If you are absolutely dead set on investing in an ETF and nothing else
will be satisfactory to you, then go ahead and invest in an ETF following the advice of whichever broker you trust to give you good advice regarding this matter as to which of the many different ETFs you should invest
in. You will, of course, have to
pay for such advice, directly as cash in the form of
transaction fees for purchasing shares of the ETF (and later for
selling the shares), and indirectly
in the form of the annual fee that brokerages charge each client.
(Many brokerages do waive transaction fees for buying and selling
ETFs that they themselves sponsor, but not for ETFs sponsored by
others)
In contrast, advice given on money.SE is free, but it can be worth
exactly what you pay for it, and in many cases can even be harmful
to your financial health. In my opinion,
for a beginning investor with small amounts
of money to start with, the advice to invest in ETFs falls in this
last category.
My personal advice to beginning investors whose ears have been
filled by back-fence talk and cocktail-party chatter and calls from
financial advisors about brokerages and
the advantages of investing in ETFs and how investing in ETFs is
the best thing to do is contrarian:
DO NOTHIING OF THE SORT.
It is far far better for the beginning investor starting out with small
amounts of money to invest in a low-cost non-exchange-traded mutual fund such as one that tracks the S&P 500 Index or the Total Market
Index or a MidCap Index or a Small-Cap Index etc instead of the
corresponding ETF. Shares of such mutual funds can be bought and
sold directly on the mutual fund's website without going through
a brokerage. Also, one can buy fractional shares of mutual
funds (down to a thousandth of a share) whereas only integer
numbers of ETF shares can be bought and sold. Thus, all one's money
can be fully invested in a mutual fund instead of some being held
for a future purchase because it is not enough to buy one full
share of an ETF. Similarly, when the mutual fund makes a distribution,
it can be fully reinvested in additional shares of the fund (one doesn't
have to reinvest, but it is an available choice), whereas
a distribution from an ETF is a cash payment that might not be fully
reinvestable in the ETF because the amount cannot buy an
integer number of shares.
True, the minimum
investment to begin investing in an ETF is one share and so the minimum investment in an
ETF is usually much smaller than the minimum investment in a mutual
fund (typically, in thousands of dollars); and ETF shares can be
bought and sold at any time the markets are open, but these
are minor issues compared to extra brokerage fees for buying and
selling "odd lots" of shares: brokerages like to trade in "round
lots" of 100 shares (or multiples of 100 shares) and charge more
if you want to buy or sell 37 shares, say. Also, for a beginner,
making an investment and holding it for a long time is far
better than chasing performance and buying and selling ETF shares
at 11:30 a.m. just because one can, instead of waiting for the
trade to be executed that evening when the markets have closed
and the mutual fund has figured out its price.
