If you're used to a full-service sit-down investing meal of actively managed mutual funds, trying out the drive-through of individual investing might seem daunting.
Don't let it be. Exchange-traded funds (ETFs) are a great starter stock for the white-tablecloth crowd. Like regular company stocks, ETFs can be bought or sold any time the market is open via a brokerage account. And they have ticker symbols -- quite snappy ones, in fact, like Cubes (Nasdaq: QQQQ ) , Spiders (AMEX: SPY ) , and Diamonds (AMEX: DIA ) . They resemble their mutual fund brethren in that they hold dozens, hundreds, or even thousands of companies under one umbrella, unified by a particular investing theme (such as companies that comprise the Dow, biotech companies, even French companies -- well, France's MSCSI Index (AMEX: EWQ ) , anyways).
But unlike actively managed mutual funds, ETFs tend to be cheap. Annual expenses range between 0.1% and 0.65% and are deducted from dividends. While some mutual funds demand a chunk of money from shareholders to get a seat at the table, ETFs don't require a minimum investment. All you need is a brokerage account and an investment idea.
As with drive-through fare and microwave meals, you sacrifice service for the sake of cost controls. There's no fund manager calling the shots, adding or subtracting to a position to balance the portfolio pie when the market sways to and fro.
But you don't need to abandon your pampered investing ways entirely. Holding baskets of stocks in a particular sector or index, instead of just an individual company, helps spread the risk around -- just like a good mutual fund manager. ETFs let you add a shot of instant diversification to your portfolio without having to leave a hefty tip for the service.
For a second helping on ETFs:
- Motley Fool Champion Funds guru Shannon Zimmerman offers a five-part dissection of the pros and cons of ETFs.
- Need just a bite to read? Nibble on our 60-second ETF overview at our ETF Center.
- More on getting international exposure via ETFs.
- With so many firms pushing ETFs (and hard), how should you judge some of the newer ones? Here are three things to know about any ETF before you buy. And an interesting look at some of the fund giants getting in on the ETF game.
- Commodities are booming, and ETFs make it a bit easier to add this asset class to your portfolio. Here's how.
Dayana Yochim is a big fan of indexing but owns none of the ETFs mentioned in this article.