“ETF” is an often heard financial acronym that still isn’t well understood by many, but these are one of the best available investments to millennials to start building their long-term investment portfolio.
Millennials don’t invest. Which is unfortunate, because they need to. Failing to invest is a six-figure mistake — because you’ll miss out on hundreds of thousands of dollars of potential returns if you stay out of the stock market and keep your cash stashed in a simple savings account.
One of the simplest and lowest cost ways to get started in the stock market is to invest in ETFs. Here is a simple introduction to these investments so you can feel informed to start adding them to your portfolio!
What is an ETF?
“ETF” stands for “Exchange Traded Fund” and are a collection of investments that trades like a single stock. This means you buy and sell shares of a single ETF, but you’re really moving a number of different stocks around when you do so.
Index Fund vs ETF
An ETF is actually a type of index fund! Or at least it usually is. More often than not an ETF is a collection of investments that track a certain index, making it an index fund.
An ETF will contain anywhere from a handful to over 100 different stocks or bonds. Usually, the ETF will be categorized based on its holdings, either by the type of investment, industry, or country. For example, you can choose an ETF that contains all dividend-paying stocks, or one that represents the globals stock market except the US. You can choose ETFs that are all financial, tech, or natural resource stocks. Chances are whatever you want to invest in, there’s an ETF for it.
ETF vs Mutual Fund
There are a number of similarities between an ETF vs Mutual Funds. Like a mutual fund, the ETF has a fund manager who selects and manages the holdings within the ETF. For this reason, you will pay some fees to own the ETF. These are the Management Expense Ratio or MER fees, just like with a mutual fund. However, unlike a mutual fund, the MER fees for an ETF are typically less than 0.5%. Many are as low as 0.20%!
The difference between an ETF and a Mutual Fund is how the shares are trades. You can only purchase who shares of an ETF, and you can only purchase them on the open stock exchange. With mutual funds, you can purchase partial shares, and you can buy them anytime — even if the stock market is not open!
How to Buy ETFs
In order to buy ETFs, you’ll need to have a brokerage account. A brokerage account is an account that lets you access the stock market.
These accounts typically require a minimum of $1,000 to open, but some financial institutions may charge as much as $5,000. Questrade is one of the most affordable online brokers, requiring only $1,000 to open account and zero-commissions to purchase ETFs!
How to buy and sell ETFs
Choosing the appropriate ETFs for your investment portfolio needs a little bit of legwork in the beginning to do your research on what’s available and choose your asset allocation. Typically it’s best to start with 1 or 2 broad market ETFs and contribute steadily to those in order to grow your wealth. Once you’ve amassed a small nest egg, you can branch out into more specific niche ETFs to meet your investment goals.
In order to trade ETFs, you have to have a brokerage account. These may or may not be offered by your bank, depending on its size. A brokerage account is an account you use to trade investments on the stock market.
To open a brokerage account, you need to be over the age of 18, typically have at least $1,000 to get started, and select a brokerage. Trading fees with brokerages can range anywhere from $0 to $30, so it’s important to keep this in mind when selecting where you want to invest.
Why ETFs are awesome for your investment portfolio
The best thing about ETFs is they offer you a lot of diversification in your investment portfolio at a very low cost. Because ETFs contain a number of different stocks or other holdings, you can get broad exposure to the entire stock market with only a handful. As few as 2 or 3 well-chosen ETFs is enough to create a diversified stock portfolio!
Additionally, ETFs can be great for creating a passive income stream. Often ETFs will contain dividend-paying investments, so when these stocks pay out their monthly, quarterly, or annual dividend, this will get passed on to you. Like many stocks on the market, ETFs typically pay out quarterly, but you can find ETFs that pay monthly if you want a more frequent income.
In short, if you’re looking to maximize your income and take control of your investments, buying ETFs is one of the easiest ways to do it.
Want to learn more about investing? Check out my eCourse, The Six-Figure Stock Portfolio, and learn how to go from $0 to $100,000 in a way that protects your investment, minimizes costs, and maximizes your passive income.