ETFs
An ETF is a basket of investments that you can buy and sell like a stock. It is one of the simplest ways to diversify, especially if you are starting with smaller amounts.
The Big Idea: Diversification
Buying one stock can be risky. An ETF can hold hundreds or thousands of stocks or bonds, so your risk is spread out across many investments.
Why ETFs are popular:
You can buy one share at a time, diversify instantly, and you are not forced to meet large minimum investments.
How ETFs Work
Trade like a stock
ETFs trade on an exchange. Their price moves during the day while markets are open, just like stocks.
You can use limit orders
A market order buys at the best available price right now. A limit order lets you set the highest price you will pay, which can help you avoid surprises.
The basket stays close to its value
ETFs have a net asset value (NAV), based on what they hold. Trading prices usually stay close to NAV, thanks to a behind the scenes process that adds or removes shares when needed.
Index ETFs vs Active ETFs
Most beginners should start with index ETFs.
Low fees: Many index ETFs are very inexpensive
Simple: You track the market instead of guessing winners
Diversified: One ETF can hold hundreds or thousands of investments
Flexible: Buy and sell anytime markets are open
Index ETF
Tracks an index such as the S&P 500, total US market, or total world market. Designed to match the market, not beat it.
Active ETF
A manager chooses investments trying to outperform. These usually cost more, and performance can be unpredictable.
ETFs and Fees
Expense ratio: The annual fee the ETF charges. Under 0.10% is great for broad index ETFs; over 0.50% is usually expensive.
Trading costs: Most brokerages offer commission free ETF trades, but your order price still matters.
Bid ask spread: The difference between what buyers pay and sellers accept. It is usually tiny for popular ETFs, but can be larger for niche ETFs.
Picking a Beginner Friendly ETF
Go broad
Prefer broad market ETFs over narrow, trendy themes. Broad ETFs are more diversified and usually cheaper.
Keep fees low
Look for low expense ratios. Over decades, fees can quietly eat a lot of returns.
Avoid hype
If an ETF is built around a fad, it can rise fast and fall fast. Beginner investing is about consistency, not excitement.
Popular Index ETFs to Know
S&P 500 ETF
Tracks the 500 largest US companies. This is a common starting point for long term investing.
Total US stock market ETF
Tracks most publicly traded US companies, large to small. More diversified than just the S&P 500.
Total world stock market ETF
Tracks companies around the world. It is a one fund approach for broad diversification.
Bond index ETF
Holds many bonds in one ETF. Often used to reduce risk and smooth out the ride as your goals get closer.
Key Takeaway
ETFs make diversification easy, and they are often a great choice when you are starting out. If you keep it broad, keep fees low, and avoid hype, you can build wealth in a simple, repeatable way.