ETF Investing for Beginners: 3 Essential Tips

Exchange traded funds, or ETFs, are a way for many investors to experience the returns found in popular indexes, without actually investing in the securities directly. An ETF is a type of investment that provides a level of instant diversification for an investor. An ETF can be based on an index of stocks or bonds, or other types of securities. The ETF does not buy the individual securities that make up the fund so it reduces some of the concentration risk that an investor may be exposed to. An ETF exposes the investor to the same types of risks that any type of investments have, including the possible loss of the amount invested. There are few things to look out for when using these investment tools:

Tip 1: Research on ETFs

As a first time ETF investor, you need to do the required research necessary to understand how the ETF works and how it fits in your investment plan. Many times an investment decision is made by a first time investor is based on returns or the past performance of the investment, without regard to how such an investment helps to achieve investment objective and goal. This is a huge mistake that can be reduced, or even eliminated, by putting in the time and effort to study information provided by the fund in its prospectus and other disclosure documents.

Performing the research allows you, as a first time ETF investor, to compare information and determine which ETF is more suitable for your needs. It also helps you to make the best ETF choice that will result in the idea ETF choice. You can approach researching an ETF by gathering the fund's prospectus and marketing materials. This material is typically easy to find and can be requested directly from the ETF's distributor, or online. With this information you can compare to similar type ETFs that are based on the same type of index or market. 

Tip 2: Pay Attention to the Performance of an ETF

Performance data on an ETF is important to the extent that it gives you a sense of how closely the fund tracks its underlying index. Performance alone should not be used to decide which ETF to choose, but it can help show how the fund actually keeps pace with its index’s performance. An ETF that closely tracks the performance of its underlying index, before charges, fees and commissions, is one that you may want to put on your watch list as a potential ETF to invest in.  

Tip 3: Match the ETF to Your Investment Objectives

Any successful investment strategy begins with a plan. This plan should be based on your individual objectives and goals, such as saving for retirement or college without losing principal invested or experienced huge fluctuations in portfolio value. These statements have to be clarified upfront before choosing the ETF that will help you meet your financial needs.