Warren Buffett once famously said, “By periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals.”
Exchange traded funds (ETF) have a number of benefits that make them the ideal choice for young investors. For example, ETFs allow an investor to build a diversified portfolio with limited capital. In addition, ETFs trade throughout the day allowing for ample liquidity, crucial for new investors who may need to sell their holdings unexpectedly. Exchange traded funds also have low-cost structures.
As of 2020, there are more than 2,000 U.S.-based exchange traded funds. For young investors, this extensive range offers a wide variety of investment choices.
What is an ETF?
An ETF is a mechanism for investing in a range of stocks with a single purchase. They have become popular in recent years amongst people who want to start investing without putting in the time to research individual stocks and for those looking for a less risky investment than individual stocks.
An ETF is a managed fund that tries to get broad exposure to a certain sector, market, or style of investing. You can find ETFs that track the overall stock market, or the price of gold, or the cybersecurity sector — there seems to be one for everything these days.
Here a rough guide on how ETFs Work:
- An ETF provider creates a basket of assets, including stocks, bonds, commodities, or currencies, and gives the group a unique ticker.
- Investors buy a share of that basket, just like buying shares in a company.
- Buyers and sellers trade the ETF on an exchange.
Why should new investors buy ETFs?
Ensuring your portfolio is diversified can prove challenging for new investors, but by investing in an ETF, you instantly diversify your stock holdings. You gain exposure to all of the underlying assets covered under the umbrella of the fund — which means that even if some of the specific assets decline, the fund can still go up if other holdings are performing well.
ETFs are a lot cheaper to invest in than other types of funds as they are passively managed. The average ETF has an expense ratio of about 0.44% per year, compared to the average mutual fund fee of over 1%.
- Tax Efficiency
Capital gains tax on an ETF is only applied upon the sale of the ETF by the investors, in contrast with mutual funds that pass on taxes throughout the life of the investment.
The best ETFs to invest in
Here are three of MyWallSt’s favorite ETFs to invest in that are perfect for those starting their investment journey. We believe that these particular ETFs would sit well alongside some of the stocks we list in MyWallSt, offering instant diversification and great exposure to various markets and up-and-coming industries.
1. S&P 500 Index (VOO)
The most popular ETF in the world is The Vanguard S&P 500. This index tracks the S&P 500, which means that you are investing in the top 500 largest companies that trade on American stock exchanges. The S&P has historically returned approximately 10% a year since its full inception in 1957, which may not sound like a lot, but it beats the vast majority of professional investors and would see you double your money every seven years on average.
The top three holdings in this fund are:
2. International Dividend Appreciation (VIGI)
The Vanguard International Dividend Appreciation provides exposure to non-U.S. equities with a history of increasing dividends and offers diversification through geography. It has returned almost 50% since its launch back in 2016. With this ETF you will be investing in a basket of stocks that have had notable price appreciation in recent years and a history of increasing their dividends, a sure sign of stability and solid financials.
The funds current top three holdings are:
- Tencent Holdings.
- LVMH Moet Hennessy Louis Vuitton.
3. PureFunds ISE Cyber Security (HACK)
The PureFunds ISE Cyber Security ETF is the world’s first cybersecurity ETF. It comprises a range of companies that offer hardware, software, consulting, and a host of other services to defend companies and governments from cybercrime.
As cybercrime is such an unpredictable and rapidly evolving problem, cybersecurity companies tend to specialize in specific areas rather than the whole industry. This makes it difficult to find a profitable company because we simply don’t know what future threats will be.
Furthermore, the ongoing COVID-19 pandemic has resulted in a significant increase in the need for cybersecurity solutions. This year, cybersecurity officers in companies across the world raced to find a solution to ensure valuable company information was kept safe as hardware, client files, and employees were brought out of the office and into the home.
Currently, the fund’s top 3 holdings are:
- Cloudflare Inc.
- Cisco Systems Plc.
- Palo Alto Networks Inc.
Read the entire ‘How To Start Investing In Your 20s’ series here:
A MyWallSt subscription gives you access to over 100 market-beating stock picks and the research to back them up. Our analyst team post daily insights, subscriber-only podcasts and the headlines that move the market. Get your free access now!
MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here.
Financial Writer at MyWallSt
Nicole's favorite stock is Etsy because she loves its original and handmade items. She believes people are going to stop buying mass-produced items and start purchasing ‘one of a kind’ fashions and furnishings. In a world of sameness, Etsy has the advantage.