Putting It Simply: What Is an ETF?

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If you are new to investing and the stock market, chances are you have probably heard of ETFs (short for Exchange Traded Fund). Put simply, by investing in ETFs, you can invest in the performance of a group of companies instead of investing in each individual one. For example, if you invest in an ETF called VOO (Vanguard 500 Index Fund ETF), you are essentially investing in all 500 largest companies in the U.S. (such as Apple, Microsoft, Google, Tesla, and 496 others) through one single ETF.

Putting It Simply: What Is an ETF?

Because an ETF tracks the performance of a group of companies, it is typically less risky because if a few companies are not performing well, all other companies tracked by the ETF can still average out the performance of the ETF as a whole, or render the “badly” performing companies insignificant.

The most popular ETFs are usually those that track S&P 500, which has historically increased in value over the past 40 years.

Technically, there are many classifications of ETFs, from speciality ETFs, commodity ETFs, fixed-income ETFs, equity ETFs, the list goes on. However, as a beginner in the stock market, I believe there’s no need to look into all of these classifications too much just yet because it only creates a veil of complexity that would stop you from investing in the first place as an everyday investor.

A classification of ETFs that would otherwise benefit beginners is simply the knowledge that there are ETFs in various economy sectors. For example, there are bank ETFs that track the performance of a collection of bank institutions. There are also energy and oil company ETFs, gold and precious metal ETFs, real estate ETFs, cryptocurrency ETFs, and more. All of these are indirect ways to invest in sectors that you have confidence in.

How to Buy ETFs?

Investing in ETFs these days are much simpler than it was in the past. All you need is:

  • A smartphone
  • Be the age of majority in your country/state/province of residence
  • A bank account
  • A stock/ETF investment app

Which Investment App Should I Use?

The answer to this would vary between different countries, so it might be a good idea to do some research on online forums and social media for an investment app that is commonly used in your country of residence. For example, in Canada, Wealthsimple is amongst the most popular investment app for beginners and seasoned investors. In the U.S, apps like Charles Schwab and Fidelity are used pretty often.

Which ETFs Should I Buy?

The typical advice that is often given for beginners is to invest in ETFs that track S&P 500, such as VOO (Vanguard 500 Index Fund ETF), because it has historically performed well and you are essentially investing in 500 largest U.S. companies that are probably not going anywhere anytime soon. VOO is a U.S.-listed ETF, and if you do not reside in the U.S., you might still be able to purchase it but possibly with additional currency exchange fees or taxes, depending on your country of residence and the investment broker service that you are using.

In Canada, the equivalent of the VOO ETF is VFV (Vanguard S&P 500 Index ETF). VFV is Canadian-listed, but it tracks the same S&P 500 companies as VOO. If you are located in another region, you can try doing some research on the equivalent of VOO in your country of residence.

Aside from ETFs that track S&P 500, you may want to explore other types of ETFs mentioned above, such as bank ETFs, energy and oil company ETFs, or real estate ETFs. Your understanding of the economy and the sectors you think would grow in the future can be a starting point for you to select an ETF to purchase in.

Another way to find out which ETFs you might want to invest in is by going through forums and social media to observe what others are doing. If a particular ETF gets recommended frequently, it’s probably an indication that there is confidence in the investment and the people who have purchased it would likely have done some research into them. This is basic, but if you’re a beginner, it’s not a bad way to get started and you’ll certainly starting picking up a thing or two as you go along.

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