Choosing the right investments is key to generating wealth in the stock market. But with seemingly endless options, it can be tough to separate the good investments from the not-so-good.
For many investors, exchange-traded funds (ETFs) can be a solid option. An ETF is a type of investment that includes dozens, hundreds, or sometimes thousands of stocks. This can create an instantly diversified portfolio with just one investment.
Not all ETFs are created equal, and some are better options than others. While everyone's investing preferences will be slightly different, there are a few types of ETFs that are a good fit for nearly every investor's portfolio.
1. S&P 500 ETF
An S&P 500 ETF aims to mirror the S&P 500 by including the same stocks as the index itself. It includes roughly 500 stocks from some of the largest companies in the U.S. across a wide variety of industries.
One of the biggest advantages of S&P 500 ETFs is that they can hold up to stock market volatility. The S&P 500 itself has faced dozens of corrections and crashes over the years, yet it's recovered from each and every one -- even if it takes a few months or years.
When you invest in this type of ETF, your portfolio will probably take a hit in the short term if there's a market downturn. However, it's extremely likely that your investments will eventually rebound. If you're concerned about a market crash in the future, an S&P 500 ETF is a smart bet to keep your money safe.
2. Total Stock Market ETF
A total stock market ETF is similar to an S&P 500 ETF, except it's much broader. While an S&P 500 ETF only contains stocks from 500 large companies, a total stock market ETF may include thousands of stocks from small, midsize, and large corporations across multiple industries.
The advantage of this type of fund is that it provides exposure to nearly all areas of the stock market. This level of diversification can help protect your investments because even if a few stocks in the fund don't perform well, they won't sink your entire portfolio.
Because this ETF tracks the stock market as a whole, it's also more likely to bounce back from crashes or downturns.
One potential downside to this type of fund, however, is that it can only earn average returns. Because it's designed to follow the market, it's impossible for it to beat the market. For many investors, the relative safety and diversification of this fund outweigh the average returns. But if your primary goal is to beat the market, this ETF may not be the best fit for your portfolio.
3. Growth ETF
A growth ETF is a type of fund that only includes stocks with the potential for rapid growth. These ETFs are designed to earn higher-than-average returns, making them a good option for those trying to beat the market.
One thing to keep in mind with this type of ETF, however, is that it can pose higher levels of risk. Fast-growing companies can be more volatile than well-established organizations, which could mean more ups and downs for your investments.
It may be a good idea, then, to pair a growth ETF with a fund like the S&P 500 ETF or total stock market ETF. This will give you more diversification while limiting your risk, which could better protect your investments.
ETFs can be a fantastic set-it-and-forget-it type of investment. By investing consistently and giving your money as much time as possible to grow, you can earn a substantial amount over time -- regardless of which of these ETFs you choose.