Jan 31, 2023
How to Invest in ETFs: A Beginner’s Guide
An ETF, or Exchange Traded Fund, is a basket of different securities collected into a single fund you can buy shares of. ETFs provide investors with a way to diversify their asset holdings with one purchase. The mix of different investment classes may include stocks, bonds, and other securities like real estate. ETFs operate much like mutual funds, but with the added benefit of trading them through a stock exchange like regular stocks.
Additionally, ETFs can help you gain broad investment exposure and develop a more diversified portfolio, which can be especially helpful for beginner investors. Ready to learn how to invest in ETFs? Read on for four simple steps that will get you started.
In this article, we’ll cover:
Step 1. Open an investment account
Just like investing in stocks and other securities, you can’t buy ETFs directly on the stock market; you’re required to open a brokerage account. A brokerage account is a taxable investment account you use to buy and sell securities, including ETFs, through a licensed brokerage firm. You deposit funds into your account, and your brokerage uses that money to buy and sell the securities you select on your behalf.
As an investor, you decide how involved you want to be in managing your brokerage account. More experienced, hands-on investors may want to take a DIY approach. If you’re a beginner or don’t want to devote large amounts of time to managing your portfolio by yourself, you may elect to have a financial advisor or the brokerage’s robo-advisor take on the management for you. Regardless of the method you choose, you can specify your risk tolerance, investing time horizon, and long-term goals to customize your investing experience.
Opening a brokerage account online is relatively simple. Be prepared to share personal information like your name, social security number, date of birth, contact information, forms of identification, and financial status when you open your investment account. Once your account is open, you’ll deposit money and select whatever stocks, funds, or other securities you’d like to buy.
What to look for in a brokerage
There are several factors to consider when you’re looking for the right brokerage to meet your needs:
- Management options: Whether you opt for a traditional brokerage firm or an online or app-based brokerage, look for one that offers the level of guidance and management you need.
- Convenience: If easy access to your account is important to you, consider that online brokers allow you to access your information and submit transaction requests from your computer or phone 24/7, while traditional brokerages may not.
- Investing options: Ensure that your brokerage offers the kind of securities you want to buy, like ETFs, mutual funds, stocks, bonds, commodities, or even cryptocurrency.
- Fees: Additionally, consider how much you’re willing to pay in fees. Nearly all brokerages charge fees, but they vary considerably.
- Balance requirements: Finally, take a look at the brokerage’s balance and minimum deposit requirements to ensure they line up with your budget.
Step 2. Research ETFs to buy
Once you’ve opened your brokerage account, it’s time to research which ETFs you want to purchase. As you explore, keep in mind your investment objectives so you can choose the one that best supports your investment goals, risk tolerance, and personal interests. Research each fund’s holdings and its track record of performance over time. If you’re investing in a market or sector ETF, decide which index you want to track, whether it’s the S&P 500, the Dow, or something else. Also, consider the costs and operating expense ratios of the funds you’re considering.
In addition to deciding which ETFs to purchase shares of, you’ll want to decide how many to invest in. While that number depends on your budget and investment strategy, financial experts generally recommend keeping up to 10 ETFs in your portfolio. If your brokerage offers fractional shares, you may be able to put money into multiple ETFs even if you don’t have a large sum of money to invest at the beginning.
Types of ETFs you can invest in
The world of ETFs is vast, and there are lots of types to investigate. The number of ETFs available in the United States has grown steadily over the last twenty years, with more than 2,600 available today. Most have a particular focus or objective, like matching the performance of an index, investing in specific sectors, or implementing a specific investment strategy.
ETFs can be passively or actively managed. Passive ETFs generally follow a buy-and-hold investing strategy that tracks a benchmark; many of the funds listed below are usually considered passive ETFs. Active ETFs, on the other hand, have a manager making decisions about portfolio allocation and, if they track an index, they may deviate from it based on the fund management’s strategy.
- Market ETFs: Also called equity funds, these ETFs could be lower risk since they try to accurately reproduce the performance of a specific index.
- Sector ETFs: These funds aim to match the overall performance of an index, like Market ETFs, but sector ETFs focus on a specific sector or industry.
- Thematic ETFs: These funds target a subset of a sector, so they’re even more narrowly focused than sector ETFs.
- Bond ETFs: Also called fixed-income ETFs, these funds invest exclusively in bonds. They’re often considered lower risk since bonds tend to be less volatile than stocks.
- Commodity ETFs: Some commodity ETFs actually purchase commodities, like gold, oil, and agricultural goods, while others invest in companies that produce or handle those commodities.
- Foreign market ETFs: These funds attempt to mirror a non-US index, like Japan’s Nikkei Index.
- Currency ETFs: Also called foreign currency ETFs, these funds track the relative value of one or more currencies.
- Inverse ETFs: These funds require active management, as they’re designed to increase in price when a given market index declines in price and can be relatively high-risk.
- Leveraged ETFs: These funds follow a risky investment strategy that uses borrowed funds to buy options and futures to increase the impact of price movements.
Step 3. Purchase your chosen ETFs
You’ve done the research, and now it’s time to make your ETF purchase through your brokerage. If you’re using an online brokerage or app, start by searching for the ETF you’ve chosen by entering its stock ticker symbol. You may be able to purchase directly from the ETF’s entry if you’re using your brokerage’s research tools. Select your ETF and enter the number of shares you wish to purchase. Then submit and confirm your order. Congratulations, you’ve just purchased your first ETF.
Step 4. Set up a regular investing schedule
Once you’ve made your first investment, it’s important to set up a regular investing schedule. When you take a dollar-cost averaging approach today, you may be more likely to build wealth over the long term. Whether monthly, weekly, or quarterly, set up a regular transfer from your bank account to your investment account so that investing becomes a habit. Maintaining a regular investing schedule could help you mitigate the risk of mistiming the market, diversify the average cost of shares over time, and reduce the potential stress of investing.
Invest in ETFs with a diverse and defensive strategy
Beginner investors may find that ETFs are a useful way to build diversity into their portfolios as they’re learning how to start investing. Investing in ETFs can be a relatively easy and flexible way to start diversifying your portfolio. With more than 90 ETF options available, plus the option for fractional shares, Stash can help you get started.
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