How to Invest in ETFs

ETFs are known for being safer instruments but can also generate good returns without much expense for the investor. For every investment, you will be charged an expense amount, determined by the expense ratio. This is usually much lower relative to investing in other instruments.

Don’t forget that there are 2 types of ETFs: passive and active ETFs. Passive investments (aka index funds) track a stock index, like the S&P 500, but an active ETF requires manpower for monitoring and rebalancing the underlying securities. As a result, this is more expensive than a passive ETF investment as the expense includes portfolio management fees.

Unlike mutual funds, ETFs don’t have a minimum investment requirement as they can trade on a per-share/fractional basis.

Here are the steps for investing in ETFs:

Open a brokerage account

You will first need to choose where you want to open a brokerage account. The majority of online brokerages offer commission-free stock and ETF investing. However, it’s good to compare the features of each platform. For example, if you’re a new investor, it might be a good idea to open an account with a brokerage like E*Trade, which offers a wide range of educational materials.

Choose your ETFs

Now that you’ve opened your brokerage account, it’s time to invest in some ETFs. As a beginner, investing in passive funds is a good idea as they are cheaper than actively managed ETFs. Additionally, actively managed ETFs don’t always beat their benchmark.

The most popular ETFs are issued by Vanguard and Charles Schwab as both companies focus on connecting people to the stock market at the lowest cost and ETFs are an efficient way for people to get involved in investing. Some examples are Vanguard S&P 500 ETF, which covers large US companies and Schwab US Mid-cap ETF, which covers mid-sized US companies.

Let the ETFs do the rest

ETFs are known for being safe investments that require minimal maintenance. The best thing to do after investing in ETFs is to leave them and let them do the work for you. One of the main reasons why investors underperform against the market over time is because of over-trading. So stop checking your portfolio and let your ETFs produce returns at their own pace.