Why ETFs Are One of the Easiest Ways to Start Investing

Most beginner investors don't fail because they pick the wrong stocks. They fail because they're overwhelmed by too many choices and too much complexity right out of the gate.

When everything is available at once, doing nothing often feels safer than doing something wrong.

If you open an account with any of the best online brokers and trading platforms for the first time today, you're immediately flooded with choices.

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Stocks, bonds, options, futures, leveraged products, crypto, prediction markets and tokenized assets all sit side by side, competing for your attention.

For new investors, the hardest part is deciding where to start.

At the same time, one of the most durable and widely used investment vehicles in the U.S. is also in the middle of a full-blown boom: exchange-traded funds (ETFs). They might have been around since the early 1990s, but the role of ETFs in portfolios has expanded dramatically.

According to ETF Central, there are now 4,864 ETFs listed on U.S. exchanges. Most investors will never need more than a handful. The sheer number helps explain why beginners often struggle to know where to start — but that's exactly how ETFs can simplify things.

ETFs cut through the noise and let you focus on getting invested, not overthinking every decision. They offer a way to build real market exposure without needing deep expertise.

If you're a beginner ETF investor, it's worth sticking around to see how a few simple choices can take you a long way.

ETFs offer capital efficiency

Imagine you wanted to build your own basket of the best stocks to buy. Research from the CFA Institute suggests that if you stick to large-cap U.S. companies, you need roughly 30 stocks before diversification benefits really begin to show.

The problem is that many blue chip stocks trade at hundreds of dollars per share. If you're just starting out, you might run out of money after buying only a few names.

ETFs solve this problem by pooling capital. When you buy a single ETF share, your money is combined with that of other investors and spread across dozens or even hundreds of companies.

With one transaction, you gain fractional exposure to many stocks. If your brokerage supports fractional shares, you might not need enough money to buy a full ETF share to get started.

This structure also simplifies future investing. Instead of repeatedly buying small pieces of many individual stocks, you can continue adding to the same ETF.

Each purchase automatically increases your exposure to the entire basket, making ETFs a capital-efficient way to stay invested over time.

ETFs provide tax efficiency

Before ETFs proliferated, many investors relied on mutual funds and often faced surprise tax bills near year-end. When investors redeem shares, the fund manager might need to sell underlying securities to raise cash. If those securities have appreciated, the sale creates capital gains.

By law, mutual funds must distribute those realized gains to shareholders. This means you can receive a taxable capital gains distribution even if you never sold your fund shares.

Investor redemptions and portfolio turnover can trigger taxes for everyone holding the mutual fund. ETFs are structured differently.

When demand for an ETF rises or falls, the issuer works with authorized participants who create or redeem shares using baskets of underlying securities, not cash. These in-kind transactions allow the ETF to adjust its share count without selling holdings and realizing capital gains.

As a result, ETFs are often far more tax efficient than mutual funds over long holding periods.

ETFs tend to have low fees

Lower fees aren't guaranteed, but on average, ETFs are cheaper than most comparable investment products. Intense competition among ETF providers has driven what's known as "fee compression."

When multiple firms offer nearly identical exposure, fees become one of the few ways to compete.

This has led to extremely low expense ratios for many ETFs. Some broad market index ETFs charge just a few basis points per year, meaning only a small drag on returns even over long-time horizons.

While there are low-cost mutual funds and zero-fee options in select cases, ETFs tend to offer consistently low pricing across asset classes, regions and strategies.

Lower fees matter because they compound. Every dollar not paid for investment costs remains invested and continues working for you year after year.

ETFs are liquid and easy to trade

The same creation and redemption mechanism that improves tax efficiency also helps keep ETF prices closely aligned with their net asset value.

When an ETF's market price drifts above or below its underlying value, authorized participants can step in to arbitrage the difference.

This process helps prevent persistent premiums or discounts such as those seen with closed-end funds (CEFs).

ETFs also trade throughout the day, just as stocks do. You can buy or sell shares whenever markets are open and see real-time bid and ask prices.

smartphone financial data investment app portfolio tracker

Mutual funds, by contrast, are priced once a day after the market closes, and all orders are executed at that single price.

Some ETFs are so liquid that options are listed on them. This opens the door to more advanced strategies later on, such as selling covered calls for income or buying put options for downside protection.

While not necessary for beginners, this flexibility highlights how liquid and widely used many ETFs have become.

ETFs democratize access to asset classes

When ETFs first appeared in the U.S. in 1993, they mainly provided access to U.S. large-cap stocks. Over time, that access expanded dramatically. Today, investors can use ETFs to reach nearly every major asset class.

Equity ETFs now span value stocks, growth stocks and dividend-paying stocks as well as high-quality, low volatility, momentum stocks and international exposure. Bond ETFs cover Treasuries, corporate bonds, high-yield (or junk bonds), municipal bonds and more specialized segments.

Investment allocation Assert A B C on wooden blocks

Commodity ETFs extend far beyond gold and silver into energy, industrial metals and niche materials. Cryptocurrency ETFs now provide regulated access to digital assets such as bitcoin, ethereum and solana that once required specialized platforms.

While this variety can feel overwhelming at first, it also means your investment options can evolve with you. As your knowledge grows, you can diversify further without leaving the ETF ecosystem.

The structure stays familiar, even as your portfolio becomes more sophisticated.

Three beginner-friendly ETFs

Warren Buffett's No. 1 rule of investing is simple: Do not lose money. That doesn't mean avoiding risk altogether. Taking risk is necessary to earn returns. What matters is avoiding uncompensated risk, which is risk you are not reliably rewarded for over time.

Being exposed to the overall stock market is a compensated risk. Historically, investors have been rewarded for owning equities. Exposure to small-cap stocks or undervalued stocks has also been shown to carry a return premium over long periods.

By contrast, concentrating your portfolio in a single sector, a single country or a handful of stocks is not something for which investors are consistently paid. Those bets can work for a while, but the outcomes depend heavily on timing and luck rather than long-term probabilities.

Broad diversification reduces the chance that one bad outcome can permanently damage your portfolio. You aren't trying to guess which company, industry or country will be the next winner.

The Vanguard Group logo on a smartphone with a stock chart and ticker board blurred in the background.

(Image credit: Pavlo Gonchar/SOPA Images/LightRocket via Getty Images)

With that principle in mind, our three beginner-friendly ETF picks focus on funds that are diversified, low-cost, well-established and supported by sizable assets under management.

These ETFs are designed to serve as core building blocks in a long-term portfolio rather than tactical or speculative positions.

Combining three ETFs such as these forms what's commonly known as the "three-fund portfolio," an idea popularized by John Bogle, the late founder of the Vanguard Group.

This approach gives you exposure to U.S. stocks, international stocks and bonds in a simple, disciplined way. With ETFs, implementing this strategy is easier and more accessible than ever.

Vanguard Total Stock Market ETF

stock portfolio diversification asset allocation pie chart candlestick chart.

The Vanguard Total Stock Market ETF (VTI) is one of the most widely used options for core U.S. equity exposure, particularly among beginner investors.

Unlike the S&P 500, which only tracks 500 large-cap companies, VTI follows the CRSP U.S. Total Market Index, which exposes you to more than 3,000 names across large-cap as well as midcap stocks and small-cap stocks, spanning both growth and value styles.

Because the fund is market-cap weighted, its top holdings still closely resemble those of the S&P 500. Larger companies naturally receive larger allocations.

That said, VTI is meaningfully less concentrated, which adds an extra layer of diversification. The fund's appeal largely comes down to its extremely low 0.03% expense ratio and tax efficiency.

One important limitation to note is that VTI only covers U.S. stocks. It doesn't provide international diversification.

For that reason, it's typically paired with an international equity ETF when used as part of a three-fund portfolio.

Learn more about VTI at the Vanguard provider site.

Vanguard Total International Stock ETF

There's no guarantee U.S. stocks will outperform indefinitely. There have been extended periods where they lagged international markets.

A well-known example is the stretch from 1999 to 2009, often referred to as the lost decade, when U.S. equities were hit by both the dot-com collapse and the global financial crisis. During that same period, many international markets held up far better.

The Vanguard Total International Stock ETF (VXUS) is commonly paired with VTI to address this risk. The ETF tracks the FTSE Global All Cap ex U.S. Index for a 0.05% expense ratio, providing exposure to thousands of non-U.S. companies across developed and emerging markets.

This includes countries such as Canada, Japan, the United Kingdom, Germany and Switzerland, along with emerging economies such as China, India and Brazil.

Like VTI, the fund is market-cap weighted, meaning larger companies receive larger allocations. While recent returns have lagged U.S. stocks, the holdings in VXUS generally trade at lower valuations.

A significant portion of the historical underperformance has also been driven by a strong U.S. dollar. If the dollar weakens, this ETF could meaningfully contribute to portfolio returns.

Learn more about VXUS at the Vanguard provider site.

Vanguard Total World Bond ETF

As investors get older, their time horizon shortens. That reduces the ability to endure drawdowns without needing to tap invested capital.

Bonds can play a stabilizing role in this phase, acting as portfolio ballast while also generating income that can exceed stock dividends.

For a three-fund portfolio, the bond allocation is meant to prioritize diversification and low cost. The Vanguard Total World Bond ETF (BNDW) fits that role well. For a 0.05% expense ratio, it provides exposure to more than 18,000 investment-grade bonds worldwide through the Bloomberg Global Aggregate Float Adjusted Composite Index.

The ETF uses an ETF-of-ETFs structure, holding U.S. bonds and international bonds in roughly equal proportions. The underlying portfolio includes government bonds, corporate bonds and mortgage-backed securities, with maturities spread across short, intermediate and long terms.

BNDW currently offers a 4.09% 30-day SEC yield and pays income monthly.

However, bond income is generally taxed at ordinary income rates, making this ETF better suited for tax-advantaged accounts such as a Roth IRA.

Learn more about BNDW at the Vanguard provider site.

Tony started investing during the 2017 marijuana stock bubble. After incurring some hilarious losses on various poor stock picks, he now adheres to Bogleheads-style passive investing strategies using index ETFs. Tony graduated in 2023 from Columbia University with a Master's degree in risk management. He holds the Certified ETF Advisor (CETF®) designation from The ETF Institute. Tony's work has also appeared in U.S. News & World Report, USA Today, ETF Central, The Motley Fool, TheStreet, and Benzinga. He is the founder of ETF Portfolio Blueprint.