• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer

The College Investor

Student Loans, Investing, Building Wealth

  • About
  • Podcast
  • Research
  • Contact
  • Save For College
      • How To Start

      • How To Save For College
      • How To Pay For College
      • What Is the Average Cost of College?
      • What Is A 529 Plan and Where to Open One in Your State
      • How Much Should You Have In A 529 Plan By Age
      • How To Use A 529 Plan For Private Elementary And High School
      • What Are Qualified Expenses For A 529 Plan (And What Doesn’t Count)?
      • The Best Brokers To Open A 529 Plan
      • Tools + Accounts

      • 529 Plans: The Ultimate College Savings Plan
      • 529 Plan Contribution Limits
      • Prepaid Tuition Plans | What To Know
      • Understanding And Using 529A ABLE Accounts
      • Using A Roth IRA To Save And Pay For College
      • FAFSA Deadlines for Financial Aid
      • CollegeBacker Review
      • Upromise Review
      • UNest Review
      • Other Options

      • Student Loan And Financial Aid Programs By State
      • The Guide To Military And VA Education Benefits
      • How To Fill Out The FAFSA
      • How To Find College Scholarships
      • The Best College Scholarship Search Websites
      • How To Find Grants To Pay For College
      • Pell Grants: What They Are And How To Qualify
      • Understanding Federal Work-Study
      • How To Use A 529 Plan If Your Child Doesn’t Go To College
  • Student Loans
      • Borrowing

        • How Student Loans Work
        • How To Apply For A Student Loan
        • Best Student Loans And Rates In January 2023
        • 10 Best Private Student Loans Of January 2023
        • Best Student Loans To Pay For Graduate School
        • Best Student Loans To Pay For Medical School
        • Parent Loans To Pay For College
        • No-Cosigner Student Loan Options
        • Guide To Income Sharing Agreements (ISAs)
        • Best International Student Loans
      • Get Out Of Debt

        • Best Student Loan Refinance Companies In January 2023
        • Best Student Loan Repayment Plans
        • Best Student Loan Refinancing Bonuses And Promotional Offers Of January 2023
        • Student Loan Forgiveness Programs (The Complete List)
        • The Full List Of Student Loan Forgiveness Programs By State
        • Public Service Loan Forgiveness (PSLF)
        • Top Student Loan Scams
        • Average Student Loan Monthly Payment
        • Average Student Loan Debt By Year
      • Reviews

        • Credible Review
        • Splash Review
        • Ascent Review
        • Citizens Bank Review
        • Commonbond Review
        • Earnest Review
        • ELFI Review
        • Laurel Road Review
        • LendKey Review
        • SoFi Review
  • Investing
      • How To Start

        • How To Start Investing in High School
        • How To Start Investing In College
        • How To Start Investing In Your Twenties For 22 – 29 Year Olds
        • How To Start Investing In Your 30s For 30 – 39 Year Olds
        • How To Start Investing With $100 Or Less
        • How To Give Kids The Gift Of Stock
        • What Is Dividend Growth Investing
        • IRA Rollover Chart
      • Tools + Accounts

        • Best Online Stock Brokers
        • The Best Traditional And Roth IRA Accounts
        • The Best Robo-Advisors
        • The Best Investing Apps
        • The Best Places to Trade Options
        • The Best Places To Open A Health Savings Account
        • The Best Solo 401k Providers
        • The Best Self-Directed IRA Providers Of 2023
        • Best Cryptocurrency Exchanges
      • Reviews

        • Vanguard Review
        • Fidelity Review 2023
        • M1 Finance Review
        • TD Ameritrade Review 2023
        • Charles Schwab Review
        • Robinhood Review
        • Webull Review
        • Betterment Review 2023
        • Wealthfront Review
  • Earn More Money
      • Extra Income

        • 20 Best Side Hustles You Can Start Earning With In 2023
        • 53 Side Hustle Ideas To Make Money Fast
        • 100 Ways To Make Money In College
        • 80 Ways To Make Money From Home In 2023
        • 5 Quick Money Making Ideas (That Take Less Than 1 Hour)
        • 10 Interesting Ways You Can Make Money Driving
        • High-Paying Side Gigs That Earn $1,000 or More Per Month
        • The 10 Best Money-Making Apps
        • Paid Surveys: Earn Money For Giving Your Opinion Online
        • 10 Crazy Ways To Make $10,000 You’ve Never Heard Of
      • Build Wealth

        • 40 Passive Income Ideas You Can Use To Build Wealth In 2023
        • 3 Ways To Make $50,000 Per Year Without Working With Passive Income
        • How To Become A Real Estate Investor With Just $500
        • 15 Best Online Business Ideas
        • Residual Income: 7 Super Smart Ways to Build It
        • The Most Common Multiple Income Streams
        • How To Become A Real Estate Mogul With Only $10,000
      • Reviews

        • Fundrise Review
        • RealtyMogul Review
        • FarmTogether Review
        • AcreTrader Review
        • Swagbucks Review
        • Survey Junkie Review
        • TopCashback Review
        • DoorDash Review
  • Personal Finance
      • Banking

        • 10 Best High Yield Savings Accounts Of January 2023
        • 10 Best Money Market Accounts Of January 2023
        • 10 Best Free Checking Accounts In January 2023
        • Best Bank CD Rates Of January 2023
        • 10 Best Business Checking Accounts In January 2023
        • Best Online Banks Of January 2023
        • Best Credit Unions Nationwide Of January 2023
        • Best College Student Checking Accounts Of January 2023
      • Insurance

        • Best Life Insurance Companies
        • Renters Insurance
        • Car Insurance
        • Pet Insurance
        • Umbrella Insurance
        • Disability Insurance
        • Tuition Insurance
        • Travel Insurance
      • Credit Tools

        • Best Budgeting Apps
        • Cash Advance Apps
        • How To Get A Free Credit Score Report
        • Best Credit Monitoring Services For 2023
        • Debt Settlement: Inside The Secret World
        • Credit Repair Explained: Should You Pay For Help?
        • Best Personal Loan Companies And Lenders
        • Online Loan Companies To Borrow From Home
      • Tax

        • Best Tax Software
        • Free Tax Software
        • IRS Tax Refund Calendar
        • Common IRS Questions and Errors
        • Federal Tax Brackets
        • Capital Gains Tax Brackets
        • 401k Contribution Limits
        • IRA Contribution Limits
        • HSA Contribution Limits
  • Forum
  • Search
Home » Investing » ETF » The College Investor’s Guide to Investing in ETFs

The College Investor’s Guide to Investing in ETFs

Updated: July 6, 2022 By Robert Farrington

Tweet
Share9
Share
Pin28
Email
Print

At The College Investor, we want to help you navigate your finances. To do this, many or all of the products featured here may be from our partners. This doesn’t influence our evaluations or reviews. Our opinions are our own. Any investing information provided on this page is for educational purposes only. The College Investor does not offer investment advisor or brokerage services, nor does it recommend buying or selling particular stocks, securities, or other investments. Learn more here.Advertiser Disclosure

There are thousands of financial products and services out there, and we believe in helping you understand which is best for you, how it works, and will it actually help you achieve your financial goals. We're proud of our content and guidance, and the information we provide is objective, independent, and free.

But we do have to make money to pay our team and keep this website running! Our partners compensate us. TheCollegeInvestor.com has an advertising relationship with some or all of the offers included on this page, which may impact how, where, and in what order products and services may appear. The College Investor does not include all companies or offers available in the marketplace. And our partners can never pay us to guarantee favorable reviews (or even pay for a review of their product to begin with).

For more information and a complete list of our advertising partners, please check out our full Advertising Disclosure. TheCollegeInvestor.com strives to keep its information accurate and up to date. The information in our reviews could be different from what you find when visiting a financial institution, service provider or a specific product's website. All products and services are presented without warranty.

Guide To ETFs

As you start building a portfolio, you’ll likely hear this kind of advice:

“You really can’t go wrong with ETFs.”

Or,

“If I could go back 20 years I’d invest only in ETFs.”

This is pretty good advice. ETFs do offer flexibility, diversity, and liquidity for starters.

But at the same time, investing is too complex -- it has too many variables and moving parts -- to be reduced to a simple, one-size-fits-all directive.

Yes, ETFs could work well for you.

But let’s find out for sure by learning how they work, how much they cost, and how you can use them effectively.

Table of Contents
What is an ETF?
What, Exactly, Is Inside an ETF?
Advantages of Trading ETF Shares
Disadvantages of Trading in ETFs
How to Get Started Investing in ETFs
Costs of Trading ETFs
Best Places to Start Trading ETFs
How Much Should You Invest in ETFs?
Bottom Line: ETFs Are a Good Place to Start

What is an ETF?

First things first, ETF stands for exchange-traded fund.

Here’s how ETFs work:

  • A fund buys a variety of assets such as stock shares.
  • The fund divides the combined value of these assets into shares.
  • Investors can trade these shares as they would trade stocks or other assets.

When you buy one share of an ETF, your share includes bits and pieces of all the fund’s assets. This means your single ETF share automatically gives you a diverse investment.

If you were buying shares of individual stock, you’d need to spend a lot more time and money to achieve this kind of diversity. This ability to create instant diversity has helped ETFs grow steadily in popularity since 1993 when they were introduced.

They’ve been even more popular over the past 10 years since mutual funds crashed in 2008, during the Great Recession.

About 4,500 different ETFs trade shares on markets worldwide. In the U.S., you can invest in about 1,700 different ETFs.

What, Exactly, Is Inside an ETF?

ETFs include a variety of assets, but they’re not comprised of a random assortment of assets. Instead, they’re built to represent a market or a specific segment of a market.

The makeup of an ETF helps us define the different kinds of ETFs:

  • Index Funds: These funds draw shares from an entire stock index such as the S&P 500. Examples include the Vanguard 500 and the Schwab S&P 500. When you buy shares in index funds, you’re connecting your money to the entire market index. Your ETF shares will gain or lose value each trading day along with the index.
  • Foreign Market Index Funds: This kind of fund lets you invest in Japanese Nikkei or MSCI Germany Index without having to become an expert on global commerce.
  • Sector (or Industry) Funds: With these ETFs you can invest in a sector of the economy such as aerospace or healthcare. Your shares’ value will perform along with the underlying industry.
  • Commodity ETFs: These funds let you earn from commodities such as grain and even gold without the hassle of actually owning the commodity.
  • Inverse ETFs: Serious investors hold shares in inverse ETFs as insurance in case the market loses significant value. These funds can actually gain value when the overall index loses value.
  • ETNs: Just when we’re getting comfortable with ETFs, it’s time to introduce another abbreviation. ETNs, or exchange-traded notes, which invest in debt, usually from banks. They’re not technically ETFs but similar enough to include here.

This is not an all-inclusive list. You can find even more kinds of ETFs.

Some track currencies, others can even capture a specific style of investing. A broker could help you decide which kinds of funds you’d like to invest in.

Advantages of Trading ETF Shares

Along with the instant diversity ETFs can give new investors, the funds have additional advantages many investors -- especially beginning investors -- will appreciate:

  • Lower fees: Brokerage fees for trading ETF shares tend to be less expensive than fees for other kinds of investments. Mutual funds, for example, charge a percentage of your purchase as a loading fee. You can avoid these fees with ETFs.
  • More tax-friendly: Since owning an ETF share doesn’t mean you own the underlying assets outright, ETFs tend to be more tax friendly to investors.
  • Liquidity: Unlike with mutual funds, you can trade your ETF shares throughout the trading day just like you would stocks.
  • Transparency: ETF managers publish the contents of their exchange-traded funds each day, so you can find out exactly what you’re investing in.
  • Passivity: You can know how your ETFs are performing just by monitoring the overall performance of the underlying index or sector. You won’t necessarily need phone alerts to keep you connected the way you might with specific stocks.
  • Accessibility: To invest in ETFs, you wouldn’t need thousands of dollars to get started. We’ll talk more about how to get started below.

Disadvantages of Trading in ETFs

With so many advantages, it’s easy to understand why people think ETFs can solve almost all investing problems.

I’ve even heard people say ETFs are risk free. Yikes!

Yes, ETFs present less risk than buying individual stock shares, but no investment can eliminate all risks and solve all problems. For example, ETFs:

  • Can Limit Growth: An Index ETF will perform at the level of the underlying index. It shouldn’t underperform the index by much, but it also won’t overperform by much. More serious investors often enjoy the freedom of trying to outperform the overall market.
  • Can Lose Value: If the underlying index loses value, your ETF shares will also lose value. This can be easy to forget, especially during periods of extended market expansion. Sector Funds or Commodity Funds, which track a specific industry or commodity, can be more volatile.
  • Are Relatively New: The rise of ETFs has taken place mainly in this century. As a relatively new investment vehicle, ETFs haven’t withstood the test of time the way many other assets have. We’re not quite sure yet what the rapid growth of ETFs could mean to the overall marketplace.
  • Require Some Knowledge: Like all powerful tools, ETFs can cause trouble for people who aren’t quite sure what they’re doing. For example, even with their tax advantages and relatively low fees, you can still spend too much and create a tax problem with ETFs.

None of these are reasons to stay away from ETFs. It’s just good to be aware of potential drawbacks before getting involved.

Related: ETFs vs. Mutual Funds

How to Get Started Investing in ETFs

A generation ago you may have needed to ask if your broker handled ETFs.

Now, more than 25 percent of volume traded on the New York Stock Exchange comes from ETFs, so it would be hard to find a broker who didn’t offer ETF trades.

And traditional brokers are no longer the only place you can get involved in ETF trading.

We’ll take a closer look at brokerage options below. But first, it’s important to understand the costs of ETFs so you’ll know what to expect from a broker or robo-advisor.

Costs of Trading ETFs

ETF shares are fluid. You can’t know the actual cost until you find out how your shares perform.

However, you can and should assess some of the fixed costs associated with ETF trades to get the most out of your investment:

  • Commissions: Your brokerage firm will typically charge a commission for each trade. On the surface a commission of $5 per trade, for example, seems reasonable. Over time, these fees add up, and they can take a big bite out of your earnings. A $5 fee on a $50 transaction would be a 10-percent cut. To control these costs, look for commission free offers and buy and sell only when you need to.
  • Spreads: The same ETF shares are bought and sold at different prices. The spread determines the difference. If you bought $10 worth of shares at a spread of 25 cents, you could sell your shares back for only $9.75. This small difference can also grow into a noticeable cut of your earnings. Look for smaller spreads and, once again, give your shares some time to grow before selling them so they can close the spread.
  • Limit Orders: Usually, a limit order, as opposed to a market order, will be your friend. A limit order lets you buy or sell your ETF shares only when the market reaches a price you specify. Limit orders give you more control over your investments and the amount you’ll earn (or keep from losing). But you have to set reasonable buy-sell limits and pay attention to the market in case it changes quickly and you’d like to change your limits.

Best Places to Start Trading ETFs

You’ll have several options when you’re ready to start buying ETF shares. No matter what route you choose, be sure you’re working with someone you trust.

Some of the best places to start include:

  • A traditional broker: You can open an account with a big name brokerage house like Charles Schwab or Fidelity and have access to the markets along with some great online tools and in-person guidance if you need it. Fees tend to be higher, but you’ll usually be in good hands.
  • ETF-specific groups: BlackRock and iShares, which is a division of Charles Schwab, specialize in offering a wide variety of ETFs.
  • Online discount brokerages: M1 Finance comes to mind here. You’re more on your own but you can also trade for free.
  • Robo-advisors: Robo-advising and ETFs are a great match. Robo-advisors use algorithms to build and balance your portfolio. ETFs provide the right combination of fluidity and stability to make an algorithm sing. Betterment, specifically, makes great use of ETFs, and you can save on fees.
  • Your existing financial advisor: If you’re already working with a financial advisor you trust, he or she can most likely give you solid advice about ETFs.

How Much Should You Invest in ETFs?

Different advisors will have different advice about how much of your portfolio you should direct into ETFs.

But here’s a general rule of thumb:

The less you have invested, the more you can benefit from ETFs.

So if you’re just starting out, it’s OK to put all of your invested money into exchange-traded funds. Of course, you shouldn’t tie up the rent money or this month’s student loan payment, but that should go without saying.

As you continue to grow as an investor and gain more resources to work with, you’ll want to mix in other types of investments, potentially lowering your ETF shares to about 50 percent of your portfolio.

Many advisors recommend creating an ETF core portfolio which includes shares in the following types of ETFs:

  • U.S. Stocks
  • U.S. Bonds
  • Real estate
  • Stock from other developed nations
  • Stock from developing nations
  • Bonds from offshore markets

You may notice that this core portfolio does not include commodities, sector, or inverse ETFs.

Those tools should supplement a broader portfolio and aren’t a good starting point for getting into the market.

Bottom Line: ETFs Are a Good Place to Start

ETFs have a lot to offer beginning investors.

  • You can get into the market a smaller amount of money.
  • You can get out of the market without losing a lot in fees.
  • You’ll have diversity in your portfolio from the outset.

The key will be finding the right relationship with a broker, robo-advisor, or ETF specialist who can connect you to the market and give you the specific advice you need.

And once you get invested, give your ETF shares some time to grow. ETFs work best as a long-term stabilizing force.

Robert Farrington
Robert Farrington

Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.

He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.

He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.

The College Investor’s Guide to Investing in ETFs
Editorial Disclaimer: Opinions expressed here are author’s alone, not those of any bank, credit card issuer, airlines or hotel chain, or other advertiser and have not been reviewed, approved or otherwise endorsed by any of these entities.
Comment Policy: We invite readers to respond with questions or comments. Comments may be held for moderation and are subject to approval. Comments are solely the opinions of their authors'. The responses in the comments below are not provided or commissioned by any advertiser. Responses have not been reviewed, approved or otherwise endorsed by any company. It is not anyone's responsibility to ensure all posts and/or questions are answered.
Subscribe
Connect with
I allow to create an account
When you login first time using a Social Login button, we collect your account public profile information shared by Social Login provider, based on your privacy settings. We also get your email address to automatically create an account for you in our website. Once your account is created, you'll be logged-in to this account.
DisagreeAgree
Notify of

I allow to create an account
When you login first time using a Social Login button, we collect your account public profile information shared by Social Login provider, based on your privacy settings. We also get your email address to automatically create an account for you in our website. Once your account is created, you'll be logged-in to this account.
DisagreeAgree

0 Comments
Inline Feedbacks
View all comments

Primary Sidebar

Robert Farrington will teach you how to get out of student loan debt and how to start investing.

Hi! My Name is

America's Millennial Money Expert

Welcome to The College Investor. We're here to help you escape student loan debt so you can start investing and building wealth for the future

Our expert guides, reviews, and more are designed to help you achieve your financial goals.

Want to learn more? See what's in my wallet.

As Featured In

Social Media

Popular Posts

Side Hustling

53 Side Hustle Ideas To Make Money Fast

Best Side Hustles

20 Best Side Hustles You Can Start Earning With In 2023

Crazy Ways To Make $10,000

10 Crazy Ways To Make $10,000 You’ve Never Heard Of

Make $50,000 Per Year

3 Ways To Make $50,000 Per Year Without Working With Passive Income

Student Loan Scams

Top Student Loan Scams

Net Worth of Millennials

Average Net Worth Of Millennials By Age

Ways To Get Student Loan Forgiveness

Student Loan Forgiveness Programs (The Complete List)

529 Plan By Age

How Much Should You Have In A 529 Plan By Age

Passive Income Ideas

40 Passive Income Ideas You Can Use To Build Wealth In 2023

Make Money From Home

80 Ways To Make Money From Home In 2023

Ultimate Guides

529 Plan Guide

529 Plans: The Ultimate Guide To College Savings Plans

Student Loans and Financial Aid By State

Student Loan And Financial Aid Programs By State

Student Loan Advice

The Definitive Guide To Student Loan Debt

Student Loan Forgiveness By State

The Full List Of Student Loan Forgiveness Programs By State

newretirement

How to Start Saving Now: The College Graduate’s Guide to Saving for Retirement

Latest Research

How much to file taxes

Tax Survey: How Much People Paid To File And The No.1 Tax Software They Used

Inflation survey

Side-Hustles To The Rescue: Survey Shows 86% Stressed About Money & Inflation

students choose to work survey

75% Of Students Would Still Choose To Work Even If They Didn’t Have To

Institutional Merit Grants

Who Gets Institutional Merit Grants At Private Colleges?

Resume Student Loan Payments

Survey: Even With Higher Expenses, Most Student Loan Borrowers Are Ready To Resume Payments

Footer

Who We Are

The College Investor is an independent, advertising-supported financial media publisher, focusing on news, product reviews, and comparisons.

Connect

  • Contact Us
  • Advertise
  • Press & Media

About

  • About
  • Our Team
  • Podcast
  • Editorial Guidelines
  • How We Make Money
  • Archives

Social

Copyright © 2023 · The College Investor · Privacy Policy ·Terms of Service · DO NOT Sell My Personal Information

wpDiscuz