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markets & investing

Investing Fundamentals: How to Invest in ETFs

Exchange-traded funds (ETFs) are a commonly used investment vehicle and can be a building block of a diversified portfolio.

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ETFs are appealing to new and veteran investors alike given their potentially low investment costs and built-in diversification. If you’re interested in adding ETFs to your portfolio, here are some basics to know before getting started.

What Is an ETF?

A variety of investments
An ETF is a type of fund containing a collection of investments that can be traded on a stock exchange. A single ETF can hold a variety of bonds (bond ETF), stocks (stock ETF), commodities (commodity ETF), or other types of assets.

As a result of how they’re structured, an ETF has diversification built into the fund, which makes it a popular option for investors. For example, when you invest in a stock ETF, you’re investing in a variety of stocks all at once. An ETF can also include stocks from companies across various industries or sectors, such as energy or technology.

Building a diversified portfolio
ETFs can even track certain indices, such as the S&P 500 Index, and since you don’t have to buy the underlying assets individually, investing in different types of ETFs could be a time-saving, cost-effective way to build a diversified portfolio.

ETFs are not risk-free but are generally less risky than investing in a single stock or bond because they can help spread risk across a number of investments. With that said, certain ETFs can be concentrated in specific industries or geographies, so some funds may be less diversified than others. If you want to get a better sense of an ETF’s level of diversification, read the fund’s prospectus.

ETFs vs. Mutual Funds

ETFs and mutual funds are similar in that they help you invest in a variety of stocks, bonds, and other securities. But ETFs are not mutual funds. Here are three key ways these investments differ.

How they are traded
ETFs can be traded on an exchange at any point during the day when the market is open. Mutual funds, on the other hand, are not traded on an exchange. Shares are bought and sold once per day when the market closes. And transactions are done directly through the mutual fund company.

Pricing
Because ETFs are traded on an exchange, their share prices can fluctuate throughout the day as shares are bought and sold. With mutual funds, share prices are based on the fund’s net asset value, which is calculated at the end of each trading day.

Reporting
Another key difference is with the frequency of reporting when it comes to disclosing a fund’s investment holdings. ETFs provide a daily disclosure of their holdings, while mutual funds are only required to report their holdings quarterly.

Choosing a fund type
Consult a tax professional if you have any questions. Whether you choose to go with ETFs or mutual funds (or a combination of both) will depend on your personal investing goals and preferences.

Evaluating ETFs

Understanding costs and risks
With so many types of ETFs to consider, research options to help you avoid taking on more risk than you’re comfortable with, or unwanted surprises when it comes to costs and fees.

While ETFs provide an affordable way to access a variety of investments, not every ETF is considered “low-cost.” For example, actively-managed ETFs tend to have higher fees compared to passively-managed funds.

Investment philosophy and objectives
A fund’s investment philosophy gives you an idea of their overall approach to investing. By understanding the investment strategies at work behind the scenes, you can decide whether their investing style makes sense for you, your risk tolerance, and your financial goals.

Performance
Review important facts, including when the fund was created and how it has performed over time (under both good and volatile market conditions). In other words, what is the expected return on investment?

How to Invest in ETFs

Practical considerations
To invest in ETFs, you need a brokerage account, and how you choose to invest will depend on your personal investing style and preferences.

For example, you could build your own portfolio by handpicking ETFs. Some brokerage firms offer their own proprietary ETFs that are managed by the firm’s team of investment professionals.

Strategic considerations
Before making any investment decisions, talk to a financial advisor to see how ETFs can fit into your overall investment strategy.

We encourage you to reach out to your Goldman Sachs team if you have any questions.

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This material is intended for educational purposes only and is provided solely on the basis that it will not constitute investment advice and will not form a primary basis for any personal or plan’s investment decisions. While it is based on information believed to be reliable, no warranty is given as to its accuracy or completeness and it should not be relied upon as such. Information and opinions provided herein are as of the date of this material only and are subject to change without notice. Goldman Sachs is not a fiduciary with respect to any person or plan by reason of providing the material herein. Information and opinions expressed by individuals other than Goldman Sachs employees do not necessarily reflect the view of Goldman Sachs. Information and opinions are as of the date of the event and are subject to change without notice.

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