A lot of first time investors do not know where and how to start. Some of the most common questions are: “Which stocks do I invest in? What if I lose all my money? How do I know when to exit an investment or add more?” ETFs, or exchange-traded funds, are a great way to start investing and mitigate risk.
What are ETFs? An ETF is a collection of hundreds or thousands of stocks or bonds, managed by experts, in a single fund that trades on major stock exchanges like the New York Stock Exchange and NASDAQ.
So why should you trade ETFs instead of individual stocks?
1. Diversification
Diversifying your portfolio or “don’t put all your eggs in one basket” is something we hear so often in our finance classes. When you invest in ETFs, you are investing in hundreds or even thousands of stocks and that instant diversification can lower your risk substantially. So why don’t you just invest in 10-15 companies individually? The thing about investing in a lot of different companies is that it can get complicated and your portfolio could still take a tumble if even one or two of those stocks don’t perform well. With an ETF, even if several of those stocks nosedive, it likely won’t make a significant dent on your portfolio.
2. Index ETFs are very likely to bounce back from a crash
Index ETFs are one of the most popular options for ETFs. They are stock market indexes, such as the S&P 500 or the Dow Jones IndustrialAverage. They are among the safest investments out there because the indexes themselves have always managed to recover from past market crashes. Check out the graph below to see the 10-year performance of Index ETFs.
However, it is important to keep in mind that in the short term, the stock market may face extreme volatility. But over the long run, these indexes experience positive returns.
3. It’s easier to invest in particular industries you are interested in while mitigating your risk
There are seemingly unlimited ETF options out there, from broad funds that track the entire stock market to narrow investments that focus on a certain industry or sector. You can invest in industry-specific ETFs such as tech stocks, real estate, healthcare organizations, or even pet care brands.In addition, if you are interested in social impact, there are ETFs focused on sustainability and creating a positive impact on the world.
4. High liquidity
Most ETFs are very liquid, this means that they can be traded throughout the day. This is especially convenient for young investors who are usually more risk averse and may want to exit a losing investment immediately in order to preserve limited capital. Ample liquidity also means that investors have the ability to use ETF shares for intraday trading, similar to stocks.
5. Low Fees
Last but not least, ETFs generally have lower expense ratios than mutual funds. In addition, many online brokers offer commission-free ETFs, even for investors with small accounts. This is a great advantage for young investors as high fees and commissions could really put a dent in their account balance.
Ready to invest in ETFs?
Check out the list below for Alinea’s recommendations:
1. S&P 500 or Top 500
2. Dow Jones
3. NASDAQ
4. iShares Global Energy ETF
5. iShares Latin America 40 ETF
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