What can you invest in as a new investor? Roughly 6,000 companies trade on the two major U.S. exchanges. Your choice of exchange-traded investments additionally includes more than 2,500 ETFs and hundreds of real estate investment trusts (REITs).
That breadth of selection is exciting -- but also overwhelming, particularly for new investors. Here's a digestible list of three solid investments. Each is suitable for your first foray into the stock market.
1. Total stock market ETFs
A total stock market fund replicates the performance of the entire stock market. These funds often take a sampling approach -- meaning they don't buy every stock. Instead, they invest in a smaller group of stocks that performs the same as the overall market.
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The Vanguard Total Stock Market ETF (VTI -0.26%) has a low expense ratio and a long history of tracking with its benchmark. Take a look at these data points:
- Expense ratio: 0.03%
- Net assets: $1.3 trillion
- One-year return: 25.72%
- Number of holdings: 4,156
VTI is a nice starting point for new investors for two reasons. First, it's diversified. The portfolio includes more than 4,000 stocks, spanning small to large companies and all 11 stock market sectors.
Second, VTI provides market-level returns. While experienced investors may strive to beat the market, tracking with the market is also a good outcome. The stock market's long-term average annual return is about 7% after inflation. That beats out earnings in a cash savings account many times over.
The caveat here is you should plan to keep your money invested for 10 years or more -- since market returns can be volatile from one year to the next.
2. Large-cap ESG ETFs
A large-cap ESG ETF may be a good fit if you're worried about the ups and downs of the stock market. Here's why:
- Large companies are generally less volatile than smaller ones.
- ESG stands for environmental, social, and governance -- it's a framework for organizing and reporting on corporate sustainability initiatives. There's growing evidence that ESG-focused companies can be more resilient in market downturns.
The Xtrackers S&P 500 ESG ETF (SNPE 0.25%) invests in large companies that also have a demonstrated commitment to sustainability. That combination is a one-two punch for investors who want growth without extreme volatility. Key metrics are:
- Expense ratio: 0.10%
- Net assets: $848 million
- One-year return through the third quarter of 2021: 29.64%
- Number of holdings: 313
The SNPE portfolio includes only S&P 500 companies with average or above-average ESG scores. The S&P 500 index includes the 500 largest public companies in the U.S., including Apple, Microsoft, Amazon, Alphabet, and Tesla. As such, the index is commonly used as a benchmark for how the most successful stocks are performing.
Interestingly, SNPE, with its ESG screening, has outperformed the S&P 500 index. Since the fund was established, the S&P 500 has produced an average annual return of 20.81%. SNPE's return in the same time frame is 22.28%.
3. Quality factor ETFs
A quality factor ETF invests in companies with strong fundamentals. That means the company is growing its earnings, and the financial statements and business outlook suggest the growth will continue.
iShares MSCI USA Quality Factor ETF (QUAL 0.09%) is one of the largest quality factor ETFs available. Notable characteristics include:
- Expense ratio: 0.15%
- Net assets: $24 billion
- One-year return: 26.90%
- Average annual return since 2013 inception: 15.37%
- Number of holdings: 125
You'll like QUAL if you want to invest in high-quality stocks but you're not sure you can pick them out yourself. The fund invests in companies with high return on equity, predictable earnings growth, and low debt.
QUAL also gives you exposure to midsized and large companies. The mid-cap exposure supports added growth opportunity. Over the last five years, the fund has produced average annual returns greater than 18%.
Consider quality stocks and diversification
Quality and diversification serve you well as a new investor. Thankfully, ETFs provide easy access to diversified portfolios at any level of quality you want. With a single share, you can get exposure to the entire U.S. stock market, the biggest companies with good ESG metrics, or a selection of stocks that are staged for ongoing growth.
Any of those are suitable as a core investment in your new portfolio -- and a foundation you can build on going forward.
