ETF's Have Overtaken Stocks In Popularity?

The stock markets in the U.S. (such as NYSE and NASDAQ) used to be where you went to buy individual stocks in the companies you wanted to invest in. While you could also buy mutual funds and ETF's, it was stocks that were the most heavily traded and took in the most dollars.

But now it seems that ETF's have pushed individual stocks aside to claim the number one spot according to this article in Bloomberg. The number of exchange traded funds have exploded in recent years and obviously people like the fact that you can buy and sell them as easily as any stock and get a bit more diversity (depending on what you buy) than individual stocks.

There are now close to 2000 ETF's to choose from and I ask the question: with that many choices, how on earth does an investor go about choosing one? I have always liked individual stocks because they are easy to understand. If you like what Netflix sells, you can buy the companies stock. If you like what Chipotle sells, you can buy its stock. Its relatively easy to figure out what businesses or business models you like and buy the stocks of those companies.

But with exchange traded funds it becomes a bit harder to identify exactly what you are getting. ETF's track different indexes or segments of the market so you will be buying something more diversified than one companies stock. If you want to buy into the technology sector for instance, you will need to decide on one of the many ETF's that track technology. But how do you decide which one to buy? Is it easy to understand the exact differences between all the technology ETF's? I don't think so.

Maybe I am naive but I think its easier to pick one company I like rather than the ETF I want to buy. That's why I'm sticking mostly with individual stocks. Obviously though, many investors feel differently and like exchange traded funds because they are easy to buy/sell and are just as cheap (fee wise) as stocks. You can buy a whole industry and sit back and not worry about this or that particular company like you might feel prone to do with stocks. You might also fell less of an urge to panic sell at every bit of bad news. That makes ETF's a good choice for anyone who doesn't want the hassle of having to look at a portfolio every day or week just to check their stocks to see what is going on with them.

Beginner Investors Should Start By Buying SPY Or VTI

For most people exploring the stock market for the first time, it is probably best that they steer clear of individual stocks. It takes time and effort to pick the companies that you think will do well in future years. In addition to that, it takes more time to monitor how your stock picks are doing. You will need to periodically evaluate whether things have gotten worse or better for the companies you choose and figure out whether you should continue to hold or perhaps sell.

In other words, learning how to successfully invest your money in the stock market by buying and selling individual stocks takes commitment and is something that is learned over years, not weeks or months.

Is There A Better Way?

I suggest a better, safer, and easier way for beginners to get started: just invest in the whole market which you can do by buying either the SPY or VTI exchange traded funds (ETF). 

ETF's are traded just like individual stocks: you can buy or sell any amount of shares at any time the market is open. They cost the same to trade as a stock (there are no hidden fees like mutual funds) and give you exposure to many stocks all under one ticker symbol.

1) SPY closely tracks the S&P 500 index which is many/most of the big companies in the United States. In other words, when the market goes down so does SPY. And similarly, when the market goes up, so does SPY.

2) VTI is another ETF that closely mirrors the market. It trades just like a stock and is super easy to buy and sell.

ETF's Are Best For Beginners

These are just a couple of the ETF's you can find that mirror the market or mirror part of the market. ETF's have become so popular that there are many to choose from and you can find a lot more with just a little research. But the important thing to understand is that you get exposure to the stock market without having to fret over what individual stocks to buy. You also get instant diversity that you don't get when you buy only individual stocks.

Beginners have a lot to learn when entering the world of stocks and can often get intimidated. This leads to many potential investors quitting before they ever get started. By buying a market tracking ETF, you get a simple and trustworthy way to put your money to work in the stock market without getting sidetracked and overwhelmed. Oh, by the way, Warren Buffett (legendary investor) also recommends ETF's over individual stocks for most investors.