Here’s the TLDR:

An ETF (Exchange Traded Fund) is a collection of individual securities (stocks, bonds, REITs etc.) into one single package that trades very similarly to stocks of single companies.

This article is for beginner investors who have a long-term (10+ year) time horizon and compares them to buying individual stocks as well as actively managed mutual funds. In short, ETFs are king.

Also note, index funds are very similar to ETFs and many of the ideas presented below can be applied to index funds as well. In short Index funds trade only once per day, whereas ETFs can trade any time markets are open. In the long run, it won’t matter whether you choose to invest in ETFs or index funds as long as you choose the right ones.

If I had a dollar for every instagram post, Motley Fool article or personal finance “expert” who claimed to know which stocks to buy, what was hot and what you should get in on, I’d have enough money to give everyone reading this article enough money to retire right now. Picking individual stocks (if you intend to make money) is a very long arduous process. To be effective at it you need to understand the following about each stock you merely consider:

What type of business it is
Profit to Earnings ratio (P/E)
Earnings per share
Past performance
Current share price compared to past performance
Past, current, and future plans for major dealings within the business
A general understanding of the economy as a whole and how it relates to this stock
Who is running the company and what does that mean for the future share price
Staying up to date on daily news and trends
…And ideally a lot more….

Disclaimer: This is not financial advice and I am not your financial advisor. This article is for entertainment purposes only. This information should not be construed as legal or financial advice. You must do your own due diligence when making personal financial decisions.

And even if you do that for every one of the thousands of publicly traded companies around the world you could still get it wrong and lose your money.

Let’s look at an example. Enron, the former energy giant:

This is a well-known case of a booming energy company where in the year 2000 brought in $101 billion in revenue! There were headlines everywhere telling investors to buy the stock. In March 2001 the stock was trading at $55/share. By October it was trading at $33/share and Wall Street was screaming “BUY”! On November 29th it was trading for a mere $0.36/share and Credit Suisse First Boston said to “hold”, it’ll go back up right?. But 3 days later the company filed for bankruptcy and that was it. All the money investors had in Enron was gone.

It turns out for months they were fraudulently covering up their debts while publicly claiming their profits were great.

Don’t get me wrong, one of the fastest and most reliable ways to build insane amounts of wealth over time would be to put all your money in just a few companies that have huge potential. Just imagine if you put all your money into Apple in the 1980s, you’d be filthy stinking rich now, much richer if you had just put your money in an ETF, but we only know that now. If we put ourselves back in the 1980s it would have been almost impossible for you to have predicted how well Apple would have done. Steve Jobs was fired in the mid 80s and Apple had a very rough following decade. The company very well could have gone under meaning you would have lost all of your initial investment. Unless you are willing to risk losing all your money, I do not recommend this approach.

In fact, I made this mistake early on in my investing days. I was lured in by the headlines “Put $1000 in this stock to see your money increase 10x in the next decade”. “This is one stock I’m buying hand-over-fist this month”. “You’ll regret not buying this one energy stock now”.

I get it, it’s sexy! Individual stocks have no management fees, and have the potential to earn you tons of cash. I mean, the next Tesla, or Apple, or Amazon is being publicly traded for dirt cheap right now. I just have no idea what the name of that company is, and looking for it is more likely going to be a waste of your time. But hey, if you want to spend hours, or even an entire career researching and picking the best stocks go right ahead, just know that it isn’t as easy as it sounds. There are tons of people already making a living doing that. They’re called Mutual Fund managers and how many of them consistently beat the market (the average return of the stock market)? It’s a ridiculously low number. Basically unless you’re ultra good at it like Warren Buffett or Ray Dalio, eventually you’re going to screw up.

But there is a solution! Honestly it is one of those things in life where it really is almost too-good-to-be-true. Enter the ETF.

As stated above: An ETF (Exchange Traded Fund) is a collection of individual securities (stocks, bonds, REITs etc.) into one single package that trades very similarly to stocks of single companies.

Here are the main advantages of an ETF:

If any single stock within an ETF fails you’ll barely notice as the rest of the stocks prop it up
If one or more of the stocks within an ETF soars, so will the value of the ETF
The management fee is MUCH smaller than mutual funds (and the performance is generally better as well)
And most importantly: Spend ZERO time researching individual stocks so you can use the extra time to live your life

Here are the main disadvantages of an ETF:

The returns will never be as good as the best performing stock, i.e. you won’t get rich quick and you have to think long-term
There is a management fee (albeit quite small usually)
No control over how the ETF constituent stocks are balanced
They’re not “sexy”

If you are young (under 30) I’d bet the biggest hurdle you’re going to have to overcome is the mentality that ETFs are not sexy. You’re not going to have an ETF that blows up like Nvidia in 2023, or Gamestop in January 2021. But on the bright side, if you are that young, investing via ETFs can yield you serious long term wealth throughout your life.

But what do I actually do???

There are a ton of ETFs out there and they’re all very different from one another. Some track stocks of a particular sector, some track bonds, some track yields on high-interest savings accounts. I will not be giving a comprehensive list of all the ETFs you can choose from, I will only be giving a very short list of ETFs that I personally think are generally a good place to start. But first, what to do.

Find an online broker

There are many ways to invest in ETFs. The way I did it is through an online broker. Thankfully gone are the days where you’d have to get on the phone with a sleazy salesman in order to invest. Today we have online brokers where you can invest yourself. In fact, that was the main hurdle I had to overcome to start investing in the first place. I just needed a platform where I could invest my money and once I had that I was off to the races. Now I’m Canadian, and two popular brokers for beginners in Canada are Questrade and Wealthsimple, but there are others too. I encourage you to do some research yourself to find online brokers with the country you live in and choose the one that is best for you. Spend some time on that and then come back to this article.

Open the correct account with your broker

For Canadians there are many different account types that can be opened, each with their own set of rules. The rules specific to each account are often identical between brokers. Examples of accounts available for Canadians are:

TFSA (Tax Free Savings Account): For investing after-tax money
RRSP (Registered Retirement Savings Plan): For investing pre-tax money
RESP (Registered Education Savings Plan): For investing money for a child’s future education
FHSA (First Home Savings Account): For investing pre-tax money for purchasing a house in the future
Margin/Unregistered: Just a normal plain old account (just to be clear you probably shouldn’t start with this one)

I already have a detailed article on the TFSA, and the other accounts are coming soon! For Americans, the Roth IRA is very similar to the TFSA and the 401K is very similar to the RRSP. For other countries please check which accounts are available for you.

Choose the ETF(s)

Here is my non-comprehensive list of ETFs to get you started. This is not to be taken as financial advice:

ETF Symbol	Expense Fee	Description	Manager
VT	0.07%	Total world stock	Vanguard
URTH	0.24%	Total world stock	Blackrock
VTI	0.03%	All US Stocks (~3900 companies)	Vanguard
ITOT	0.03%	All US Stocks (~3900 companies)	Blackrock
VXUS	0.07%	Non-US Stocks	Vanguard
IXUS	0.07%	Non-US Stocks	Blackrock
VOO	0.03%	S&P 500	Vanguard
IVV	0.03%	S&P 500	Blackrock
VBR	0.07%	Small-Cap Value Stocks	Vanguard
IJS	0.18%	Small-Cap Value Stocks	Blackrock
BNDW	0.06%	Global bonds	Vanguard
BND	0.03%	US Bonds	Vanguard
AGG	0.04%	US Bonds	Blackrock
BNDX	0.07%	Non-US Bonds	Vanguard
IAGG	0.07%	Non US Bonds	Blackrock
XIC	0.06%	Canadian Stocks	Blackrock
HXS	0.4%	S&P 500 traded in CAD	Horizons

Vanguard and Blackrock (as evident by the above chart) are the two major companies that manage ETFs.

Over the past century, the S&P 500 (the 500 largest US companies) has been a very reliable index, returning on average just under 10% per year. That does not mean it will return that much in the future, but it is still a good bet nonetheless. I will be doing an article just on the S&P 500 in the future but for now here is the gist so you have an example:

Each of the 500 companies that the S&P 500 tracks has a total value or “market capitalization” which is the share price of the stock multiplied by the number of shares in existence. If company BlahBleeBloo* trades for $45/share and there are 15,000,000 shares in existence then the market capitalization of BlahBleeBloo is $675,000,000. The companies with the larger market capitalization make up a larger percentage of the index and the smaller companies make up a smaller percentage. For example, as of August 2023, Apple is the largest company in this group and makes up 7% of the index. 500th largest is some company called “Fox Corp Class B” which makes up just 0.012%. Add in the total weights of the other 498 companies in between and it will add up to 100%.

Technical note, the S&P 500 is not an ETF, it is an index so you can’t directly invest in the S&P 500. You need to buy an ETF that tracks the S&P 500 (like VOO) which is essentially the same thing as far as your money is concerned.

*BlahBleeBloo is (surprise) not a real company, but I now hold playground quality dibs on the name so I shall receive 15% royalties from the lucky (or unlucky?) soul who eventually does incorporate it.

Buy the ETF(s)!

This is very important! Once you have opened an account with your broker and chosen which ETF(s) you want to buy, you actually have to click “buy”! Otherwise your money will be sitting in your account as cash not invested in anything! Apparently lots of people make this mistake, so now you have no excuse.

What will buying an ETF look like?

Assuming you have chosen your broker, opened up your account and chosen which ETF you want to put your money in here is what you will do (these are general steps, not specific to one broker):

Make sure you are within scheduled trading hours where you live. You typically can’t trade on the stock market at 2 AM. In the Eastern Standard Time Zone in North America trading hours are between 9:30 AM and 4:00 PM. Don’t like that? Take your gripes to Wall Street.
Search for the ETF ticker symbol (similar to the left-most column in the chart I shared above)
You’ll probably then be presented with some information about the ETF including how much it is currently worth.
Click the button to “buy” or “trade” or something like that.
Choose which type of order you want. There are many ways to buy, but a “Market Order” is the most straight forward, where you will buy at whatever the current market price is
Choose how many shares you want to purchase (say your ETF is trading at $68.21 per share and you want to buy 2 shares, that will end up being exactly $136.42, no trickery here.
Place your order and as long as there isn’t any trading fee to buy ETFs (I suggest going with a broker that doesn’t charge trading fees to buy ETFs) then your money is now in the ETF and you can watch it going up and down all day long (though I don’t recommend watching your portfolio compulsively, it is a waste of time and will just make you anxious).
Repeat on a regular basis for the next 30 years and become filthy stinking rich.

Note: For building long term wealth, the best practice approach is to invest your money at regular intervals for decades. Say for example $500/month every month for 30 years. This is called “dollar cost averaging” and is one of the simplest and most effective pieces of advice to give and implement. It takes out the emotion from investing, avoids you panic selling or trying to time the market and prevents you from putting all your money in at the peak of the market only to have it fall over the next few months or years (which doesn’t feel very good).

What’s the catch?

Is it all sunshine and rainbows? No. Here is what to expect when you invest your money in ETFs.

You’ll pay a management fee

ETFs are not completely passively managed, they require someone to rebalance them which isn’t free. There is a management fee associated with them. You will never see this fee taken out as a transaction, it is automatically embedded into the cost of each share. The costs are typically WAY less than comparable mutual funds however (a collection of stocks that a professional money manager personally chooses). ETF fees are typically about 0.03% – 0.4% annually, compared to mutual funds which start at roughly 1% and go as high as 3% per year. On a $100,000 portfolio here is what those fees look like:

Management fee	Yearly cost on $100,000 portfolio
Low cost ETF at 0.03%	$30
High cost ETF at 0.4%	$400
Low cost Mutual Fund at 1%	$1000
High cost Mutual Fund at 3%	$3000

$30/year for never having to research which stocks to buy, is a fucking bargain, trust me. $3000/year, not so much.

Here’s a quick chart showing how much in fees you’ll pay assuming you start investing with $10,000 and you contribute $500/month for 30 years and get an average return on your investment of 8%/year:

Year number	ETF value	Yearly payment to ETF (0.06%)	Mutual fund value	Yearly payment to mutual fund (2%)
1	$10,000	$6	$10,000	$200
2	$17,270.40	$10.36	$16,960	$339.2
10	$100,562.43	$60.33	$89,979.56	$1799.59
20	$309,457.47	$185.67	$244,969.54	$4899.39
30	$757,946.98	$454.77	$522,533.00	$10,450.66

After 30 years the difference between the two portfolios is $235,413.98! That’s like a whole ass Ferrari, or a stupidly luxurious months long trip around the world or about enough bananas to last me 3 whole months!

The “catch” here is that you will end up paying about $4687 in fees to the ETF over the whole 30 years, but with a mutual fund you’ll end up paying $119,815 just in management fees. By year 30 you’ll be shelling out over $10,000 per year! You do not need to do that. Spend a few hours learning how to open a self-directed investing account and end up saving hundreds of thousands of dollars in the long run.

You’ll have to choose the right ETF

Don’t just put your money in some random ETF and expect to have a 10% return. There are thousands of ETFs out there. Do your research first. Not all ETFs are the same.

Be prepared to lose money in the short term

It is very possible that the first time you buy a share of an ETF you’ll see the price drop within a few seconds of buying it. If for example you bought 1 share of ZZZ for $68.21 and 5 seconds after you bought it the value drops all the way down to $68.20. Holy hell! Run for the hills?!

Not so fast. This is extremely likely to happen. Don’t panic. ETFs and stocks fluctuate in value in random ways every few seconds. But if you choose ETFs that contain a diverse range of quality stocks, it is very likely to go up in the long run. Remember this is a long term gain, no day trading here.

Conclusion

Ultimately, most of your time should be spent on researching and picking the correct ETFs for your purposes. For now I will not go in depth on each ETF that exists (there are too many) but I may go into more detail in a future article. The main point I want to make here is that you should learn what ETFs are and use them. They’re not just for financial professionals, they are for everyone who uses money. I just want to reiterate some important points to keep in mind:

You must have a long enough time horizon if you want to build wealth from investing, investing your money in ETFs will not get you rich quick
Do your own research into which broker, account, and ETFs you invest your money

If I learned what ETFs were and how to invest in them back when I was in school I would have a lot more money now. At least I can do what I can to help other people learn about them.

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