Benefits of ETFs

If you’ve been dabbling in investing, you’ve probably heard about ETFs. An exchange-traded fund (ETF) is a fund that is traded like an individual stock. 

The difference is that ETFs can contain hundreds of different companies — like a charcuterie board offering a buffet of meats and cheeses.

Many expert investors recommend ETFs because they’re usually inexpensive, well-diversified, and easy to trade.

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Benefits of Investing in ETFs

There are many reasons you should consider investing in ETFs. Here are some of the best ones:

Low cost 

One of the biggest reasons that people recommend ETFs — especially for beginning investors — is that they’re usually cheap. 

When you’re picking an investment, the fee you pay can eat away at your returns. You can maximize your returns by minimizing fees. 

ETFs often have lower fees than mutual funds and many ETFs do not have any transaction fees. 

READ MORE: How to Start Investing When You Don’t Have Much Money

Trades like stocks

Buying and selling an ETF is easy — you can buy and sell it the same way you would an individual stock. 

And because ETFs are traded like stocks, you don’t have to wait for a particular time of day to sell, as long as it’s during regular trading hours (normally weekdays between 9:30 a.m. and 4 p.m.).

Similarly, the biggest difference between an ETF and a mutual fund is that mutual funds can only be bought and sold once a day.

If you want to maximize flexibility, you may prefer an ETF. 

Transparency about holdings and fees

It should be fairly straightforward to see what a particular ETF is holding.

If you know what ETF you want to buy, you can Google its initials to learn more. Sites like Yahoo! Finance, Morningstar, and Marketwatch are also good for research.

For example, let’s say you want to buy VOO, Vanguard’s S&P 500 index ETF. When you look it up on Vanguard’s official website, you’ll learn about its asset class, past performance, category, management style, risk tolerance, and more. 

This information can help you easily determine if it’s an appropriate investment for you.

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Safety and security

When you’re trying to figure out what to invest in, it can be hard to make a decision. No one wants to choose an investment that could turn out to be a flop! 

Because most ETFs are made up of a large number of different companies, you’re not really at risk of losing the entire amount you invested.

READ MORE: Understanding Value-at-Risk and Your Loss Potential

Product variety

There are thousands of ETFs on the market, ranging from basic S&P 500 ETFs to specialty ETFs for niche industries. 

When most investors think about ETFs, they may only consider basic index funds. However, ETFs exist across a variety of different sectors.

For example, you can buy cryptocurrency ETFs that purchase different types of cryptocurrency for your portfolio. 

Can buy fractional shares

ETFs are one of the most democratic investments because you don’t need to be rich to buy them. 

While one ETF share can cost hundreds of dollars, you are allowed to buy part of a share, also known as a fractional share.

For example, VTI costs about $265 as of June 2024, but you can get a fractional share for as little as $1.

One place you can buy ETFs — including as fractional shares— is through Webull. It's a user-friendly investing platform that's a good choice for beginners who want to start investing without spending a fortune.

READ MORE: Webull Review: How It Compares for Beginner Investors

Disadvantages of ETFs

As great as ETFs are, they’re not perfect. Consider some of the downsides before you put all of your money into ETFs.

Can’t automatically invest

One of the few downsides to an ETF is that you can’t automatically invest in it. Instead, you have to purchase the funds manually. This means that you’ll have to set aside time every month (or however often you choose) to purchase your ETFs.

Some investors may find this annoying and instead prefer to invest in mutual funds, which allow automatic investing. With mutual funds, you can create a set-it-and-forget-it schedule that can let you be more hands-off with your investments. 

Because ETFs have to be bought manually, you should set up a recurring calendar reminder. Some people like to buy ETFs once a week, while others do it biweekly or monthly. 

Just make sure to do it regularly and not wait for a “good deal” or a dip in the market. It’s best to buy them at the same time, no matter what the market is doing.

READ MORE: How to Manage Your Own Investment Portfolio

No control 

ETFs are usually made up of many different stocks, bonds, or both. If you want complete control over what you’re investing in, then you may not like ETFs. 

It’s like being forced to eat off of a fixed restaurant menu instead of having the freedom to order a la carte. 

Some investors — especially those concerned with sustainability or environmental causes — may find it difficult to pick an ETF that reflects their values. 

Might not be passively managed

One of the confusing parts of ETFs is that not all ETFs are index funds or passively managed. You’ll have to dig deep to verify that the ETF you’re interested in is passive.

You can do this by reading the fund description, which will usually explain whether it’s active or passive. ETFs with higher fees are often actively managed.

READ MORE: Active vs. Passive Investing: Which Is Best?

How To Invest in ETFs

Before you start buying up all the ETFs, you should figure out where you want to invest. 

Think of it like your morning coffee. Before you pour it, you need to choose a cup. If you try to pour without having a cup ready, it will spill all over the counter and create a mess.

For most people, your investment options include: 

• Employer-sponsored retirement plans, like 401(k)s 
• Traditional IRA or Roth IRA
• Taxable brokerage accounts

Where you choose to buy your ETF can make a huge difference in terms of tax benefits and implications. 

For example, you won’t receive special tax benefits if you buy an ETF in a taxable brokerage account, but it’s also slightly easier to sell and withdraw funds from these accounts. 

If you already have an IRA or a 401(k), you can choose to buy your ETFs there. 

Just know that 401(k)s may or may not have a wide variety of ETFs — this depends on your employer and what securities they offer. Some 401(k)s have better offerings than others. 

If you want more ETF selections, you can invest them in an IRA, either a Roth or a traditional one. 

You can also choose to invest in ETFs in multiple investment accounts, depending on your goals. For example, you may choose to contribute enough to your 401(k) to get your employer match, while simultaneously maxing out your IRA through ETFs.

READ MORE: IRA vs. 401(k): Which One Is Better for You?

TL;DR

ETFs are a popular starting point for new investors. They’re affordable, provide insistent diversification, and are easy to research.

But they do have some limitations — like you can’t pick what’s inside the ETF and they can’t be automatically invested the way that mutual funds can be.

If you want to invest in ETFs, you can do it through your 401(k) or IRA, or through a separate taxable brokerage account.

For more lessons in investing, check out these episodes of the Erika Taught Me podcast:

• How To Invest for Beginners (Step by Step)
• Money & Investing Pitfalls To Avoid
• The Missing Piece in 99% of Financial Advice

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