Different Types of ETFs

ETFs come in various types, each designed to provide exposure to different asset classes, investment strategies or market segments. Here are some of the main types of ETFs that may be appropriate for beginning investors:

How to Choose the Best ETFs for Beginners

Although beginners are often long-term investors and can accept more market risk than older investors, the strategy for choosing the best ETFs is similar for all investors. These steps begin with identifying a time horizon and risk tolerance, guiding the portfolio's asset allocation and specific ETF selection.

The basic steps for choosing the best ETFs for beginners are:

1. Identify your time horizon: How long will you hold the ETF? Generally, the longer your time horizon, the more risk you can take with your investments.

2. Gauge your risk tolerance: How comfortable are you with market fluctuations? Higher risk investments, such as stock ETFs, will generally produce higher long-term returns, but they may also have more pronounced short-term declines in value compared with more stable investments, such as bond ETFs.

3. Determine your asset mix: Also known as asset allocation, your asset mix is a reflection of your risk tolerance and time horizon. For example, higher risk tolerance and a time horizon of more than 10 years may call for a higher allocation to stocks. Lower risk tolerance and short time horizons are more suitable for more stable investments, such as bond ETFs.

4. Choose the best ETFs for you: Select among the different types of ETFs and be sure that the fund(s) you choose align with your time horizon and risk tolerance from previous steps.

5. Choose a portfolio structure: Like any other construction, you need a design for your investment portfolio. While some may like a simple, equal allocation, such as four ETFs with 25% allocated to each fund, another good structure is called "core and satellite." As the name suggests, you begin with a core holding like an S&P 500 index fund and build around it with the satellite holdings.

For more information, see our article, How to Build an ETF Portfolio in 7 Steps .

Best ETFs for Beginners to Build a Portfolio

With thousands of ETFs to choose from, deciding on the best ETFs for a beginning investor can seem intimidating. In general, the top criteria for choosing ETFs are high assets under management, or AUM, and low expenses. Based upon those simple criteria, here are 10 examples of the best ETFs for beginners to choose from when building a portfolio:

1. iShares Core S&P 500 ETF (IVV) : This ETF from BlackRock checks the boxes on size, diversification, and low cost. IVV is the second-largest equity ETF, and it tracks an index of the 500 largest U.S. publicly traded companies, offering diversification and long-term growth. IVV’s AUM is $441 billion, and its expense ratio is one of the lowest on the market at 0.03%.

2. Vanguard Total Stock Market ETF (VTI) : Vanguard is known for its low-cost ETFs and mutual funds. VTI offers broad diversification as it tracks an index that replicates the performance of the entire U.S. stock market, including large-cap, midcap and small-cap stocks. VTI’s AUM is $374 billion, and its expense ratio is 0.03%.

3. Invesco QQQ Trust (QQQ) : For beginners who want a more aggressive growth ETF, QQQ tracks an index of the top 100 stocks in the NASDAQ index. This tilts QQQ’s portfolio heavily toward the technology sector. QQQ’s AUM is $227 billion, and its expense ratio is 0.20%. For a lower-cost version of QQQ, beginning investors can consider Invesco NASDAQ 100 ETF (QQQM) , which has $22 billion in assets and an expense ratio of 0.15%.

4. iShares Core S&P Small Cap ETF (IJR) : Since many broad market ETFs lean heavily toward large-cap stocks, a small-cap ETF like IJR can add diversity to a portfolio. IJR is the largest small-cap fund on the market with $77 billion in AUM. The expense ratio for IJR is among the lowest in its category at 0.06%.

5. Vanguard Total International Stock Index ETF (VXUS) : VXUS tracks an index that covers 98% of the investable market capitalization outside of the U.S. This broad diversification makes VXUS a good choice for beginners wanting exposure to foreign markets. AUM for VXUS is $69 billion, and its expense ratio is 0.07%.

6. Vanguard Total Bond Market ETF (BND) : BND enables investors to cover the entire U.S. bond market in one low-cost security. The first ETF to cross $100 billion assets, BND’s AUM is $104 billion, and its expense ratio is 0.03%.

7. Vanguard Dividend Appreciation ETF (VIG) : The largest dividend ETF on the market, VIG focuses on stocks of companies that have a history of increasing their dividends consistently over time. VIG’s AUM is $76 billion, and its expense ratio is 0.06%.

8. Schwab U.S. Dividend Equity ETF (SCHD) : For investors wanting higher yields, and potentially higher long-term returns than dividend funds like VIG, SCHD can be a good alternative. AUM for SCHD is $54 billion, and its expense ratio is 0.06%.

9. SPDR Gold Shares (GLD) : Beginners seeking to add some diversification to a portfolio with commodities may want to consider a large gold fund like GLD, which tends to have low correlation with other assets like stocks and bonds. GLD’s AUM is $62 billion, and its expense ratio is 0.40%.  Investors wanting more diversification may consider a broad-basket commodity fund like Invesco DB Commodity Tracking Index (DBC) .

10. VanEck Semiconductors ETF (SMH) : For investors who want to invest in technology that can benefit from artificial intelligence, and don’t mind taking on more risk in exchange for the potential for higher long-term returns, SMH is the best performing ETF in the past 10 years and can be a good addition to a growth-oriented portfolio. SMH's assets are $18 billion, and its expense ratio is 0.35%.

Tip: When researching ETFs, an excellent tool to use is etf.com’s ETF Screener . If you want to compare ETFs, use etf.com’s ETF Comparison Tool .

List of 10 Best ETFs for Beginners

Data as of May 1, 2024. This list is for educational purposes only. Past performance is no guarantee future results.

How to Get Started Investing in ETFs

To invest in ETFs, you will need an investment account, which may be an individual brokerage account, a joint brokerage account, or any variety of individual retirement account. Once you have the investment account open, you will need to fund it with cash, and you’ll be ready to invest in ETFs.

The basic steps to invest in ETFs are:

1. Open an investment account: Most brokerages will offer ETFs, but the largest investment companies that offer ETFs include Vanguard , Charles Schwab and Fidelity .

2. Fund the investment account with cash: Investors typically link a bank account to their brokerage account to transfer cash and make deposits. You can also set up a systematic investment plan and invest a fixed dollar amount over a specified frequency, such as once per month.

3. Select the ETF(s) to purchase: When your brokerage account or IRA is funded, and you’ve researched ETFs suitable for your goals and risk tolerance, you’re ready to buy shares.

4. Execute the trade(s) to buy shares: Most beginners will place what’s called a market order, which is an order to buy or sell a stock at the market's current best available price.

Is It OK to Start Investing With Just One ETF?

When getting started building a portfolio, it's not only acceptable to start with one exchange-traded fund, but it may also be necessary. Investors who aren't able to buy multiple ETFs in the beginning, can start with a core holding, such as an S&P 500 index fund or a total stock market index fund. From there, an investor can build around the core with other ETFs that add diversity to the mix, such as fixed-income funds and sector funds.

Bottom Line on the Best ETFs for Beginners

While ETFs offer many advantages for beginners, it's important to do some research, understand the specific ETFs you're interested in, and develop an investment strategy that aligns with your financial goals and risk tolerance. Additionally, seeking guidance from a financial advisor or using educational resources on ETFs can be valuable when starting your investment journey.

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