As you start building a portfolio, you’ll likely hear this kind of advice:Or,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, ETFswork 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.
First things first, ETF stands for exchange-traded fund.Here’s how ETFs work: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.ETFs include a variety of assets, but they’re not comprised of a random assortment of assets. Instead, they’re .The makeup of an ETF helps us define the different kinds of ETFs: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.Along with the instant diversity ETFs can give new investors, the funds have additional advantages many investors — especially beginning investors — will appreciate: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 . 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:None of these are reasons to stay away from ETFs. It’s just good to be aware of potential drawbacks before getting involved.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.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.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: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: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: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.ETFs have a lot to offer beginning investors.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.