Basics of ETFs for Beginners | Ally (2024)

FAQs

What is ETF basics for beginners? ›

What is an ETF? An exchange-traded fund, or ETF, allows investors to buy many stocks or bonds at once. Investors buy shares of ETFs, and the money is used to invest according to a certain objective. For example, if you buy an S&P 500 ETF, your money will be invested in the 500 companies in that index.

Exchange-traded funds (ETFs) are ideal for beginning investors due to their many benefits, which include low expense ratios, instant diversification, and a multitude of investment choices. Unlike some mutual funds, they also tend to have low investing thresholds, so you don't have to be ultra-rich to get started.

Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification.

At least once a year, funds must pass on any net gains they've realized. As a fund shareholder, you could be on the hook for taxes on gains even if you haven't sold any of your shares.

There is no transfer of ownership because investors buy a share of the fund, which owns the shares of the underlying companies. Unlike mutual funds, ETF share prices are determined throughout the day. A mutual fund trades only once a day after market close.

However, individuals opting for a single equity ETF must be cognizant of the inherent risks and volatility within the equity market. Always consider your risk tolerance and investment goals before making a decision.

Investing in the stock market is one of the most effective ways to generate long-term wealth, and you don't need to be an experienced investor to make a lot of money. In fact, it's possible to retire a millionaire with next to no effort through exchange-traded funds (ETFs).

Holding an ETF for longer than a year may get you a more favorable capital gains tax rate when you sell your investment.

Before purchasing an ETF there are five factors to take into account 1) performance of the ETF 2) the underlying index of the ETF 3) the ETF's structure 4) when and how to trade the ETF and 5) the total cost of the ETF.

What is the number 1 ETF to buy? ›

Vanguard S&P 500 ETF

Exchange-traded funds (ETFs) are one of the safer types of investments out there, as they require less effort than investing in individual stocks while also increasing diversification.

An ETF, or Exchange Traded Fund is a simple and easy way to get access to investment markets. It is a pre-defined basket of bonds, stocks or commodities that we wrap into a fund and then we list onto the exchange so that everyone can use it.

ETFs provide broad diversification by only needing to purchase a small number of securities. In contrast, when buying and holding hundreds of individual securities to achieve a similar level of diversification, greater costs are incurred in brokerage and fees – imagine the brokerage to buy 200 individual stocks!

Key differences between stocks and ETFs

Stocks represent a piece of ownership in a publicly traded company. ETFs are a bundle of assets and securities such as different stocks and bonds. A single ETF can contain dozens or hundreds of different stocks, or bonds or almost anything else considered an investable asset.