerage account may sound daunting, but it’s really no different than opening a bank account.
If you’d rather have someone do the work of investing for you, you might be interested in opening an account with a robo-advisor. Robo-advisors build and manage an investment portfolio for you, often out of ETFs, for a low annual fee (typically 0.25% of your account balance). Because robo-advisors offer curated investment portfolios, you may not be able to find and invest in the ETFs outlined above. But that’s part of their appeal — the robo-advisor picks investments for you.
» Check out our list of the top robo-advisors.
To screen and invest in the specific ETFs you want, you’ll need a brokerage account at an online broker.
» Want to compare options? See the full list of our best brokers for ETF investors.
2. Find and compare ETFs with screening tools
Now that you have your brokerage account, it’s time to decide what ETFs to buy. It's important to research ETFs, just as you'd research stocks. Whether you’re after the best-performing broad index ETFs or you’d like to search for others on your own, there are a few ways to narrow your ETF options to make the selection process easier.
Most brokers offer robust screening tools to filter the universe of available ETFs based on a variety of criteria, such as asset type, geography, industry, trading performance or fund provider.
There are thousands of ETFs listed in the U.S. alone, so screeners are critical for finding the ETFs you’re looking for. Try using the below criteria in your brokerage’s screener to narrow them down:
Administrative expenses. Also known as expense ratios, these expenses cut into profit, so lower is better. According to Morningstar, the asset-weighted average expense ratio for passively managed funds was 0.12% in 2020, so this could be a good number to start with in your screener. You’ll find, though, that some popular ETFs have expense ratios much lower than this, so don’t be afraid to screen for below the average.
Commissions. These are fees you pay per transaction when you buy or sell an ETF. Fortunately, commissions are virtually nonexistent at most major online brokers these days, but it’s a good idea to check before you buy. Brokers that charge a commission often offer select ETFs commission-free.
Volume. This shows how many shares traded hands over a given time period — it’s an indicator of how popular a particular fund is.
Holdings. You’ll be able to see the top holdings in the fund, which simply means the individual companies the fund invests in.
Performance. You know the saying: “Past performance doesn’t indicate future returns.” But it still can be useful to compare the performance history of similar funds. Look at a fund's long-term performance, so three-year, five-year or 10-year performance instead of one-year for example, to get a sense of how it has performed historically.
Trading prices. ETFs trade like stocks; you’ll be able to see current prices, which dictates how many shares you can afford to buy.
» Still not sure how it works? Learn all about ETFs first.
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3. Place the trade
The process for buying ETFs is very similar to the process for buying stocks. Navigate to the “trading” section of your brokerage’s website; in this context, “trade” means you’re either buying or selling an ETF. You’ll buy the ETF using its ticker symbol — here’s more on that and other basic terms you’ll need to know:
Ticker symbol | The unique identifier for the ETF you want to buy. Be sure to check you have the correct one before proceeding. |
Price | The current trading price is determined by:
|
Number of shares | The number of shares you wish to buy. |
Order type | These basic order types should suffice, though additional options may be available:
|
Commission | Price per trade the brokerage will charge for its service. Most major brokerages now offer commission-free ETF trades. |
Funding source | The bank account linked to your brokerage account — be sure it has sufficient funds to cover the total cost. |
And here’s what that looks like within a brokerage, in this case Vanguard:
Before you execute your order, you’ll have an opportunity to double-check that everything is correct. Make sure your order is set up as intended: Check the ticker symbol (ETFs with similar ticker symbols can be wildly different), order type and that you haven’t made a “fat finger” error — for example, typing 1,000 shares when you intended to buy only 100.
4. Sit back and relax
Congratulations, you’ve just bought your first ETF. These funds can help form the basis of a well-diversified portfolio and serve as the first step in a long-lasting investment in the markets. There’s no need to compulsively check how this ETF (or your other investments) are performing, but you can access that information when you need it by checking the ticker symbol on your brokerage’s website or even just by typing it into Google.
If you're wondering how your brand new ETF purchase might affect your long-term investment goals, you can look at different scenarios (e.g. 9% or 5% annual returns) using an investment calculator.
Frequently asked questions
How is an ETF different from a stock?
When you buy individual stocks, you’re buying shares of a single company. An ETF holds a collection of several stocks, bonds, commodities or a combination of these, and each share you purchase gives you a slice of all of them. This is an easy way to diversify your portfolio. To build this diversification with individual stocks, you'd have to do significant research and purchase shares in many different companies.
Are ETFs safer than stocks?
In many situations, ETFs can be safer than stocks because of their inherent diversification. If you buy shares of a stock and the company performs poorly, the value of your stock goes down. If that’s the only stock in your portfolio — or even one of a few — that can be a big blow to your finances. However, if you’d purchased shares of an ETF and one or two stocks in the ETF perform poorly, the other ETF holdings can offset those losses.
Are ETFs good for beginners?
ETFs can be some of the best investments for beginners. They’re relatively inexpensive, available through robo-advisors as well as traditional brokerages, and tend to be less risky than investing individual stocks. (Robo-advisors are online investment advisors that build and manage a portfolio for you, often using ETFs because of their low cost.)
Learn more about sector ETFs:
15 Best-Performing Energy ETFs.
How to choose the right biotech ETFs for you.
Why gold ETFs are having a record year.
Marijuana ETFs: On a Roll or Up in Smoke?
Understand .
Invest abroad? Check out China ETFs.
Neither the author nor editor held positions in the aforementioned investments at the time of publication.
