Written by Jacob Sipos
Published September 26, 2026

Invest in ETFs

What if you wanted to invest in hundreds of companies, but you did not want to research and purchase hundreds of individual stocks one at a time?

That is one of the reasons ETFs have become such an important investing tool.

Imagine walking into a grocery store because you want fruit. You could buy one apple. Or you could buy a basket containing apples, oranges, bananas, strawberries, and grapes.

An ETF can work somewhat like that basket.

Instead of buying one company, one ETF may hold shares of dozens, hundreds, or even thousands of companies. Other ETFs may hold bonds, focus on one industry, follow a particular investing strategy, or provide exposure to other assets.

ETF stands for Exchange Traded Fund.

The name sounds complicated. The basic idea does not have to be.

You purchase shares of the fund through a brokerage account. The fund owns a portfolio of investments. By owning shares of the ETF, you own a proportional interest in that portfolio.

First, What Exactly Is an ETF?

An Exchange Traded Fund, usually shortened to ETF, is an investment fund whose shares trade on a stock exchange.

The SEC’s Investor.gov explains that registered ETFs pool money from many investors and use that money to invest in stocks, bonds, short term money market instruments, other securities or assets, or combinations of investments. Each ETF share represents part ownership of the fund’s portfolio and the income it generates. citeturn0search0turn0search2

Here is a simplified example.

Imagine a fictional ETF called the ABC 100 Fund. The fund owns stock in 100 different companies.

You put $500 into the ETF.

You did not directly go out and place 100 separate stock orders. You purchased shares of one fund that owns those underlying investments.

If the combined value of the portfolio rises, the value of your ETF shares may rise. If the underlying investments fall, your ETF can fall too.

An ETF is not automatically safe simply because it contains more than one investment.

A fund holding hundreds of companies across many industries can be highly diversified. Another ETF may concentrate almost entirely on one industry, one theme, or even one stock. The word ETF tells you the structure. It does not tell you how risky the contents are.

Step One: Understand What You Actually Own

This is where many beginners make a mistake.

They see an ETF name and assume they understand the investment.

Do not stop at the name.

If an ETF says “technology,” what does that mean? Does it own 300 technology companies? Fifty? Ten? Are half of the fund’s assets concentrated in a few enormous companies?

If an ETF says “dividend,” does it own companies with sustainable dividends, unusually high dividends, dividend growth, or some completely different strategy?

Before buying an ETF, you should be able to answer:

• What does this fund own?
• What is the fund trying to accomplish?
• How does it choose investments?
• How diversified is it?
• What are the largest holdings?
• How much does it cost?
• What could cause it to lose money?

A $100 ETF does not mean you own $100 of every company

Suppose you invest $1,000 into an ETF with 500 holdings.

Your $1,000 is economically exposed to the portfolio according to the weight assigned to each holding. If one company represents 7 percent of the fund, roughly 7 percent of the fund’s exposure is tied to that company. If another represents 0.05 percent, its effect is much smaller.

This is why the number of holdings alone does not tell the entire diversification story.

Step Two: Understand How an ETF Works

ETF shares trade during the day on stock exchanges. That is one of the major differences between ETFs and traditional mutual funds.

As a regular investor, you generally purchase ETF shares from another market participant through your brokerage account rather than directly asking the fund to create one share for you.

Net Asset Value

You will often see the abbreviation NAV. It means Net Asset Value.

NAV represents the value of the ETF’s assets minus its liabilities, divided by the number of shares under the applicable calculation. Registered ETFs calculate NAV each business day. citeturn0search1

Imagine an ETF’s portfolio is worth $1 billion after liabilities and it has 10 million shares outstanding.

In a simplified example:

$1 billion ÷ 10 million shares = $100 NAV per share.

Market price

The price you see trading on the exchange is the market price.

That market price can be slightly above or below NAV.

If NAV is $100 but the ETF trades at $100.50, it is trading at a premium to NAV.

If NAV is $100 but the ETF trades at $99.50, it is trading at a discount to NAV.

The SEC explains that ETF market prices can differ from NAV because shares trade throughout the day. The ETF creation and redemption process and arbitrage activity generally help keep market prices relatively close to underlying value, although premiums and discounts can occur. citeturn0search1

Who creates ETF shares?

Behind the scenes, large financial institutions known as Authorized Participants can transact directly with the ETF in large blocks commonly called creation units.

You usually do not need to participate in this process yourself. It is useful to understand because it helps explain why ETF shares can trade throughout the day while still remaining connected to the value of the underlying portfolio. citeturn0search1

Step Three: Learn the Major Types of ETFs

There are thousands of exchange traded products, and they are not all designed for the same purpose.

Step Four: Understand Index ETFs Versus Active ETFs

Index ETF

An index ETF generally attempts to track a specific index.

Imagine an index contains 500 companies according to a defined methodology. An ETF designed to track that index attempts to produce results that correspond closely to the index, before or after applicable costs depending on how performance is described.

The manager is generally not waking up every morning trying to decide which company will become the next superstar. The fund follows the index methodology.

Actively managed ETF

An actively managed ETF gives a portfolio manager more discretion to choose investments consistent with the fund’s stated strategy.

The SEC explains that index based ETFs seek to track an underlying securities index, while active ETFs buy and sell portfolio investments according to their objective without having to conform to an index. citeturn0search0turn0search1

Which is better?

There is no automatic answer.

An index fund can be inexpensive, diversified, and easy to understand when the underlying index itself is broad and straightforward.

An active fund may pursue opportunities an index cannot, but performance depends partly on the strategy and manager, and expenses may be higher.

Compare the actual funds rather than assuming “active” or “passive” automatically means good or bad.

Step Five: Open an Account That Can Buy ETFs

You generally buy ETF shares through a brokerage account, much like purchasing an individual stock.

You might use a regular taxable brokerage account or, when appropriate and eligible, an account intended for retirement such as an Individual Retirement Arrangement, commonly called an IRA.

When comparing brokerage firms, examine:

• Trading commissions and other costs
• Whether fractional ETF shares are available
• Automatic investing features
• Research tools
• Investment choices
• Customer service
• Security features
• Cash management
• Account minimums

Do not choose a brokerage simply because its app looks exciting. The account will hold money that may matter to your future.

Step Six: Research an ETF Before You Buy It

This is where you turn ETF investing from “I heard this ticker is good” into an actual decision.

1. Read the investment objective

The objective tells you what the ETF is trying to accomplish.

Is it trying to track the total stock market? Generate income? Follow technology companies? Hold short term government bonds? Produce twice the daily movement of an index?

If you do not understand the objective, do not buy it yet.

2. Find the index or strategy

If it is an index ETF, find out exactly which index it tracks and how that index chooses and weights investments.

Two indexes that sound similar can produce different portfolios.

3. Look at the holdings

Go to the ETF provider’s official website and examine the holdings.

Look at:

• Number of holdings
• Largest holdings
• Percentage in the top 10 holdings
• Industry exposure
• Country exposure
• Asset types

Most ETFs publish portfolio holdings on their websites daily, according to the SEC’s ETF investor bulletin. citeturn0search1

4. Look at concentration

Imagine ETF A owns 500 stocks but its largest few companies represent a significant part of the portfolio.

ETF B owns 500 stocks but weights them differently.

They may react differently even though both technically contain 500 companies.

5. Find the expense ratio

The expense ratio represents ongoing fund operating expenses as a percentage of fund assets under the applicable calculation.

Suppose an ETF has a 0.10 percent annual expense ratio.

On $10,000, 0.10 percent is approximately $10 per year based on that amount as a simplified illustration.

If another fund costs 0.75 percent, $10,000 corresponds to approximately $75 per year under the same simplified calculation.

Those differences become more meaningful as balances and years grow.

The SEC emphasizes that fund fees reduce investment returns and that even small cost differences can create large return differences over time. citeturn0search9

6. Look at performance, but do not chase it

Review how the ETF has behaved during different market environments. But do not simply sort funds by whichever had the highest return last year.

Past performance does not predict future returns. A sector that just experienced an extraordinary run may perform very differently next year. citeturn0search0

7. Read the prospectus

A prospectus is a disclosure document containing important information about the fund, including its objective, strategies, principal risks, costs, and other information.

The SEC specifically recommends reading an ETF’s summary prospectus or full prospectus and recent shareholder information before investing. These documents can be found through the fund and SEC filings. citeturn0search1

Step Seven: Understand What an ETF Really Costs

ETFs are often described as inexpensive investments, and many broad index ETFs do have low expense ratios.

But “ETF” does not automatically mean “cheap.”

Expense ratio

The fund deducts operating expenses from fund assets. You generally do not receive a separate monthly invoice for the expense ratio. The cost reduces the fund’s investment return.

Brokerage commissions

Some brokers offer commission free ETF trading, but not every transaction or service is necessarily free. Check your broker’s current fee schedule.

The bid ask spread

ETFs have a bid and an ask.

The bid is the highest current price a buyer is offering. The ask is the lowest current price at which a seller is offering shares.

The difference is the bid ask spread.

The SEC gives a helpful example: if an ETF is quoted at a $59.50 bid and a $60 ask, buying 200 shares at $60 and immediately selling at $59.50 would create a $100 loss from the spread alone, ignoring other changes and costs. More liquid ETFs often have tighter spreads. citeturn0search1

Premiums and discounts

You may purchase ETF shares for more than NAV or sell them for less than NAV. Historical premium and discount information can often be found on the fund’s website. citeturn0search1turn0search9

Step Eight: Here Is How You Actually Buy an ETF

Now imagine you have completed your research and selected an ETF that fits your plan.

1. Log into your brokerage account

Make sure the account has available cash to invest.

2. Search for the ETF’s ticker symbol

Every exchange traded fund has a ticker symbol used for trading. Verify the exact fund name and ticker because providers can offer several funds with very similar names.

3. Open the ETF information page

Before buying, confirm the current price, fund name, and other information. Do not accidentally purchase a similarly named fund.

4. Decide how much you want to invest

Suppose the ETF trades at $100 per share and you want to invest $500.

If whole shares are required, $500 could purchase five shares before applicable costs.

If your brokerage supports fractional ETF shares, you may be able to enter a dollar amount instead.

5. Choose an order type

A market order generally prioritizes getting the trade executed at the best available current price, but the exact price is not guaranteed.

A limit order lets you specify the maximum price you are willing to pay when buying. The trade may not execute if the ETF never reaches your limit.

6. Review before submitting

Confirm:

• The ticker is correct
• You selected buy rather than sell
• The number of shares or dollar amount is correct
• The order type is what you intended
• You understand any displayed fees

7. Submit the order

If the order executes, the ETF shares will appear in your brokerage account.

8. Do not stare at it every five minutes

If you bought the ETF for a long term goal, minute by minute price movements may have little to do with your original reason for owning it.

9. Consider automatic investing

If your brokerage supports recurring ETF purchases or fractional shares, you may be able to automate a set dollar amount on a regular schedule.

For example, someone might decide to invest $200 from every paycheck into a diversified ETF according to their financial plan.

Automation does not remove market risk. It can make the saving and investing behavior more consistent.

Step Nine: Understand How an ETF Can Make Money

There are several ways an ETF investor may receive a return.

The ETF’s market value rises

If the underlying portfolio becomes more valuable, the ETF’s NAV and market price may rise.

If you buy shares for $100 and later sell them for $125, you have a $25 gain per share before applicable taxes and costs.

Distributions

The underlying investments may generate dividends or interest. A fund can distribute applicable income to shareholders after expenses.

Capital gain distributions

Funds can also realize capital gains from portfolio transactions and may distribute gains to shareholders under applicable rules.

Investor.gov identifies dividend payments, capital gains distributions, and increases in market price as ways ETF investors may earn money. citeturn0search0

Reinvesting distributions

Some brokerage firms allow distributions to be automatically reinvested into additional ETF shares or fractional shares.

This can allow the investment to compound over time, although taxes may still apply in taxable accounts even when distributions are reinvested.

Step Ten: Understand the Dangers of ETFs

Step Eleven: Compare Two ETFs the Right Way

Suppose you find two ETFs that both appear to invest in the same part of the market.

Do not choose based only on which ticker you like better.

Create a simple comparison.

Then ask the most important question:

Which one better accomplishes the job I need this investment to do?

The ETF with the highest recent return is not automatically the answer.

A Beginner’s Step by Step ETF Plan

Step 1: Decide why you are investing

Retirement, long term wealth, income, a future goal, and short term speculation require different thinking.

Step 2: Decide how much risk you can take

Consider your timeframe, financial stability, emergency savings, debt, and ability to tolerate market declines.

Step 3: Choose the account

Understand the differences between a taxable brokerage account and retirement accounts available to you.

Step 4: Choose the exposure you need

Do you want broad United States stocks, international stocks, bonds, a particular company size, or another allocation? Start with the job the ETF needs to perform.

Step 5: Find several ETFs that perform that job

Do not stop after finding the first one.

Step 6: Compare their strategies

Look at the index, holdings, concentration, expenses, risks, bid ask spread, and prospectus.

Step 7: Understand every unusual word in the fund name

If you see terms such as leveraged, inverse, ultra, daily, covered call, volatility, futures, or another strategy you do not understand, research it before investing.

Step 8: Decide how much to invest

Choose an amount appropriate for your finances and overall diversification. You do not have to invest everything at once.

Step 9: Place the order carefully

Verify the ticker, dollar amount or shares, order type, and any costs before submitting.

Step 10: Keep contributing and reviewing

If the ETF continues to fit your long term plan, regular contributions can build the position over time. Periodically confirm that the fund still follows the strategy you intended to own.