New Investors: 3 Simple Reasons to Buy ETFs

New investors may keep it simple by starting investing in ETFs to get immediate diversification and keep costs low.

| More on:
exchange-traded funds

Image source: Getty Images

New investors have lots to learn. They can take baby steps by starting to invest in exchange-traded funds (ETFs). ETFs originally came about as a passive investing instrument that follows the performance of an index for a very low fee. They give the opportunity for new investors who have just started saving and investing to build their wealth without getting a big cut on returns from fees.

Diversification

One advantage of investing in ETFs is the immediate diversification. When you buy one stock or bond, you’re exposed to that single security. When you first start investing, you might have little to invest. To avoid concentration risk in one security, you can choose to invest in an ETF that provides exposure to a basket of securities.

Warren Buffett, one of the best long-term investors in the world, thinks that consistently buying an S&P 500 (NYSE:SPY) low-cost index fund makes the most sense practically all of the time.

This is wise advice because the general stock market goes up in the long run. The S&P 500 fund, as the name implies, provides investors exposure to about 500 large-cap companies in the U.S. market. Similarly, in Canada, investors can consider the S&P/TSX 60 (TSX:XIU), which provides exposure to about 60 large-cap stocks across different sectors.

Here’s how an initial $10,000 investment has grown, in each of the market-wide ETFs, in the long run. An investment in XIU in this period resulted in annualized returns of about 7.6%.

SPY Total Return Level Chart

SPY and XIU Total Return Level data by YCharts

Notably, you greatly reduce your risk through diversification when you invest in SPY or XIU ETFs but you’re still exposed to market risk. For example, you can see the “V-shaped” market crash in March 2020 in the graph above when the North American economies came to a halt during the pandemic. Government programs, including payouts to citizens who couldn’t work during the economic, shutdowns, and vaccine rollouts helped drive the strong rebound and subsequent market rally.

New investors need to be aware of these market corrections or crashes that will occur without warning and focus on long-term investing.

Low cost

ETFs that employ passive-investing strategies have low management expense ratios (MERs). SPY’s MER is 0.09%. XIU’s is 0.18%. Typically, passive ETFs have low MERs. ETFs that have MERs of more than 1% likely take on a more active investing approach.

New investors should consider investing for the long term in low-cost ETFs, such as adding to their SPY or XIU positions over time. The idea is that many years later, you expect the stock market to be much higher. What’s considered long-term investing? We’re looking at 5, 10, 20, 30, or even 40 years down the road. Potentially, ETFs can be a part of your retirement fund.

Notably, your investing platform may charge a trading fee. Scotiabank provides 103 commission-free trading ETFs for investors to explore. Other financial institutions may also provide commission-free trading for certain ETFs.

Keeping it simple

You can keep it really simple by only investing in SPY or XIU over time. There are also ETFs that provide exposure to specific sectors, industries, or bonds. In any case, they provide exposure to a basket of securities, which is much simpler to invest in than investing in securities one at a time. As a result, it’s also much simpler to manage an ETF investment portfolio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng has no position in any of the stocks mentioned. The Motley Fool recommends BANK OF NOVA SCOTIA.

More on Stocks for Beginners

grow dividends
Stocks for Beginners

Why Cargojet Stock Is Surging Past 52-Week Highs

Cargojet (TSX:CJT) stock surged by 17% after a new deal was announced, with upgrades coming in as well for the…

Read more »

Canada Day fireworks over two Adirondack chairs on the wooden dock in Ontario, Canada
Dividend Stocks

1 Dividend Superstar I’D buy over TD Bank Stock

TD (TSX:TD) may still be discounted, but there other great options to buy right now. Here's a top pick better…

Read more »

data analytics, chart and graph icons with female hands typing on laptop in background
Stocks for Beginners

Building a Million-Dollar TFSA: A Step-by-Step Guide for 2024

To get that million-dollar TFSA, it will take consistency and commitment. But if you can be patient, it doesn't have…

Read more »

Target. Stand out from the crowd
Stocks for Beginners

If I Could Only Buy 2 Stocks in 2024, I’d Pick These

Do you want some of the best stocks in 2024 to buy for long-term growth? Here are two options that…

Read more »

An airplace on a runway
Stocks for Beginners

Is Bombardier Stock Still a Buy After Surging 46% in May?

Here are some key fundamental factors that could help Bombardier stock continue soaring in the years to come.

Read more »

gold stocks gold mining
Stocks for Beginners

1 Gold Stock to Buy for More Growth, Less Risk

This gold stock has seen shares rise 15% in the last year. But it's more than just the price of…

Read more »

Gas pipelines
Stocks for Beginners

3 Reasons to Buy Enbridge Stock Like There’s No Tomorrow

Enbridge (TSX:ENB) is a superb long-term option. Here's why you should buy Enbridge stock right now and hold it for…

Read more »

growing plant shoots on stacked coins
Stocks for Beginners

1 Copper Stock to Buy as Copper Prices Shine

The price of copper continues to climb, and more copper production is on the way for this top stock up…

Read more »