Trying to choose winning stocks in the market can be one of the most stressful parts of investing. What if you could start investing without having to pick the right stock?
That’s what exchange-traded funds (ETFs) are all about. When you invest in ETFs, you get access to a wide array of the stock market all at once, providing you with an instant safety net as your investments are all spread out. It gives you a chance to take advantage of the overall performance of the market.
If you’re looking to start investing — or if you’re already experienced and you want an expert-recommended path to growing your wealth over time — here’s what you need to know about the best ETFs of 2021.
What Are ETFs?
Exchange-traded funds, or ETFs, represent a basket of investments. Many of the most popular ETFs focus on stocks and bonds, but there are also ETFs that include commodities and foreign currencies.
“Think of ETFs as a bag of Skittles,” says Jully-Alma Taveras, a bilingual financial expert and founder of Investing Latina. One package of Skittles is filled with a number of different flavors, and it’s easy to trade different packages.
Some of the best ETFs are those that offer exposure to a large swath of the market, providing instant diversity with one investment.
“ETFs are useful because you can get a mix of stocks without having to do too much research or individual stock analysis,” Taveras says. “Adding them to your portfolio allows you to acquire more shares of the companies within that ETF. They also can help protect your portfolio, because ETFs can be created to be broadly diverse.”
Diversifying your portfolio is a healthy part of financial wellness since it spreads out your investments among numerous companies, instead of just one.
You can hold ETFs in taxable brokerage accounts, through brokerages such as Fidelity or Charles Schwab, as well as in tax-advantaged retirement accounts like a Roth IRA or 401(k).
How Do ETFs work?
An ETF is a basket of investments that trades on the stock market, just as you would trade any other stock.
ETFs aren’t mutual funds. Though they’re very similar, mutual fund transactions have to be settled at the end of each day, and so shares of mutual funds can only be bought and sold once a day. ETFs, on the other hand, can be traded throughout the day and are treated like stocks on the exchange.
Best ETFs for 2021
The best ETFs, according to investing experts, are index funds. Index funds are low-cost and give you exposure to an entire market.
“Start with index ETFs because they come with low expenses and provide instant diversity,” says Alissa Krasner Maizes, a financial planner and founder of the financial education website Amplify My Wealth. Some of the ETFs she suggests might be a good fit for a wide variety of people include:
- Vanguard Total Stock Market ETF (VTI)
- Vanguard Total International Stock ETF (VXUS)
- Vanguard Total Bond Market ETF (BND)
- Vanguard Total International Bond ETF (BNDX)
Taveras also likes ETFs that take advantage of the S&P 500, which tracks the largest companies in the United States, including:
- Vanguard 500 Index ETF (VOO)
- SPDR S&P 500 ETF Trust (SPY)
It’s also possible to look for ETFs that follow a specific sector, if you’re interested in areas like technology and healthcare, according to Taveras. She suggests considering such sector index ETFs as:
- Vanguard Information Technology Index Fund ETF (VGT)
- First Trust Dow Jones Internet Index ETF (FDN)
- Health Care Select SPDR Fund (XLV)
- Vanguard Health Care Index Fund (VHT)
In general, ETFs that follow specific sectors will carry higher fees and are subject to more volatility than ETFs that track entire markets.
Top Equity ETFs
As of 2020, there were more than 2,000 ETFs available in the United States, and more than 7,000 available worldwide. Determining the top equity ETFs can be difficult, but Maizes recommends comparing the performances and fees of index ETFs to their actively managed counterparts. Experts suggest passively managed funds to keep expenses low and avoid higher taxes.
“Investors should always consider that actively managed funds usually have more significant taxable implications at the end of the year,” she says. “Also, those sectors are likely already represented in a diversified investment portfolio.”
How to Invest in ETFs
Investing in ETFs can be done on your own. both Taveras and Maizes suggest looking for a brokerage account with low fees. Fidelity, eTrade, Charles Schwab and others offer access to free trades on ETFs. Many robo-advisors like Betterment, Acorns and Wealthfront don’t allow you to choose your own investments, but they construct your portfolio using ETFs.
Maizes recommends comparing different ETFs and their fees. All ETFs have expense ratios, which are administrative fees charged by the fund. Index ETFs generally have smaller expense ratios than actively-managed ETFs. Keep an eye out for low expense ratios, somewhere near 0.2%-0.5%. If you see an expense ratio in the 1% range, try to pick another fund that’s lower. A high expense ratio will eat into your profits.
Are ETFs risky?
As with any investment, some ETFs are riskier than others. In general, index ETFs and all-market are considered less volatile because they offer exposure to a wide swath of the market. As with any investment, though, there is the risk of loss, especially if you sell when prices are low. When you invest in ETFs or any other types of investments, long-term holding is the name of the game. Try to keep your money in as long as you can so that compound interest can work its magic and you can ride out ups and downs in the market.
How much money do you need to invest in an ETF?
In many cases, it’s possible to purchase shares of an ETF with a few dollars. Some brokers offer fractional shares of ETFs, allowing you to purchase a portion of an ETF share and take advantage of potential growth even if you don’t have enough money to buy a full share.
How do you trade ETFs?
You can place a market order for an ETF through your brokerage account, just as you would when buying any other stock. Look for the ticker symbol of the ETF you’re interested in and place your order.