ETF Basics

By Jon Scott

Abstract: This article explains why ETFs are a good investment for those new to investing, and the benefits of an EFT versus other investments. Additionally, this article explains the importance of the investment purpose of each ETF and the effect the purpose can have on risk, volatility, and returns. Lastly, the article explains how to go about investing in ETFs.

ETFs are the gold standard for new investors. Choosing stocks on your own requires tons of research, and the vast majority of retail traders will never beat the market. ETFs provide a bundle of securities chosen by professionals that are easy to buy and sell.

In fact, ETFs are particularly beneficial for new investors because of their diversity. For example, Vanguard’s VTI Total Stock Market ETF purpose is to track the total performance of the stock market. The difference between the VTI versus other ETFs such as the SPDR S&P 500 Trust ETF is that VTI provides a much wider range of diversity of stocks by incorporating 3,000 more stocks than the SPDR and a much larger exposure to medium and small cap stocks. Indexes such as the SPDR S&P 500 ETF (SPY) only track large cap stocks meaning if small and medium cap stocks see gains, VTI ETF holders will reap the benefits. However, if small and medium cap do not see gains or large gains outperform more than smaller caps the SPY holders will see larger gains.

There are some factors to consider for those new to investing.

Returning to Vanguard’s VTI example, let's take a look at what the decision-making process would be given these factors.

How to invest in an ETF

Investing in ETFs is very easy.

  1. Open an account with a broker that allows stock trading.

    1. For example: Webull, Robinhood, Charles Schwab, E-Trade.

  2. Do your research to find an ETF that’s best suited for your investment goals.

    1. The best place to research is the ETF’s investment manager’s site (e.g. Vanguard for VTI). This site usually has all the factors that need to be considered when choosing an ETF. It also does not hurt to consider investment opinions from other websites.

  3. Log into your brokerage account and find the trading ticker (VTI, for example, for Vanguard’s Total Stock Market ETF) and search for it.

  4. You should see the ETF appear, and the next step will be to buy the number of shares or dollar amount you wish to purchase.