How to Start Investing with ETFs

April 3, 2017

If you want to build wealth over time, one of the best ways to go about it is to start investing. Investing allows you to take advantage of compound returns that can supercharge your earnings over time.

One way you can get started investing is to take advantage of exchange-traded funds (ETFs). These are funds that trade like stocks in the market. They are easy to buy, and they come with low costs.

Advantages of Investing with ETFs

The two biggest advantages to investing with ETFs are the instant diversification and the low cost.

When you invest in an ETF, you gain exposure to a variety of assets. One of the easiest ways to start is with a broad-based index ETF. There are ETFs that track the S&P 500. There are even ETFs that follow all of the publicly-traded stocks. It’s also possible to invest in bond ETFs. You can get ETFs that focus on the energy sector and those that focus on dividend-paying assets.

In the end, you can get instant diversity just by buying two or three ETFs.

On top of that, ETFs are low cost. They usually have much lower expense ratios that traditional mutual funds. You also pay for them as though you are trading stocks. So, if your broker charges you $6.95 a trade, you pay $6.95 when you buy your shares. Plus, you also have the expense ratio.

However, many brokers have commission-free ETFs. Before you open an account, check to see the collection of commission-free ETFs. That way, you won’t have to pay the regular fee when you trade. You only have the expense ratio, which is quite small, usually ranging between 0.04% and 0.75% per year.

Open a Brokerage Account

The good news is that it’s fairly easy to open a brokerage account and get started with investing in ETFs. Many brokers will let you open an account with no minimum. Plus, if you set up a regular investing plan, committing at least $100 a month, you can usually get started fairly easily, without minimum requirements of any kind.

You just need basic identifying information (name, address, birthdate, driver’s license, and Social Security number) to get started. Plus, you need to provide funding information so that you can get the money from your bank into the investing account.

Once you open your account, you can choose which ETFs you want to invest in. If you set up an investment plan, you can choose two or three ETFs and the proportion that you want to put into each. So, you can choose a stock ETF and a bond ETF, and put 80% of your monthly contribution in the stock ETF and 20% in the bond ETF.

Use Dollar Cost Averaging to Invest in ETFs

One of the best ways to start investing with ETFs is to use dollar cost averaging. This is when you contribute a set amount of money each month, no matter what. Many brokers will let you buy fractional shares of ETFs when you set up a regular investing plan.

So, if an ETF is priced at $75 a share, and you invest $200 a month, you would get 2 ⅔ shares. Of course, as the ETF rises and falls in price, your $200 would buy more or fewer shares each month. Over time, though, dollar cost averaging like this can help you build your portfolio fairly efficiently.

Plus, because you are investing in a broad ETF, you only have to do as well as the collection of assets. You aren’t trying to choose the “right” stock. It’s one way to limit some of your losses. This can be especially effective if you choose a broad-based index ETF. Over time, you only have to do as well as the market does — and the market hasn’t yet lost in any period of 25 years.

Bottom Line

Investing with ETFs is fairly simple and can provide solid returns over time. Of course, you are investing so there is a risk of loss. However, over the long run, investing in broad-based ETFs offer the potential to build wealth.

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