How much money do you need to be able to invest in ETFs?
ETFs don't have minimum investment requirements -- at least not in the same sense that mutual funds do. However, ETFs trade on a per-share basis. Unless your broker offers the ability to buy fractional shares of stock, you'll need at least the current price of one share to get started.
Pros and cons of ETFs
Let's look at some pros and cons of investing in ETFs.
Pros:
- ETFs provide exposure to a variety of stocks, bonds, and other assets, typically at a low expense.
- ETFs take the guesswork out of stock investing. Many ETFs are index funds, which allow investors to match the performance of a certain benchmark index over time.
- ETFs are more liquid (i.e., easy to buy and sell) than mutual funds. Online brokers make it easy to buy or sell ETFs with a simple click of the mouse.
- It can be extremely complicated to invest in individual bonds on your own, but a bond ETF can make the fixed-income portion of your portfolio very easy.
Cons:
- Since ETFs own a diverse assortment of stocks, they don't have quite as much total return potential as individual stocks.
- ETFs are often low-cost, but they aren't free. If you buy a portfolio of individual stocks on your own, you won't have to pay any management fees.
Criteria to choose an ETF
There are literally thousands of ETFs available to invest in right now. In fact, the number of ETFs recently surpassed the number of publicly traded stocks for the first time ever. So, how do you find the right ETFs for you?
Here are some things to consider:
- Investment objective: This is the most important consideration. Do you simply want passive exposure to the entire stock market? Do you want exposure to a certain sector? Do you want to invest in a specific trend such as artificial intelligence?
- Active versus passive: Do you want to simply track an index's performance over time, or do you want fund managers who try to beat a benchmark index?
- Fees: You can find a basic S&P 500 ETF that has a 0.03% expense ratio or a large-cap ETF that has almost the same portfolio and charges 1%. Of course, there are some good reasons to choose a higher-cost ETF, such as if you want to invest in a highly specialized stock index. But if you find an ETF that meets your needs, it's worth checking to see whether there's another that does essentially the same thing for a lower cost.
Common ETF investing mistakes
When you invest in ETFs, there are some big mistakes to avoid. Just to name the most common:
- Over-trading: The average stock fund investor underperforms the S&P 500 over time, and the biggest reason is over-trading. In other words, ETFs work best as long-term buy-and-hold investments, and moving in and out of ETFs tends to result in subpar performance.
- Following the crowd: Don't buy an ETF just because everyone else is. Buy ETFs that are the best fit for your own investing goals.
- Ignoring fees: Be sure to shop around to see whether there are lower-cost options for ETFs that meet a certain objective. A seemingly small difference in expense ratios can make a big difference, especially if you hold the ETF for many years.
