What Is an ETF? Here Are 6 Things to Know as a Beginner Investor.

Last Updated:   • 

If you are new to investing in the stock market, chances are you have probably heard of ETFs (short for Exchange Traded Fund). When you invest in an ETF, you are essentially investing in a group of companies all at once instead of investing in only one at a time.

What Is an ETF? Here Are 6 Things to Know as a Beginner Investor.

For example, if you invest in an ETF called VOO (Vanguard 500 Index Fund ETF), you are essentially investing in all 500 largest companies in the U.S. (such as Apple, Microsoft, Google, Tesla, and 496 others) through one single ETF.

Here are 6 things about ETFs you may want to know before deciding on whether to invest in them.

1. An ETF is less risky

imagine an ETF that tracks the performance of 100 companies.

If 10 of them are not performing well, there are still 90 that you can count on. If 90 of these companies are performing decently, they can average out the poorer performance of the 10 companies and as a result, your investment in the ETF would be relatively safe.

Compare this to the situation where you only invest in 1 single stock from 1 single company. If the company does poorly, so will your investment. Long story short, investing in an ETF is less risky compared to investing in only one or a few companies.

2. What's the most popular ETF?

Amongst the most popular ETFs are those that track S&P 500 companies (500 of the largest companies in the U.S.), which has historically increased in value over the past 40 years.

VOO as previously mentioned is an ETF that tracks the S&P 500, but it is not the only one. Other similar ETFs include IVV (iShares Core S&P 500 ETF) and SPY (SPDR S&P 500 ETF Trust).

3. There are many types of ETFs based on the economic sector

As a beginner, it's helpful to know that there are many types of ETFs that tracks the performance of various economy sectors. For example:

  • S&P 500 ETFs, which track the performance of 500 largest companies in the U.S. The 500 companies in these ETFs usually span across many sectors in the economy.
  • There are also Bank ETFs, which track the performance of bank institutions only.
  • You can also invest in Real Estate ETFs, so you can technically invest in real estate without owning a physical property.

ETFs in other industries include:

  • Technology ETFs,
  • Energy and Oil ETFs
  • Gold and Precious Metal ETFs,
  • Cryptocurrency ETFs (so you can also invest in cryptocurrency but without owning it directly),
  • Telecommunication ETFs,
  • Bond and Equity ETFs,
  • and more!

All of these ETFs are ways to invest in sectors that you have confidence in. 

4. How to buy ETFs?

Investing in ETFs these days are much simpler than it was in the past. All you need is:

  • A smartphone
  • Be the age of majority in your country/state/province of residence
  • A bank account
  • A stock/ETF investment app

5. Which investment app should I use?

The answer to this would vary between different countries, so it might be a good idea to do some research on online forums and social media for an investment app that is commonly used in your country of residence.

For example, in Canada, Wealthsimple is amongst the most popular investment app for beginners and seasoned investors. In the U.S, apps like Charles Schwab and Fidelity are quite commonly used.

6. Which ETFs should I buy?

The typical advice that is often given for beginners is to invest in ETFs that track the S&P 500, such as VOO (Vanguard 500 Index Fund ETF), because it has historically performed well, and because you are essentially investing in 500 of the largest U.S. companies that are probably not going anywhere anytime soon.

VOO is a U.S.-listed ETF. If you do not reside in the U.S., you might still be able to purchase it, but you may have to pay additional currency exchange fees or taxes, depending on your country of residence and the investment broker service that you are using.

In Canada, the equivalent of VOO is VFV (Vanguard S&P 500 Index ETF). VFV is Canadian-listed, but it tracks the same S&P 500 companies in the U.S. like VOO does. If you are located in another region, you can try looking up on the equivalent of VOO in your country of residence.

Another way to find out which ETFs you might want to invest in is by going through reliable forums and social media channels to observe what others are doing. If a particular ETF gets recommended frequently across many different platforms, it’s probably an indication that there is a certain level of confidence in the investment. This is basic, but if you’re a beginner, it’s not a bad way to get started and you’ll certainly start to pick up a thing or two as you go along. 

Over and Out

If you're new to investing, it's best not to invest too much early on.

There is a learning curve that you need to make, and it takes a while to figure out the best investment strategies that work for you.

If you invest too much early on in something that isn't right for you, you may have a hard time selling them.

Try investing only a little bit for at least a couple months and get a feel of what it's like to have your investment go up and down in the stock market before investing more.

Connect with Ryan

Find Ryan from DoorToRiches on X (Twitter), Threads, and Reddit for more finance content. Feel free to say hi!