With the recent rise (and subsequent fall) of new investing vehicles — cryptocurrency and NFTs, to name a few — it’s been easy to forget that exchange-traded funds (ETFs) are all you need to retire as a millionaire. On a base level, ETFs are attractive because of their minimal costs, diversification benefits, and ease of access.
Let’s go over the main reasons investing in ETFs is a completely reasonable method of achieving a seven-figure net worth.
Minimal costs
One of the major keys to successful investing is keeping your investment expenses as low as possible. Many investment choices, like actively managed mutual funds, come with recurring fees that can eat significantly into your portfolio balance. In the words of the great Jack Bogle, founder of Vanguard, “returns come and go. But fees are forever.”
This is not to say that all ETFs have low expenses, but many of them do — especially if we’re talking about broad-market index ETFs. Funds like the Vanguard Total Stock Market ETF run on very low expense ratios, in the ballpark of 0.05% or less per year. On a $10,000 balance, that amounts to $5 annually — not a bad deal.
Trading fees for most ETFs are also quite low, especially if you use one of the online discount brokerages, like Fidelity, Charles Schwab, or Vanguard. If you buy in-house ETFs, or those branded by the company you’re trading with, you probably won’t pay any trading commission at all. That means you won’t have to worry about additional costs when you enter or exit a position.
Image source: Getty Images.
Increased diversification
As has been said before, putting all your eggs in one basket is rarely ever a good idea — especially when it comes to saving for retirement. Investing in ETFs is an incredible way to diversify your money since ETFs represent baskets of stocks from different industries and sectors. Some even cover global stocks, which means you won’t need to buy more than a few ETFs to have a fully diversified portfolio.
Diversification also works to bring down the overall risk of your portfolio. If you invest in single stocks, you tie yourself to the company-specific risks (sometimes called “unsystematic risks”) of the particular companies you chose. ETFs, on the other hand, often include hundreds of stocks and insulate you from the poor performance of any one company.
This is all to say that ETFs can provide worthwhile diversification at extremely low costs, which represents great value to the everyday investor.
Ease-of-access
ETFs are widely available to any retail investor with an internet connection, which makes them attractive for a number of reasons.
First, unlike hedge funds, private equity funds, or even most stock-picking financial advisors, there are no investment minimums to buy ETFs. You don’t need to be a millionaire already to buy ETFs, which many people find appealing on its face. What’s more, high-fee investment options are often unable to beat the investment returns that ETFs can deliver over the long run, especially after accounting for expenses.
Next, the days of calling up a stockbroker to buy a stock for you are completely behind us, as this practice has been deemed entirely obsolete, especially by younger generations. You can buy ETFs directly from your phone with absolutely no hassle whatsoever, or you can create a setting within your account to buy new shares automatically.
Finally, passive ETFs require no ongoing management by the investor. Funds built to track the broad markets are meant to be left alone for long periods of time. Compounded ETF returns can easily make you a millionaire if you’re able to simply hold the underlying funds long enough. Put another way: ETFs save time and effort.
ETFs make a lot of sense
Exchange-traded funds are really appealing to the everyday investor for a variety of reasons, but it’s clear that their overall value and time-saving nature are two things most people can get behind. There isn’t any real reason to overcomplicate your investing life when products like ETFs exist.
If you’re already invested in single stocks, you might think about building a portfolio of ETFs around your existing positions. Alternatively, if you’re starting from scratch, it makes sense to start with ETFs and build satellite positions from there. Either way, it’s worth taking a look at the benefits ETFs have to offer the long-term saver.
