As part of our new Wall Street 101 series, we explain how to invest in an ETF and answer some key questions investors have about exchange-traded funds.
So, you have decided to throw caution to the wind in an effort to build up your portfolio and you’re considering exchange-traded funds (ETFs). Or, perhaps you are looking to add income to your retirement.
If you have done any research at all, you’ll see there are a ton of investment options out there for you. You can also mix and match what you invest in and how you do it.
A popular vehicle for investment, especially for beginner investors, are exchange-traded funds, or ETFs.
In this article, we will answer some key questions about ETFs, such as what they are, whether they are good investments and how you can earn income from them.
How to Invest in an ETF: What is an ETF?
ETFs are just like stocks. They can be traded on the market, but ETFs allow you to do one thing that buying individual stocks cannot — be diversified.
An ETF is just a bucket of equities that will track an underlying index. Instead of just one stock, ETFs can hold hundreds of stocks across different industries.
They are very similar to mutual funds, only they are listed on exchanges and shares of ETFs trade just like any other stock.
For example, the most popular ETF is the SPFR S&P 500 ETF (NYSE: SPY). It tracks the S&P 500 Index. Its holdings include Apple Inc. (Nasdaq: APPL), Amazon.com Inc. (Nasdaq: AMZN) and Microsoft Corp. (Nasdaq: MSFT).
If you were to invest in SPY, you would be diversifying your investment into all the different holdings that ETF has. To check the performance of your money, however, you only need to see how SPY is performing, not each individual stock inside it.
Knowing what an ETF is can help you figure out how to invest in an ETF (and we’ll address knowing in a bit).
Are ETFs Good Investments?
Well, that is a bit of a loaded question.
As with any stock or investment, there are things that are good about them and things that aren’t so good. ETFs are really no different.
The key, just like with any other type of investment, is doing your homework. There are ETFs out there for just about every sector — from cyber-security to smartphones and just about everything in between.
Find sectors that interest you and work from there (we’ll get to the different ETFs available in just a sec).
What Are the Benefits With an ETF?
Diversified: As we said above, ETFs allow investors to diversify their investments across different industries. If you wanted to invest in the top S&P 500 stocks, it would take a lot of money. However, you could still invest in those companies, but cheaper and broader with SPY.
Open Information: Unlike mutual funds, ETFs disclose their holdings every day. With mutual funds, that information is released to the public monthly or even quarterly, according to NerdWallet. With an ETF, you can search anywhere to find what a particular ETF is holding on any given day.
Taxes: With an ETF, you are typically taxed on capital gains when you sell, unlike mutual funds where you can be taxed over the course of the investment.
As you can see, there are solid benefits when you look at how to invest in an ETF.
What Are the Risks With an ETF?
Costly: Unlike with stocks, there can be management fees associated with an ETF. So while you may pay a commission — or in most cases