Investing your money to grow your net worth and build your wealth is becoming more popular by the day. As beginner investors start dipping their toes in the water, they quickly realize there is a wide range of investments to choose from.
If you’ve ever tried jumping into the stock market head-first, then you know how intimidating it is. You don’t know where to begin or which stocks to focus on. The good news is that getting started with ETFs can help ease some of the confusion.
From index funds to traditional stocks and bonds, there’s a way for every investor to reach their financial goals. The first move for many beginners is putting money into an ETF. ETF stands for Exchange-Traded Fund, and the benefits of investing in them are plentiful – especially for young investors.
What are ETFs?
ETFs are a collection of multiple assets, such as stocks and bonds, that provide investors with diversification.
This means that when you invest in an ETF, your money is not placed in just one pot but instead spread across different investments. The performance of ETFs is based on an index like the S&P 500, meaning it will follow the ups and downs. Like stocks, investors can earn dividends on ETFs (depending on the type), and ETFs can be bought and sold on an exchange.
Benefits of Investing in ETFs
ETFs are a great way for investors to get started because of the built-in diversification and low cost. They offer the flexibility to trade like stocks but enough of a diversified portfolio to make a profit. Take a look at these top benefits of investing in ETFs.
ETFs are Lower Risk
There are plenty of risks with ETFs; however, the chances are lower than in other investments.
The investment structure is not what makes EFTs safer; instead, it’s determined by the fund itself. The risk is higher if a fund has more extensive exposure to stocks. If the fund has more exposure to bonds, there is less risk.
Investors choose ETFs because of the diversity and how the money is spread out in the stock market. This tactic lowers risks because you’re not putting all of your money into one individual stock.
ETFs Offer Affordability and Flexibility
ETF stands for more than its given name. When someone hears ETF, they generally think of affordability and flexibility.
Operating expenses like portfolio management fees, administrative fees, and distribution costs are incurred regardless of funds and structure. The lower the cost of investing, the higher the return. Although bought and sold like stocks, brokers often offer a free commission on ETFs – even for young investors with small accounts. This saves beginners a lot of money as fees can quickly add up to any return made on funds.
ETFs also have a lower expense ratio than mutual funds and lower expenses for transfers, notifications, and monthly statements. Because brokerages issue monthly, quarterly, and annual reports, record keeping and administrative duties for thousands of people are light on ETF companies – meaning lower fund expenses for individual investors.
In terms of flexibility, it’s straightforward to move money between assets such as stocks and bonds. Although not recommended, it is possible for investors to effectively and efficiently get their allocation into investments within an hour and move them within the next hour.
Better Tax Benefits
ETFs have their unique mechanism for buying and selling, and they are passively managed, meaning fewer transactions. These are the two biggest reasons ETFs offer better tax benefits than other funds.
The dividends from ETFs are taxed based on the amount of time the invested owned the fund. If the fund is held for more than 60 days, then it’s taxed between 0% to 20%. The percentage is based on the investor’s income tax rate. If the dividend is held for less than 60 days, then that income is taxed at the investor’s income tax rate.
This leads to another benefit of investing in ETFs – the dividends of open-ended ETFs are immediately reinvested. Unlike other index funds, where time for reinvestment varies based on several factors.
Types of ETFs
As you’ve learned, ETFs are easily traded on the stock market. This helps beginners invest in assets like currencies and commodities that help them gain more exposure to the market. There are several types of ETFs when looking to invest:
Stock ETF – These ETFs track equities based on their industry of index. These types of ETFs are best for long-term investors because they’re subject to market volatility.
Bond ETF – If you’re interested in fixed income investments, bond ETFs are best because they pay regular dividends from government or corporate bonds.
Commodity ETF – ETFs track metals, goods, natural resources, and agriculture.
Sector ETF – These track specific industries such as energy and health care.
Currency ETF – Obviously, these ETFs trade currencies – mostly foreign – to provide exposure to foreign markets.
Leveraged ETF – These are best for short-term investments because they are at higher risk. These types aim to increase returns 3xs more than a general ETF tracking the same index.
Regardless of the type of ETF you choose to invest in, there are specific benefits and risks associated with each.
Start Investing in ETFs
If you’re convinced to start investing in ETFs, it’s easy to get started!
- Set up an online account through a $0 commission trading platform or broker.
- Find the account.
- Purchase ETFs and choose how many shares you want (this depends on the current pricing and your unique monetary situation).
Young investors are drawn to investing in ETFs because ETF stands for low-risk flexibility with little hands-on work. There are even robo-advisors that will automatically invest on your behalf if you feel you’re not familiar enough to choose an ETF on your own.
We’re dedicated to weighing all the costs and benefits of investment decisions. These benefits of ETFs are just the beginning, there are several more advantages once you start investing and exploring the market for yourself.