Want to know about ETFs and the minimum investment needed? You might be surprised to learn that you can start with just $1 today.
Young investors had to wait until they saved enough money to build an investment portfolio a decade ago. Today, ETF investing has become more available to everyone through smartphone apps and low-cost investment platforms. The process needs just a few simple steps. Many brokerages have removed account minimums and transaction fees. You can open an account quickly with simple information like your Social Security and bank account numbers.
The ETF market gives you plenty of choices with about 12,400 ETFs across the world. We can help you choose from options like the Vanguard S&P 500 ETF (VOO) with $862 billion in assets to globally diversified multi-asset portfolios that give you access to thousands of investments. You can trade Vanguard ETFs for any dollar amount whatever the share price, thanks to fractional investing.
Let’s take a closer look at everything you need to know about ETF investing for beginners — from understanding what they are to placing your first trade and building a balanced portfolio.
Understand What ETFs Are
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Understand What ETFs Are
What is an ETF and how does it work?
Exchange-Traded Funds (ETFs) are baskets of securities you can buy and sell in a single trade on a stock exchange [1]. While stocks represent just one company, ETFs bundle multiple securities together—hundreds or thousands of them—into one package [2].
Large financial institutions called authorized participants create ETFs. They buy underlying securities and swap them for blocks of ETF shares through an “in-kind” transfer [3]. These blocks, known as “creation units,” usually contain 25,000-200,000 shares [3]. The authorized participants then sell these ETF shares to investors on exchanges.
Why ETFs are good for beginners
ETFs give new investors several advantages. They offer one of the simplest ways to vary a portfolio [1]. Your overall returns stay safer because your investments spread across many securities instead of relying on just one [1].
ETFs have no minimum investment requirements, unlike mutual funds that need initial investments between $1,000 and $3,000 [1]. You can start investing with any amount you can afford.
ETFs also cost less than similar investment products [2]. Competition between ETF providers has pushed down fees, which leads to very low expense ratios for many ETFs [4].
ETFs vs mutual funds: Key differences
ETFs and mutual funds differ mainly in how you trade them. ETFs trade like stocks throughout the day with prices that change minute by minute [5]. Mutual funds trade only once daily after the market closes, based on their net asset value (NAV) [5].
There’s another reason ETFs stand out – they’re better with taxes. The way ETFs work means they create fewer capital gains than mutual funds [5]. People buy and sell ETF shares directly in the market rather than through the fund company. This means the fund rarely needs to sell securities that might trigger capital gains [5].
ETFs also show you what they own every day [6]. Mutual funds only reveal their holdings four times a year with a 30-day delay [7].
Set Up Your Investment Account
Set Up Your Investment Account
You now understand ETFs, so let’s create your investment home base.
Choose the right brokerage platform
The right brokerage platform is a vital part of your ETF investment trip. Charles Schwab, Fidelity, Vanguard, E-Trade, Firstrade, Merrill Edge, and Ally Invest offer commission-free ETF trading [8]. These factors matter when comparing platforms:
- Trading fees (many now offer zero-commission ETF trades)
- Account minimums (most have none)
- Available ETF selection
- Educational resources for beginners
- Accessible interface
Vanguard, 23 years old in the ETF market, stands out for low-cost fund offerings. Charles Schwab pairs zero commissions with no account minimums [8].
Open and fund your account
You can open an investment account in less than 15 minutes [9]. Here’s what you need to do:
- Visit your chosen broker’s website and click “Open an Account”
- Select your account type (individual brokerage for general investing)
- Provide personal information including name, address, and Social Security number
- Link your bank account for transfers
Most brokers don’t require minimum deposits. eToro needs a modest $50 to start [9]. Fund transfers take 3-7 days after you submit your application [10].
Understand settlement funds and fractional shares
Your settlement fund works like a virtual wallet in your account. Money flows into it before purchases and returns there after sales [10]. Stock and ETF trades follow a T+1 settlement cycle since May 28, 2024. This means transactions complete one business day after execution [11].
A Monday sale settles on Tuesday [12]. You can use unsettled funds for new purchases. However, selling these new positions before the original funds settle might trigger account violations [12].
Fractional shares let you buy portions of ETFs instead of whole shares. A $100 ETF becomes accessible with just $10, giving you 1/10th of a share [13]. This feature helps beginners diversify their investments even with limited money as they start their ETF trip.
Use screeners to find suitable ETFs
The global market offers more than 14,600 ETFs [14]. Smart tools can help you find the right one that matches your priorities. ETF.com and similar platforms let you search through thousands of funds by applying specific filters [15].
These key filters will help you narrow down your search:
- Asset class (stocks, bonds, etc.)
- Geographic focus
- Industry sector
- Trading volume and liquidity
- Assets under management
Check expense ratios and performance
Your returns will take a direct hit from ETF expense ratios. This annual operating cost comes as a percentage deducted from fund assets [16]. The best low-cost ETFs charge under 0.10%, while others charge more than 10% [17].
A $100,000 investment with a 0.5% expense ratio could cost you about $20,000 in returns over 20 years [17].
Place your first ETF trade
The market tends to be volatile during the first and last 20 minutes of trading. You should trade between 9:40 AM and 3:40 PM EST [18]. Fractional investing now lets you buy ETFs for any amount, whatever the share price [3]
Build a Simple ETF Portfolio
You’re ready to build a complete portfolio that matches your investment goals after picking your first ETF. A well-balanced portfolio doesn’t need dozens of ETFs. You can create a fully diversified portfolio with just four ETFs.
Start with a diversified core ETF
Broad market ETFs should form your portfolio’s foundation. These ETFs give you extensive coverage of multiple sectors and companies. Total market ETFs track entire markets at the broadest level and make excellent starting points. Your portfolio might include:
- A U.S. stock ETF (approximately 60% of your stock allocation)
- An international stock ETF (roughly 40% of your stock allocation) [19]
“Total stock” ETFs invest in small, mid-size, and large companies with varying investment styles. This gives you instant diversification across thousands of securities.
Consider adding bond ETFs for balance
Bond ETFs help lower your portfolio’s volatility and can generate income. These ETFs focus on steady interest payments rather than just growth [20]. A well-balanced portfolio often uses allocation strategies like:
- Aggressive: 80% stocks/20% bonds
- Moderate: 60% stocks/40% bonds
- Conservative: 40% stocks/60% bonds [21]
You might want to split your bond allocation between U.S. bonds (70%) and international bonds (30%) to get the best diversification [19]. This approach using multiple regions adds another layer of protection against market swings.
Conclusion
ETF investing has revolutionized the way newcomers enter the market. This piece shows how ETFs are now available to everyone – you can start investing with just $1. The process takes only a few minutes to complete.
Understanding ETFs creates a solid foundation to make smart investment decisions. These baskets of securities give you instant diversification without buying individual stocks. The next step is picking the right brokerage platform that fits your needs based on fees, user experience, and available tools.
After funding your account, ETF screeners help you filter through thousands of options to find investments that line up with your goals. The expense ratios need careful attention because small percentage differences can affect your long-term returns by a lot.
You don’t need many different ETFs to build a balanced portfolio. A few well-chosen funds across domestic stocks, international markets, and bonds can give you proper diversification. Your personal risk tolerance and time horizon should determine how you split money between these categories.
FAQs
Q1. How do I start investing in ETFs as a beginner? To start investing in ETFs, open a brokerage account with a reputable platform, fund your account, research ETFs that align with your goals, and place your first trade. Many brokers offer commission-free ETF trading and educational resources for beginners.
Q2. What’s a good ETF for new investors to consider? A broad market ETF that tracks a major index like the S&P 500 is often recommended for beginners. These provide instant diversification across many companies and typically have low expense ratios, making them a solid foundation for a new investor’s portfolio.
Q3. How much money do I need to start investing in ETFs? You can start investing in ETFs with very little money. Many brokers offer fractional shares, allowing you to invest with as little as $1. This makes ETFs highly accessible for beginners who want to start small and gradually increase their investments over time.
Q4. What’s the difference between ETFs and mutual funds? The main differences are that ETFs trade throughout the day like stocks, while mutual funds trade once daily after market close. ETFs are often more tax-efficient and transparent, typically disclosing their holdings daily. Mutual funds usually have higher minimum investments, while many ETFs have no minimums.
Q5. How do I build a diversified ETF portfolio? Start with a core ETF that provides broad market exposure, such as a total stock market fund. Add international stock ETFs for global diversification. Consider including bond ETFs to balance risk. Adjust the allocation based on your risk tolerance and goals, and rebalance periodically to maintain your desired asset mix.