Published February 26, 2026 • 20 min read • By monkey.investments
An Exchange-Traded Fund, or ETF, is one of the most important financial innovations of the past thirty years. At its core, an ETF is a basket of securities, typically stocks or bonds, that is bundled together and traded on a stock exchange like a single stock. When you buy one share of an S&P 500 ETF, you instantly own a proportional piece of all 500 companies in that index. Instead of researching and buying individual stocks one at a time, you get broad market exposure in a single transaction.
ETFs were introduced in 1993 when State Street Global Advisors launched the SPDR S&P 500 ETF Trust (SPY). Since then, the ETF market has grown to over $10 trillion in assets under management globally as of early 2026, according to data from the Investment Company Institute. There are now more than 3,000 ETFs available in the United States alone, covering everything from the total US stock market to specific sectors like technology or healthcare, international markets, bonds, commodities, real estate, and even cryptocurrency.
The reason ETFs matter for beginners is simple: they eliminate the two biggest barriers to successful investing. The first barrier is complexity. Instead of analyzing individual stocks, you invest in the entire market or a broad segment of it. The second barrier is cost. ETFs charge annual fees as low as 0.03%, which means you pay just $3 per year for every $10,000 invested. Compare that to the 1% or more that actively managed mutual funds or financial advisors typically charge, and the savings compound into tens of thousands of dollars over a lifetime of investing.
These three terms are often confused by beginners, so it is worth clarifying the differences. A mutual fund is a pooled investment vehicle managed by a fund company. Investors buy shares at the end of each trading day at the fund's net asset value (NAV). Mutual funds can be actively managed, where a portfolio manager picks individual stocks, or passively managed, where the fund simply tracks a market index.
An index fund is a specific type of mutual fund that passively tracks a market index like the S&P 500 or the total stock market. Index funds do not try to beat the market. They try to match the market's return as closely as possible while charging minimal fees. The concept was popularized by John Bogle, founder of Vanguard, who launched the first index fund for retail investors in 1976.
An ETF can also track an index, and most popular ETFs do. The key difference is in how they trade. Mutual funds and index funds trade once per day at the closing NAV price. ETFs trade throughout the day on stock exchanges at fluctuating market prices, just like individual stocks. This means you can buy or sell an ETF at 10:30 in the morning at that moment's market price, while a mutual fund order placed at 10:30 will execute at whatever the closing price turns out to be at 4:00 PM.
For most beginners, the practical differences are minimal. Both index mutual funds and index ETFs provide the same broad market exposure at similar expense ratios. However, ETFs have two advantages that make them slightly more beginner-friendly in 2026: fractional share investing (you can invest any dollar amount, even $1) and greater tax efficiency in taxable accounts.
When you buy a total stock market ETF like VTI, you own a piece of over 3,700 US companies in a single purchase. This diversification protects you from the risk of any single company failing. If one stock in the index drops 50%, it barely affects your portfolio because it is one of thousands of holdings. Building this level of diversification by buying individual stocks would require hundreds of separate transactions and far more capital.
The expense ratio on Vanguard's VTI is 0.03% per year. That is $3 for every $10,000 invested. Fidelity's FZROX total market index fund charges 0.00%, literally zero fees. These costs are a fraction of what actively managed funds charge (typically 0.50% to 1.50%) and a fraction of what a human financial advisor charges (typically 1.00% of assets under management). Over 30 years of investing, the difference between paying 0.03% and 1.00% on a $500,000 portfolio amounts to over $150,000 in saved fees.
Every major online brokerage in 2026, including Fidelity, Schwab, Vanguard, and Robinhood, offers commission-free ETF trading. You pay nothing to buy or sell ETF shares. This was not the case before 2019, when most brokerages charged $5 to $10 per trade. Commission-free trading means you can invest small amounts frequently without fees eating into your returns.
With fractional shares available at most brokerages, you can start investing in ETFs with as little as $1. There is no minimum account balance at Fidelity, Schwab, or Robinhood. This eliminates the old barrier where index mutual funds required $1,000 or $3,000 to open an account. You can literally start with your next paycheck, no matter how small.
The S&P Dow Jones Indices publishes an annual SPIVA scorecard comparing actively managed funds to their benchmark indexes. The data consistently shows that over 15-year periods, more than 90% of actively managed large-cap funds underperform the S&P 500 index. By buying an index ETF, you are choosing the strategy that beats most professional fund managers over the long term. Warren Buffett himself recommended index funds for most investors and famously won a $1 million bet that an S&P 500 index fund would outperform a collection of hedge funds over a ten-year period.
The honest answer is: whatever you have. The old myth that you need thousands of dollars to start investing is completely outdated. In 2026, every major brokerage supports fractional share investing, which means you can buy a fraction of an ETF share for any dollar amount. If VOO (Vanguard S&P 500 ETF) costs $550 per share, you can invest $10 and own approximately 0.018 shares. Your $10 grows or shrinks at the same percentage rate as someone who invested $10,000.
That said, the amount you invest matters less than the consistency of investing. Someone who invests $50 per week automatically, every week, for 30 years at an average 10% annual return will accumulate approximately $470,000. The key is starting early and staying consistent, not starting with a large lump sum. This strategy is called dollar-cost averaging, and it works especially well with ETFs because there are no transaction fees or minimum investment requirements to worry about.
Your brokerage is where you open an account, deposit money, and buy ETFs. All major brokerages offer commission-free ETF trading, SIPC insurance (protecting your account up to $500,000), and fractional share investing. The differences are in user experience, research tools, and account types.
Best for: Overall experience, research, customer service
ETF commissions: $0
Account minimum: $0
Fractional shares: Yes (as low as $1)
Fidelity is the largest brokerage in the US by assets and consistently ranks highest in customer satisfaction surveys. Their platform is clean and beginner-friendly while offering advanced tools for experienced investors. Fidelity also offers their own zero-fee index funds (FZROX, FZILX) which are unique in the industry.
Best for: Banking integration, physical branches
ETF commissions: $0
Account minimum: $0
Fractional shares: Yes (Schwab Stock Slices)
Schwab offers a complete financial ecosystem including checking accounts, credit cards, and physical branch locations. Their Schwab Stock Slices feature lets you buy fractional shares of ETFs and stocks. Schwab merged with TD Ameritrade in 2024, combining the best features of both platforms.
Best for: Long-term buy-and-hold investors, lowest-cost ETFs
ETF commissions: $0
Account minimum: $0
Fractional shares: Yes
Vanguard is the pioneer of index investing and manages the most popular ETFs in the world (VTI, VOO, VXUS, BND). Their unique ownership structure means the company is owned by its funds, which are owned by investors, so there is no external pressure to maximize profits at investor expense. The platform is functional but less polished than Fidelity or Schwab.
These track the entire US stock market, including large, mid, small, and micro-cap companies. Examples: VTI (Vanguard), ITOT (iShares), SPTM (SPDR). These are the broadest and most diversified equity ETFs available, holding 3,000 to 4,000 stocks.
These track the 500 largest US companies by market capitalization. Examples: VOO (Vanguard, 0.03%), IVV (iShares, 0.03%), SPY (SPDR, 0.09%). The S&P 500 represents approximately 80% of the total US stock market value, so these ETFs provide similar performance to total market ETFs with slightly less diversification.
These provide exposure to companies outside the United States. VXUS (Vanguard Total International) covers both developed markets like Europe and Japan and emerging markets like China and India. IXUS (iShares) is a similar option. International diversification reduces your dependence on the US economy performing well.
Bond ETFs hold government and corporate bonds, providing income and reducing portfolio volatility. BND (Vanguard Total Bond Market) is the most popular, holding over 10,000 US investment-grade bonds. Bond ETFs are typically recommended as a stabilizing component of a diversified portfolio, with a higher allocation as you approach retirement.
These focus on specific sectors like technology (VGT), healthcare (VHT), energy (VDE), or real estate (VNQ). Thematic ETFs target trends like artificial intelligence, clean energy, or cybersecurity. These are higher-risk, less diversified, and generally not recommended as core portfolio holdings for beginners. They can be useful as small satellite positions once you have a solid core portfolio established.
| ETF | Tracks | Expense Ratio | Holdings | Why It's Great |
|---|---|---|---|---|
| VTI | Total US Market | 0.03% | 3,700+ | Broadest US diversification |
| VOO | S&P 500 | 0.03% | 500 | Largest US companies |
| VXUS | Total International | 0.07% | 8,500+ | Global ex-US exposure |
| BND | Total US Bond | 0.03% | 10,000+ | Stability and income |
| VT | Total World Stock | 0.07% | 9,900+ | One-fund global solution |
| SCHD | US Dividend | 0.06% | 100 | Quality dividend stocks |
For a deeper understanding of index investing philosophy, The Little Book of Common Sense Investing by John Bogle remains the definitive guide and is worth reading before you invest your first dollar.
The simplest approach for beginners is to start with just one or two ETFs that cover the entire market. Complexity is not your friend when you are starting out. A portfolio of VTI (total US market) plus VXUS (total international) gives you exposure to over 12,000 companies across the globe for an average expense ratio of about 0.05%. That is a professionally diversified global portfolio for less than the cost of a cup of coffee per year on a $10,000 investment.
As your portfolio grows and your knowledge deepens, you can add bond exposure for stability (BND), tilt toward certain factors like dividends (SCHD) or small-cap value (VBR), or add a small allocation to real estate (VNQ). But none of these additions are necessary in the beginning. The most important thing is to start investing consistently, not to build the perfect portfolio on day one.
The three-fund portfolio, popularized by the Bogleheads investment community, is arguably the most effective investment strategy for the vast majority of people. It consists of three ETFs that together cover every major asset class.
A common allocation for someone in their 20s or 30s is 60% VTI, 30% VXUS, 10% BND. As you age and approach retirement, you gradually increase the bond allocation to reduce volatility. Someone in their 50s might use 40% VTI, 20% VXUS, 40% BND. There is no perfect ratio. The key principle is that younger investors can tolerate more stock market volatility because they have decades for their portfolio to recover from any downturn.
Go to Fidelity.com, Schwab.com, or Vanguard.com and open an individual brokerage account or a Roth IRA (if you want tax-free growth). The process takes about 10 minutes and requires your Social Security number, address, and bank account information for funding. There is no minimum deposit required.
Link your bank account and transfer money to your brokerage. Electronic transfers typically take 1 to 3 business days, though some brokerages make funds available instantly for trading. Start with whatever amount you are comfortable with, even $10 or $50.
Use the search bar to find the ETF by its ticker symbol. For example, type "VTI" to find Vanguard Total Stock Market ETF. Review the fund's summary page to confirm the expense ratio, holdings, and recent performance.
Click "Buy" or "Trade" and enter the dollar amount or number of shares you want to purchase. For beginners, a market order is fine. This buys the ETF at the current market price. If using fractional shares, enter a dollar amount (like $100) rather than a share count. Review the order details and submit.
After your first purchase, set up a recurring automatic investment. Most brokerages let you schedule weekly, biweekly, or monthly purchases of specific ETFs. This automates dollar-cost averaging and ensures you invest consistently without having to remember or make active decisions each time.
The expense ratio is the annual fee an ETF charges, expressed as a percentage of your investment. It is deducted automatically from the fund's returns, so you never see a separate charge on your statement. An expense ratio of 0.03% means you pay $3 per year for every $10,000 invested. An expense ratio of 1.00% means you pay $100 per year for every $10,000 invested.
The difference compounds dramatically over time. Consider two investors who each invest $500 per month for 30 years at an 8% gross return. The investor paying 0.03% ends up with approximately $680,000. The investor paying 1.00% ends up with approximately $567,000. That is a $113,000 difference, all due to fees. This is why low-cost index ETFs are so powerful: they let you keep more of your returns.
Beyond the expense ratio, watch for these potential costs: bid-ask spreads (the difference between buying and selling prices, usually pennies for popular ETFs), account maintenance fees (most major brokerages charge none), and transfer fees if you move your account to a different brokerage (often reimbursed by the receiving brokerage).
ETFs are more tax-efficient than mutual funds due to a mechanism called in-kind creation and redemption. When large institutional investors (called authorized participants) create or redeem ETF shares, they exchange baskets of the underlying stocks rather than cash. This process avoids triggering capital gains distributions that mutual fund shareholders typically receive at year-end, even if they did not sell any shares.
In practice, most broad market ETFs distribute very little or no capital gains to shareholders. Vanguard's VTI, for example, has distributed zero capital gains for years. Mutual fund equivalents tracking the same index sometimes distribute gains that create unexpected tax bills for investors.
The most tax-efficient strategy is to hold ETFs in a Roth IRA, where all growth and withdrawals are completely tax-free. If you invest in a taxable brokerage account, ETFs are still more tax-efficient than mutual funds, but you will owe taxes on dividends received each year and on capital gains when you eventually sell shares. A comprehensive guide to tax-efficient investing can help you optimize your strategy across multiple account types.
Trying to time the market. Research consistently shows that even professional investors cannot reliably time market tops and bottoms. Missing just the 10 best trading days over a 20-year period cuts your returns roughly in half. Invest consistently regardless of whether the market feels "high" or "low."
Checking your portfolio too often. The stock market goes up roughly 53% of trading days and down 47%. If you check daily, you will see losses almost half the time, which triggers anxiety and impulsive selling. Check your portfolio monthly or quarterly, not daily.
Chasing past performance. Last year's best-performing ETF is often next year's underperformer. The SPIVA data shows that fund performance does not persist. Stick with broad market index ETFs rather than chasing whatever sector or theme performed well recently.
Overcomplicating your portfolio. You do not need 15 different ETFs. A two-fund or three-fund portfolio of VTI, VXUS, and BND covers every major asset class. Adding more funds creates rebalancing complexity without meaningfully improving diversification. Keep it simple.
Selling during a downturn. Market corrections of 10% happen roughly once per year. Bear markets of 20% or more happen every few years. These are normal, expected, and temporary. The S&P 500 has recovered from every single downturn in its history. Selling during a downturn locks in losses and prevents you from participating in the recovery.
Not investing in tax-advantaged accounts first. Before investing in a taxable brokerage account, maximize contributions to your Roth IRA ($7,000 per year in 2026 for those under 50) and your employer's 401(k) match. The tax benefits of these accounts are worth tens of thousands of dollars over a career.
Calculate compound growth, compare expense ratios, and plan your investment strategy with free tools from the Spunkeroo network.
Explore Free Tools →An ETF (Exchange-Traded Fund) is a basket of securities like stocks or bonds that trades on a stock exchange like a single stock. When you buy one share of an S&P 500 ETF like VOO, you own a proportional piece of all 500 companies in the index. ETFs charge a small annual fee called an expense ratio, typically 0.03% to 0.20% for broad index ETFs. Unlike mutual funds, ETFs trade throughout the day at market prices.
You can start with as little as $1 thanks to fractional share investing, now offered by Fidelity, Schwab, Vanguard, and Robinhood. There are no minimum account balances at most brokerages, and all ETF trades are commission-free. The amount you start with matters far less than the consistency of your investing habit.
An index fund is a mutual fund that tracks a market index. An ETF can also track an index but trades on an exchange like a stock throughout the day. ETFs trade at fluctuating market prices while index mutual funds trade once daily at the closing NAV. ETFs have no minimum investment via fractional shares, while many index funds require $1,000 to $3,000 to start. ETFs are generally more tax-efficient. Expense ratios are often identical for equivalent funds.
The best ETFs for beginners are broad market index ETFs with low expense ratios. Top picks: VTI (Vanguard Total Stock Market, 0.03%), VOO (Vanguard S&P 500, 0.03%), VXUS (Vanguard Total International, 0.07%), and BND (Vanguard Total Bond Market, 0.03%). A simple two or three-fund portfolio using these ETFs provides diversification across thousands of securities at minimal cost.
Broad market index ETFs are among the safest ways to invest in equities because they diversify across hundreds or thousands of companies. However, all stock market investments carry risk, and prices fluctuate daily. The S&P 500 has returned approximately 10% annually over the long term, but individual years can see 20% losses. ETFs are best for money you will not need for 5 to 10 years. Your brokerage account is protected by SIPC insurance up to $500,000.
ETFs generate taxes through capital gains when you sell for a profit and through dividend distributions. Long-term capital gains (shares held over one year) are taxed at 0%, 15%, or 20% depending on income. ETFs are more tax-efficient than mutual funds due to their in-kind creation and redemption process. Holding ETFs in a Roth IRA eliminates all tax on growth and withdrawals.
For the vast majority of beginners, ETFs are the better choice. Over 90% of professional stock pickers underperform broad market indexes over 15-year periods according to the SPIVA scorecard. ETFs provide instant diversification, lower risk, and historically superior returns compared to most stock-picking strategies. If you want to own individual stocks, consider limiting them to 10% or less of your portfolio while keeping the core in broad index ETFs.
Investing in ETFs is the single most impactful financial decision most people can make. The combination of broad diversification, rock-bottom costs, tax efficiency, and accessibility makes ETFs the ideal building block for any investment portfolio. You do not need a financial advisor, a finance degree, or a large sum of money to get started. You need a brokerage account, a consistent investing habit, and the patience to let compound growth work in your favor over decades.
Open an account today, buy your first share of VTI or VOO, set up automatic recurring investments, and then do the hardest part of all: nothing. Do not check it daily. Do not sell when the market drops. Do not chase the latest hot ETF. The investors who earn the best long-term returns are the ones who invest consistently, keep costs low, and stay the course through market ups and downs.
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