Yesterday we told you all about what exchange-traded funds are. Now, we will explain how to invest in ETFs.
Step 1: Open a brokerage account.
To invest in ETFs, before you can buy or sell, you’ll need a brokerage account. Fortunately, most online brokers now offer commission-free stock and ETF trades. The best way to choose the right broker is to compare each fund’s features and platform. Moreover, if you’re new to investing, it might be wise to go with a broker that offers a wealth of educational resources – such as TD Ameritrade(NASDAQ:AMTD), E*Trade (NASDAQ:ETFC), or Schwab (NYSE:SCHW) – but there are many other great options out there too.
Step 2: Choose your first ETFs.
Passive index funds are typically the best route for those just starting to invest. This is because indexes cost less than actively managed fund counterparts. Furthermore, the sad reality is that most active managers underperform their benchmark indexes eventually.
To summarize, below is a list of ETFs with a brief description of what each invests in for beginners who are constructing their portfolios:
10 Great ETFs for New Investors
- Vanguard S&P 500 ETF (NYSE:VOO) – Large U.S. companies
- Schwab U.S. Mid-Cap ETF (NYSE:SCHM) – Midsize U.S. companies
- Vanguard Russell 2000 ETF (NYSE:VTWO) – Smaller U.S. companies
- Schwab International Equity ETF (NYSE:SCHF) — Larger non-U.S. companies
- Schwab Emerging Markets Equity ETF (NYSE:SCHE) — Companies from nations with developing economies
- Vanguard High-Dividend ETF (NYSE:VYM) — Stocks that pay above-average dividends
- Schwab U.S. REIT ETF (NYSE:SCHH) — Real estate investment trusts (REITs)
- Schwab U.S. Aggregate Bond ETF (NYSE:SCHZ) — Bonds of various types and maturity lengths
- Vanguard Total World Bond Fund (NASDAQ:BNDW) — Includes international and U.S. bonds of various lengths and maturities.
- Invesco QQQ Trust (NASDAQ:QQQ) – Tracks the Nasdaq-100 Index, which leans towards tech and other growth stocks.
You may notice that this list is primarily Vanguard and Schwab. There’s a solid reason for it. That is, both firms are committed to making it easier for Americans to get involved in the stock market at a low cost. Therefore, ETFs from both tend to be among the cheapest in the business.
Step 3: Let your ETFs do the hard work for you.
It’s crucial to remember that ETFs are usually maintenance-free investments.
Newer investors have a bad habit of frequently checking their portfolios and making emotional, knee-jerk reactions to significant market fluctuations. In reality, the average fund investor underperforms the market over time, and overtrading is to blame. As a result, once you acquire shares in some excellent ETFs, the best advice is to leave them alone and allow them to grow your money for long periods.