On a similar note...
On a similar note...
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Exchange-traded funds can be an excellent entry point into the stock market for new investors. They’re cheap and typically carry lower risk than individual stocks, because a single fund holds a diversified collection of investments. Perhaps best of all, these aren’t complicated financial products. Here’s how to identify the best ETFs for you, and how to buy them in just a few steps.
Ready to start investing? Follow the four steps below.
How to buy an ETF
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 100% 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. Here’s a 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. Whether you’re after the best ETFs we outlined above 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 more than 2,000 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 0.15% in 2018, 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.
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.
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:
The unique identifier for the ETF you want to buy. Be sure to check you have the correct one before proceeding.
The current trading price is determined by:
Number of shares
The number of shares you wish to buy.
These basic order types should suffice, though additional options may be available:
Price per trade the brokerage will charge for its service. Most major brokerages now offer commission-free ETF trades.
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.
Below is a list of the five best starter ETFs, and a breakdown of what makes these investments strong candidates for beginner investors.
The best ETFs for 2020
One of the best ways for beginner investors to get started is to buy ETFs that track broad market indexes, such as the S&P 500. In doing so, you’re investing in some of the largest companies in the country, with the goal of long-term returns. 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.
To arrive at our list, we looked for ETFs with expense ratios below 0.1% that hold the largest U.S.-based companies — the ETFs below track the S&P 500 or other large- or mega-cap indexes. We've only included ETFs with a 5-star Morningstar rating, which measures the historical risk-adjusted return of the fund. It's important to remember that metrics based on past performance, like the Morningstar rating, don't guarantee future results, but they can provide a good starting point in your search. Lastly, we’ve included the ETF's inception date, which marks the date the fund began operating. ETFs with longer track records provide investors more information and insight regarding long-term performance.
SPDR Portfolio S&P 500 ETF (SPLG)
At 0.03%, SPLG's expense ratio is the lowest among the 5-star ETFs on this list. The fund was designed to give investors broad, diversified exposure to the U.S. large-cap market by tracking the S&P 500. SPLG’s older sibling SPY (another very popular ETF) is also detailed below. Expense ratio: 0.03% Inception date: Nov. 8, 2005
Vanguard Large-Cap ETF (VV)
The first of two Vanguard ETFs on this list, VV tracks the CRSP U.S. Large Cap Index, which includes companies that make up the top 85% of investable market capitalization. This is compared to the S&P 500, which covers approximately 80% of available market cap. Expense ratio: 0.04% Inception date: Jan. 27, 2004
iShares Core S&P 500 ETF (IVV)
Similar to SPLG, IVV gives investors exposure to the companies of the S&P 500 with a focus on long-term growth and tax efficiency. This is a well-established ETF that has been helping investors track the returns of the S&P 500 for over 20 years. Expense ratio: 0.04% Inception date: May 15, 2000
Vanguard Mega-Cap ETF (MGC)
MGC tracks the CRSP U.S. Mega Cap Index, which is slightly more focused than the S&P 500, including companies that make up only the top 70% of investable market capitalization. In total, the ETF invests in 261 companies — more than a quarter of which are in the technology sector. Expense ratio: 0.07% Inception date: Dec. 17, 2007
SPDR S&P 500 ETF Trust (SPY)
SPY is the most established ETF on this list; it was the first ETF listed in the U.S., dating back to January 1993. SPY is essentially the original version of the aforementioned SPLG — they both seek to mirror the returns of the S&P 500.
The biggest difference is that SPY was set up as a unit investment trust, which operates under different rules than a typical ETF. And while there are a few technical differences, what matters most to beginner investors is that SPY cannot immediately reinvest its dividends. Rather, these dividends must be distributed as cash. If unit investment trust investors want to reinvest the dividends, they would need to do so through their broker’s dividend reinvestment program, if available. Expense ratio: 0.0945% Inception date: Jan. 22, 1993
Exchange-traded fund FAQs
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 are great for stock market beginners and experts alike. 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.)
Do ETFs pay dividends?
Yes, as long as the underlying stocks held within the ETF pay dividends. These companies’ dividends are collected by the ETF issuer and distributed to investors, typically quarterly, based on the number of shares the investor owns in the ETF. However, if none of the underlying companies in the ETF offer dividends, the ETF won’t pay dividends, either. Some ETFs are constructed specifically to maximize dividend income, known aptly as dividend ETFs.
» Related: 25 best performing high-dividend ETFs
Can you sell an ETF at any time?
Yes. Just like stocks, ETFs can be bought or sold at any time throughout the trading day (9:30 a.m. to 4 p.m. Eastern time), letting investors take advantage of intraday price fluctuations. This differs from mutual funds, which can only be purchased at the end of the trading day, for a price that is calculated after the market closes.
Learn more about sector ETFs:
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