What are ETFs, and what are the best ETFs to buy? This article is written for long-term investors who want to successfully ETF invest. With tips and explanations about ETF investing, such as: which ETFs to buy? What are the best ETFs to buy in the first place? And more, such as the risks of ETF investing, the pros and cons and practical tips to increase returns.
After this article, you'll know all about long-term ETF investing to get off to a great start.
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Before we dive into the depths of what ETFs are, it's good to reflect on what they are. Do you already know exactly what ETFs are? How they work? It's important to understand what we're investing our money in to assess risk.
What is an ETF? This is an investment product that stands for Exchanged-Traded Fund. This is a large equity fund that is publicly traded. How this works, and what the advantages and disadvantages are, we will explain later in this article. For now it suffices to know what an ETF is.
An ETF keeps track of the price development of multiple stocks. Often an ETF is described as a basket full of shares. Instead of buying one stock, an Exchanged-Traded Fund allows you to buy multiple stocks at once. The management of ETFs are passive. They do not actively trade stocks, but "follow" the price. That's why we also call ETFs tracker(s).
In essence, an ETF is an investment product to quickly spread a lot of risk. ETFs are by nature passive equity funds. They follow a set of stocks. This can be 10, or it can be 9,000. The larger the ETF, the more risk diversification.
What are ETFs to us as individuals? Simple: a way to start investing without needing much knowledge. ETFs are inexpensive and offer a lot of risk diversification. In exchange for this service, we pay an annual fee to the management. This ranges from 1% to 0.05%. Anything below 0.5% is significantly cheaper than unlisted equity funds.
In essence, an ETF is of relatively lower risk. However, there are exceptions. Such as risky trackers where we work with levers. These types of risky ETFs are not suitable for beginners. Avoid them at all times.
As a beginner investor, there are excellent ETFs that offer (global) diversification.
An example of a diversified ETF is the Vanguard Total World Stock ETF. You can see this as a safety net containing more than 9000 (!) stocks. In other words: investing in this fund means that you indirectly invest money in 9000 companies worldwide. The ETF is a tracker that follows the price of all these 9000 shares.
We call this a way of "investing in the global economy".
Global funds are perfect for significant risk diversification within the stock market. It is one of the safest ways for private investors to participate in stocks.
Note that there are even safer investments such as bond ETFs. There are also real estate ETFs. Read our articles on investing in real estate.
We now know what ETFs are. We know they can offer a lot of diversification. Yet global equity funds, which as trackers offer the lowest risk, are not among the best ETFs.
The best ETFs try to make a selection of the best stocks. One that separates the wheat from the chaff. After all, in a great ETF there are also many broken companies. Eliminate these, and the better companies remain. In the long run, the best ETFs offer higher returns. The downside? They also provide more price fluctuations (volatility). Keep your emotions in check and this type of ETF will give higher returns.
What are the best ETFs to buy if you are young?
Read our research on the best ETFs for young investing
ETF investing is popular. ETF investing for novice investors is almost always better than investing in stocks. The latter can potentially lead to (much) higher returns, but it also has more risks. Moreover, it requires more time and knowledge.
This is not to say that ETF investing is without risk. There are risks, but the big advantage is that these risks are less intense compared to individual stocks.
These are risks in ETF investing:
Importantly, ETF investing offers lower risk, but is not without risk.
Individual investment risk leads to the greatest losses. This is the risk that one stock performs particularly poorly or even goes bankrupt. This is the risk that equity investors face. As an ETF investor, this risk is avoided because you deliberately choose multiple stocks.
Depending on your preference, ETFs that offer 100+ stocks are already sufficient. You could also buy one global ETF. Our tip is to make a selection of complementary ETFs that reduce the above risks. Another tip is to invest in real estate, commodities, bonds, and other investment markets in addition to stocks.
Later in this article, we provide tips for lower risk ETF investing. We also provide tips on how to achieve higher returns. Read more.
Don't have an investment account yet? When it comes to ETF investing, two things are very important, (1) costs and (2) supply.
The lower the costs in ETF investing, the higher the returns. A tracker has two costs. The first is transaction fees when buying and selling. The second is the annual fee for management (expense ratio). In terms of transaction costs, it is good to choose low-cost investment platforms. There are even investment platforms where we buy ETFs with no transaction fees.
Finally, supply is important. We want to buy the best ETFs. The greater the supply of an investment platform, the more likely they are to offer the stock funds we want. In our case, because of the range, we have an investment account with both Freedom24 and eToro. But there are many more, such as Robinhood, Webull, SoFi, Ally, and the list goes on.
ETF investing as a beginner?
Our top 2 ETF brokers are as follows:
Above we have already discussed which ETFs to buy. However, it may be that you invest through BUX Zero or eToro. We have also done research on this. We have compared all ETFs available at both brokers.
Based on this comparison, we have made a subjective compilation of the best ETFs at eToro.
In addition to choosing an investment platform, you may also want to invest in different types of trackers. Previously, we have provided many tips with links to our research. Below you'll find a link to research to two specific types of trackers, dividends and commodities.
Want to invest specifically in dividends? That is also possible with a tracker. A dividend ETF contains various stocks that pay out a (higher than average) dividend. Again, you have many types: from global trackers to small themed ETFs.
Here is my research on the TOP 10 best dividend ETFs.
In addition to "normal" and "dividend" stocks, you also have commodity stocks. The commodities market (commodities) is a different business. For example, you can invest in gold mines, oil companies, soybeans, agriculture and so on. Commodity markets are separate from companies. An IT company can perform very poorly, while a gold mining company has its best year ever.
You might want to invest a small portion in the best commodity ETFs.
We will now go deeper into ETF investing, with tips and explanations on reducing risk and increasing returns. To understand these tips, it's good to have a better understanding until ETF investing. Like how an ETF works.
There are different types of ETFs, but they all work the same. All they do is track stocks. The trackers that purely track an index fund like the S&P 500 perform almost the same as this index fund.
Now you may be thinking, why wouldn't I invest directly in the index fund? After all, index funds are one of the more secure ways to invest in the stock market. But the reason is simple. Take the S&P 500 as an example. If you wanted to buy a share of this index fund directly, you would be out over $3,300 per share (at the time of writing). That's a lot of money.
Now take the iShare S&P 500 as an example (pictured). This is an ETF that performs the same as the index fund S&P 500 in terms of return and risk. Only, a share of this ETF costs $320. The share is really not cheaper than the normal index fund, but it is simply reduced by a factor of 10. The big advantage of this is that as a novice investor, you can also invest in the S&P 500 thanks to investing in ETFs. And here the spread is much greater than with individual stocks.
Finally, you have themed ETFs. These can be anything. From 100 dividend stocks from the U.S. to 25 industrial companies in China for lithium and cobalt. Below I give you specific examples of such themed ETFs.
Investing in ETF offers a number of powerful advantages for novice investors, including:
Why invest in Exchange Traded funds? There are two strong reasons:
1. As a novice investor, it allows you to spread a lot of risk quickly and cheaply. This is an excellent way for passive investing, where you invest in the "global economy"
2. As an advanced investor, you can use themed ETFs to achieve higher returns at acceptable risk
When I started investing at 23, I took too much risk. I invested exclusively in (growth) stocks and in crypto currencies (in 2017). Now I am 30 and financially free. In recent years, I have structurally started to invest more in ETFs. In this way I can reduce risk and still get potentially nice returns. I succeed by investing in the best ETFs (from research and analysis).
If I can do it, you can do it too.
First of all, the question is how you are going to invest in ETFs in terms of duration. You will have to decide whether to invest large sums once in a while or opt for a monthly deposit (with small amounts).
Whatever you do: only invest with money that you can lose 100%.
The advantage with large one-time deposits is that you can get in at favorable times. Buy in a dip, so you get higher returns. This is the "buy the dip" tactic.
The downside to this is that as a (novice) investor, we often cannot time the market well. Even professional investors have trouble with this. In case you are 100% sure that you are buying at a good time, then it is best to opt for large one-time deposits. An example of such an entry moment is after the economic crisis of 2009. Then you buy in a huge dip. More recently, there was the dip during corona time.
The disadvantage is waiting for a big dip. Sometimes this dip comes only after 5 or even 10 years. That is why many investors choose another tactic, namely that of structurally investing a smaller amount every month. The advantage is that you spread the risk of timing over time. The potential disadvantage is lower returns than when you invest immediately (lump sum).
Of course, you can combine both tactics. By depositing monthly and saving for a big dip at the same time.
Attention: monthly deposits often involve higher transaction costs. With this tactic it is best to invest using cheap online brokers as mentioned above (scroll back).
If you can handle some risk, and you're going to invest with money that you can miss anyway, there are interesting ETFs with high returns. The best tip for this is to invest in ETFs that are in growth sectors and markets.
Investing in ETFs within growth sectors can be interesting for more advanced investors. An example of such a good ETF is RBOT or CIBR. These are ETFs that invest in 100 stocks within automation and robotics, and the latter in cybersecurity. But there are many more, think about the healthcare sector, online sales, the green sector for sustainability, et cetera.
An added benefit is that such ETFs often contain interesting growth stocks. Growth stocks typically carry high risk, but on the other hand offer the opportunity for higher returns. These are currently small companies that will become the future Facebook, Amazon and Apple in 10 or 20 years. A small investment of 1,000 euros in such a company can lead to 0 euros, or to tens of thousands of euros.
The harsh reality is that very many professional investors underperform the average stock market, represented by index funds. The annual average return of an index fund like the S&P 500, Dow Jones or Nasdaq is often higher than the individual performance of mutual funds and individual investors. Of course, there are exceptions. But these are people who are in it full time.
If you, as a novice investor, really don't have a clue, then you're better off just investing in the stock market through index funds. I am not saying that you cannot outperform the average stock market. Certainly it is possible, but only if you really get into it. That takes years of effort. However, it is a super cool and instructive learning process, which you will also benefit from within the business (think business analysis, thinking in terms of return and ROI, thinking about the future, etc.).
In short, if you have little understanding of investing and do not want to worry about it, you can best invest in a complementary mix of ETFs. Buy more each month with money you can spare. Have this money tied up for at least 10 to 20 years. Here's how to get rich slowly!
Finally, there are two effective tips for lowering risk when investing in ETFs. The first when investing in ETF is to always invest for the long term. Make a combination of ETF for index funds and growth markets that are booming over the next ten to twenty years.
If you think logically a bit, you probably know which sectors are going to do (or continue to do) well in the long run. Consider, for example, the food industry. People keep eating, and population growth is increasing (especially in Africa and Asia then). Also, the industry of automation is steadily increasing. Or how about the healthcare industry with the alarming trend of an aging population? The trick is to make long-term investments in ETFs linked to growing markets or growing index funds (long live America).
Another tip for lowering risk in ETF investing is diversification. This trick of diversification always works. For example, you may have found the "golden" growth market with 100% certainty. But you don't put 100% of your money on a "golden" horse that you are 100% sure is going to win the race, do you?
After all, you never know with 100% certainty, that's the sad truth. That's why the tip is to spread out. Spread your money across multiple ETFs based on your risk profile.
So, what are your experiences with investing in Exchange Traded Funds?