Exchange-traded funds (ETFs) have become one of the most popular investment options, offering a simple and cost-effective way to potentially grow wealth. But are ETFs good for beginners? Absolutely! If you’re looking to dip your toes into investing but don’t want to get lost in a sea of complicated jargon or take on high risks, ETFs might be a good place to start.
In this article, we’ll explain exactly what this investment is, how it works, and how to make money with ETFs. By the end, you’ll feel confident about investing in ETFs and taking steps toward building your financial future.
What are ETFs, and how do they work?
An ETF, or exchange-traded fund, is a basket of securities (like stocks, bonds, or other assets) that you can buy and sell on the stock exchange—just like individual stocks. The beauty of ETFs is that they allow you to invest in a broad range of assets with a single purchase, giving you instant diversification. To do so, ETFs follow a specific market index (like the S&P 500), giving you exposure to a broad range of companies. This means you're spreading your risk across multiple investments rather than putting all your eggs in one basket. (Think of it as a variety pack.)
“ETFs track the performance of an underlying index or commodity,” says Kevin Huffman, a personal finance and investment specialist. “They are exchange-traded, meaning they are bought and sold like any other security. ETF investors get instant diversification that matches the way that the underlying index or commodity is composed and is often highly diversified.”
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How much money should I have in an ETF?
The right asset allocation for ETFs very much depends on your particular financial circumstances, attitude to risk, and the time you have to wait for the returns. “If you’re new to the world of investing in ETFs, begin with a small allocation and increase it as you become more comfortable with the asset class,” Huffman says.
You can start investing in ETFs with as little as $100. Most brokerage firms allow you to buy fractional shares of ETFs, meaning you don't have to purchase a whole share at once. This makes it more accessible for those with smaller investment amounts.
How do you get paid by ETF?
Similar to stocks, you can make money with ETFs through price appreciation (when the value of the ETF increases) and dividends (portions of a company’s earnings distributed to shareholders). Many ETFs distribute dividends to investors, which can be reinvested to grow your investment further.
Do ETFs pay out monthly?
Dividends are sometimes paid monthly, though most ETFs pay dividends quarterly or annually—overall it depends on the specific fund. Always check an ETF's distribution schedule before investing, especially if monthly dividend payments are important to your financial goals.
Are ETFs good for beginners?
Yes! “ETFs are an investment vehicle that is ideal for beginners or for those looking for convenient exposure to a particular asset class,” Huffman says. ETFs are beginner-friendly because they offer built-in diversification, low costs, and ease of trading. They can be a great way to start investing without the complexity or risk of picking individual stocks.
Are ETFs a good way to build wealth?
ETFs can be a great way to build wealth. “They can be cheap, are very liquid, and are usually tax-efficient,” Huffman says. “They give you access to all kinds of asset classes, which can help you spread risk, and might make you more money over the long term.”
Let’s break down the benefits of investing in ETFs further:
- Diversification: ETFs offer exposure to a wide range of assets. For example, if you buy an ETF that tracks the S&P 500, you’re immediately investing in 500 different companies without the burden and the risk that comes with holding individual stocks.
- Low cost: ETFs generally have lower fees than mutual funds because they are passively managed; in other words you’re not paying a fund manager to actively pick stocks for you. That means you keep more of your money working for you.
- Liquidity: Since ETFs trade on exchanges like stocks, they can be bought or sold at any time during market hours. This makes them a liquid and flexible investment option.
- Variety: There are ETFs that cover almost every sector, region, or type of asset class you can imagine. Whether you're interested in tech stocks, clean energy, cannabis, women-owned businesses, or international markets, there’s likely an ETF that fits your values and investment goals.
What is the downside of owning an ETF?
While ETFs offer many advantages, like any investment they also come with risks. For example, ETFs that track specific sectors can be volatile, and as with any investment, there’s the potential to lose money if the market takes a downturn.
Is it OK to just invest in ETFs?
Many investors, both beginners and pros, use ETFs as the foundation of their long-term investment strategy because of their simplicity and flexibility. But the golden rule is to always diversify your investments. You need different methods for your different goals.
“An all-ETF strategy can be a restrictive one,” Huffman says. “A balanced portfolio can help you smooth out market volatility and stick to your long-term financial goals.” The investment that will give you extra money to travel next summer is not the same as one that will help you retire comfortably 30 years from now. A thoughtful investment strategy might mix and match ETFs with high-yield savings accounts, a 401(k) or Roth IRA, for example.
How to make money with ETFs: A step-by-step guide to get started
Now that you have a basic understanding of how this investment option works, let’s answer the burning question: How do you make money on an ETF? Investing in ETFs doesn’t have to be intimidating. Here’s how you can get started:
1. Set your investment goals
Think about your financial goals to decide how much money you'll be investing in ETFs. Are you going for the long term (like retirement), or do you have short-term goals (like saving for a down payment)? Knowing what you want to achieve will help guide your decisions on which ETFs to choose and how much to invest.
2. Open a brokerage account
Wondering how to buy ETFs? You’ll need a brokerage account. Many online brokers offer commission-free ETF trading, which means you won’t pay extra to buy or sell ETFs. Choosing well-known platforms can make you feel more secure if you’re new to investing.
3. Research the right ETFs for you
Not all ETFs are created equal, so do your homework. Some ETFs track broad indexes like the S&P 500, while others focus on specific industries, regions, or themes. The price of an ETF is just one factor to consider when making investment decisions.
Also evaluate the ETF's underlying holdings, expense ratio, and other factors to determine if it aligns with your investment goals. If you’re a beginner, broad-market ETFs might be a good starting point because they provide a well-rounded exposure to the market.
4. Buy your chosen ETFs
Once you’ve selected the ETFs that align with your investment goals, it’s time to buy. Just like you would with a stock, you can purchase shares of an ETF through your brokerage platform. Remember, you don’t have to go all-in at once. You can start small and build your portfolio over time.
5. Monitor and adjust your investments
After buying ETFs, keep an eye on your investments. While ETFs are generally lower maintenance compared to individual stocks, it’s still important to check in on your portfolio periodically. Over time, your goals might change, or the market might shift, so you may need to adjust your ETF holdings to stay on track.
Tips to maximize your gains
Can you make good money with ETFs? Yes, you can—especially over the long term. ETFs that track broad-market indexes like the S&P 500 have historically provided strong returns, making them a solid investment for building wealth over time.
ETFs can be a useful tool for generating income and building wealth, but here are some tips to help you maximize your returns:
Focus on long-term investing
ETFs are best suited for long-term investing strategies, so don’t expect to make quick profits overnight. As with individual stocks, the longer you hold onto your ETFs, the more time they have to grow and compound. This is especially true for ETFs that track large indexes like the S&P 500, which historically deliver steady returns over time.
Reinvest your dividends
Many ETFs pay dividends to shareholders. You can reinvest these dividends into more shares of the ETF, helping your portfolio grow faster through the power of compounding. Most brokerage platforms offer dividend reinvestment programs (DRIPs) that automate this process for you.
Diversify across sectors
While ETFs already provide diversification by holding multiple assets, you can take diversification a step further by investing in ETFs across different sectors or asset classes. For example, you might hold one ETF focused on U.S. stocks, another on international markets, and one that tracks bonds or commodities. This approach helps spread out your risk even more.
Keep an eye on fees
One of the reasons ETFs are so popular is their low cost. In general, aim for ETFs with an expense ratio (annual fee) of 0.5% or lower. However, some ETFs come with higher expense ratios, especially if they are actively managed or target niche markets. Make sure you’re not paying more in fees than necessary.
Bottom line: ETFs are a smart choice for beginner investors
ETFs are a versatile and low-cost investment tool that can help you grow your wealth over time. Whether you’re just starting or looking to expand your portfolio, understanding how to make money with ETFs is key to your financial success. By doing your research, staying patient, and diversifying your investments, you’ll be well on your way to achieving your financial goals.