Investing in ETFs – How to Invest With No Investing Knowledge Required

ETFs (Exchange Traded Funds) are a perfect tool for beginners that don’t know anything about investing but still want to be invested, but even for experienced professionals. They can be used as the first stepping stone to finding your own companies to invest in or even as the primary investment for the rest of your life. You don’t need to know much at all, and there’s little room to make mistakes. Let’s see how they work.

What is an index?

First of all we need to define what an index is. An index is the calculated return of the average stock in an economy. 

So, for example, have you ever heard of the S&P 500? It is the combined performance of the biggest 500 companies in the US. So, if the S&P 500 goes up by 10%, we generally say the US stock market went up 10%. Now as an investor that is trying to make great returns, you do a lot of research and invest in only those companies within the 500 companies that make up the S&P 500 to get an even better return than average. Some succeed, some fail. But what if you don’t have the time or knowledge to stay researching? That is where ETFs come in.

What is an ETF?

An ETF tries to track the index as precisely as possible (most of them, anyway). So say the S&P 500 is the average of the 500 biggest companies in the US. An ETF is like a stock that makes its money by investing in those exact 500 companies. 

If you look at the price chart of an ETF, it is normally identical to that of the index it represents. The financial institution then charges a very small management fee that is deducted automatically. Over here, since they do not outperform or underperform the average return, then there is no benefit to choosing different ETFs that track the same index, just choose the one with the lowest management fee. 

What are the benefits of an ETF?

ETFs give you a very well diversified portfolio with the purchase of just 1 investment. They are super cheap too in terms of management fee, normally something like 0.1% per year for the biggest ETFs. You do not need to know much about investing to invest in these, because you are not choosing individual companies. 

You are investing in all companies in an economy, so you just have to hope that the economy keeps getting stronger in the long term and you will make money. 

If you look at the long-term performance of each index, there have been years it goes down but in the long term it generally always goes up. There would be a huge problem if the economy in 20 years was worse off than it is today. 

How many ETFs do I need?

An ETF gets you a perfectly diversified portfolio of a given country. However, ideally you want a mix of different countries. 

Buying the SP 500 ETF, for example, gives you a mix of all sectors and companies of the US economy. 

That’s great, but what if something major happens to the US? 

You need more country diversification. 

The MSCI world index is a good start, it is meant to represent stocks from all over the world. Therefore, owning an ETF that tracks just this index is already enough to have a great overall portfolio. The only issue is that is tends to still have a large exposure to the US as an index and it might make sense to balance it a bit more. 

Let’s say you bought 3 separate ETFS with your money, one third in a US index, one third in a European index, and one third in an emerging markets index. Now it starts to get even better diversified. See what makes sense to you, and what fees are charged to do this with your broker. 

Which are some good ETFs?

ETFs have brands, they do the same thing though. You’re looking for one good enough to have low management fees and many people are trading them so it’s easily to sell your ETFs when you want to. 

SPDR, Vanguard, iShares, Invesco and Charles Schwab are all very good brands of ETFs you can buy. The name of an ETF should look something like this on your trading platform: SPDR S&P 500 ETF

Learn more about ETF’s by listening in to our podcast below: