Q: I want to invest in ETFs. How do I get started? What are some good options for beginners?
A: Exchanged-traded funds (ETFs) trade on the open market, just like stocks, so investing in them can be easier than you think.
The first step is to open an account with a broker -- either with a general online discount broker (TD Ameritrade, E*Trade, Charles Schwab, etc.), or directly through the company whose ETFs you plan to buy, such as Vanguard. With an online broker, you can invest in a wide variety of ETFs, and can add individual stocks into the mix if you choose, but you'll pay commissions on each trade.
On the other hand, by investing directly through the ETF's management company, you can typically avoid these commissions, but your commission-free choices may be rather limited. Both are good options, and the best choice depends on your goals.
After you've opened your account, the best idea is to create a strong base for your portfolio. By this, I mean that your first ETF investment should be a low-cost index fund that covers a wide variety of stocks, such as the S&P 500 or Russell 2000, just to name a couple. In other words, if you're buying your first ETF, don't buy one that just covers, say, the tech sector.
I already mentioned Vanguard, and that's my personal favorite (although Fidelity, Schwab, and others have some solid ETF offerings as well). Vanguard currently offers 55 ETFs to help you invest in stocks and bonds, both foreign and domestic, and broad index funds as well as sector-specific ETFs.
A good place to start is with Vanguard S&P 500 ETF (VOO +0.37%), which has a rock-bottom 0.05% expense ratio and tracks a basket of 500 of the largest U.S. stocks, so your performance won't depend too much on any one. Alternatively, Vanguard Total Stock Market ETF (VTI +0.37%) has the same low fee, and further diversifies your holdings into small and mid-sized companies as well.
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