The complicated stuff in life gets a little less complicated when you break it down into six basic questions: What, Why, Who, Where, When and How?
ETF stands for exchange-traded fund. An ETF contains a large collection of investments such as stocks, bonds, or other types of securities — similar to a mutual fund. Think of an ETF as a basket that can hold all these types of investments in one place. For example, your ETF can contain a variety of bonds (bond ETF), stocks (stock ETF), or a mixture of both (multi-assets ETFs).
However, unlike mutual funds, ETFs can be traded like stocks on an exchange (e.g., Nasdaq). ETFs have been growing in popularity thanks to their trading flexibility as well as their lower investment costs and built-in diversification.
First, you will need to open a brokerage account if you do not already have one. Once an account is opened, you have the option of building your own ETF portfolio by handpicking ETFs yourself.
Some brokerage firms offer their own proprietary ETFs, which you can choose from. These proprietary funds are managed by the firm’s own team of investment professionals.
You may also take a more hands-off approach to ETFs by using an automated investing service (so-called “robo-advisors”), which uses computer algorithms to help you choose your investment goals and manage your portfolio.
You need to have a brokerage account to invest in ETFs. The minimum age requirement to open an account varies state to state. Depending on where you live, you have to be at least 18 or 21 years of age. Minors can also invest in ETFs with the help of their parents, who can open a brokerage account (known as a custodial account) on their children’s behalf.
Investing in ETFs is generally less risky than buying individual stocks and bonds because you’re not putting all your eggs in one basket.
Remember: An ETF contains a wide variety of stocks or bonds, so the diversification is already built in. In other words, risk is spread across this large, diverse collection of stocks or bonds, which can help better shield your investments from the ups and downs of the markets.
ETFs are also known for their lower operating costs and transparency. First, lower costs typically mean higher returns from the fund. Second, ETFs in many cases provide greater transparency than mutual funds, as most ETFs have to disclose their holdings daily.
You can start investing in ETFs at any point in your life. But as always, it’s important to do a little research and talk to a financial advisor before making any investment decisions.
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