Investing can be your pathway to riches, and many people resolve to do a better job with their money at the beginning of a new year. Yet like many resolutions, it can be easy to get intimidated by the prospects of having to choose from thousands of different stocks and find ones that will make you wealthy while avoiding the ones that could wipe you out financially.
Exchange-traded funds provide a great way for beginning investors to get started. With extensive holdings of stocks and other investments, ETFs have diversified portfolios and are less volatile than individual stocks. By choosing ETFs with the right market exposure and low costs, you can put together an entire portfolio with just a handful of selections.
In fact, the following five ETFs offer a simple way for anyone to start investing.
SPDR S&P 500 (NYSEMKT: SPY)
U.S. large-cap stocks
iShares Core S&P Small-Cap (NYSEMKT: IJR)
U.S. small-cap stocks
iShares Core MSCI EAFE (NYSEMKT: IEFA)
Vanguard FTSE Emerging Markets (NYSEMKT: VWO)
Vanguard Total Bond Market (NASDAQ: BND)
Data source: Fund companies.
What these 5 ETFs offer
Many beginning investors make the mistake of not having an investment strategy in mind when they start building their portfolios. Without a strategy, you can easily fall into the trap of just buying a stock or ETF because it's popular or seems like the next hot investment. Sometimes that works out well, but more often, it leads to disappointment.
To avoid that mistake, one strategy many beginners follow involves asset allocation . By putting certain percentages of your portfolio into different types of investments, you'll protect yourself against the risks of any one investment while still giving yourself an opportunity to see your portfolio grow over time.
Image source: Getty Images.
Stock ETFs can play a key role in the asset allocation strategy for beginning investors, many of whom still have decades to go before they'll need money for retirement or other long-term expenses down the road. That's why there are four stock ETFs in this list of five, as each one offers investors a chance to put their money in a different piece of the global stock market.
Meanwhile, bond ETFs offer an alternative to stocks with unique characteristics of their own. Bonds don't offer the same growth opportunities as stocks, but they're designed to make predictable payments of interest at regular intervals to help investors supplement their income.
Why these 5 ETFs stand out
Even though there are thousands of ETFs to choose from, these five can fit together well. Drawn from different ETF providers, they all feature low costs while focusing on different parts of the investing universe:
- SPDR S&P 500 helped pioneer the ETF industry, and with more than $300 billion in assets under management, it's the largest ETF today. The fund tracks the S&P 500 index of 500 large-cap U.S. stocks, and it returned almost 30% in 2019 and has delivered consistent returns throughout its history.
- Small-cap stocks offer better growth prospects than large caps, and iShares Core S&P Small-Cap tracks an index that includes hundreds of stocks of small companies. The iShares family of ETFs is the largest in the industry. Small-cap returns slightly lagged large caps in 2019, but over longer periods of time, they've been better performers.
- Investors typically have most of their assets invested in domestic stocks, but international stocks provide valuable diversification. Here, too, the low-cost iShares MSCI EAFE ETF tracks one of the best-known indexes of stocks in developed market countries like Japan, the U.K., and Canada, as well as other markets in Europe and the Asia-Pacific region.
- Internationally, countries with faster-growing emerging economies have also come into their own, and the Vanguard FTSE Emerging Markets ETF includes stocks from China, India, Brazil, and several other smaller nations scattered across the world. Vanguard's reputation for low costs is well-established, and its emerging markets fund is the biggest in the ETF industry.
- In the bond arena, Vanguard Total Bond Market offers a wide variety of different bond investments, including those issued by the U.S. Treasury, other sovereign governments, and private corporations. You'll also find more complex bond investments like mortgage-backed and asset-backed bonds. Bond returns lagged stocks considerably in 2019, but the returns of bond ETFs have often helped improve overall returns during bad years for the stock market.
Get started today
Starting to invest is a worthy financial goal, and these five ETFs make it easy to make good on your resolution for 2020. By dividing your assets among these funds to match your risk profile and goals for returns, you'll be able to create an investing strategy and get on the path toward financial stability and wealth.
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Dan Caplinger owns shares of iShares Core MSCI EAFE ETF and Vanguard International Equity Index Funds. The Motley Fool owns shares of iShares S&P SmallCap 600 Index, Vanguard International Equity Index Funds, and Vanguard Total Bond Market ETF. The Motley Fool has a disclosure policy .