What Is an ETF? I Think It's the Single Best Starting Point for New Investors.

Many long-term investors consider the stock market to be the greatest wealth creator in the world. Since its inception in 1957, the S&P 500 (SNPINDEX: ^GSPC) has generated an average annual total return of about 10.5%. A $1,000 investment in the index, with reinvested dividends, would be worth more than $1 million today. That's equivalent to about $85,000 in 1957 dollars.

For most investors, it makes more sense to invest in the entire S&P 500 index, which is rebalanced quarterly to track the 500 largest U.S. companies, rather than in individual stocks. For growth-oriented investors, it might be smarter to invest in the Nasdaq-100, which includes the 100 largest non-financial stocks listed on the Nasdaq Composite (NASDAQINDEX: ^IXIC).

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In the past, the only way to invest in an entire index was through an index fund, a passively managed mutual fund that only traded once per day. But in the early 1990s, the first exchange-traded funds (ETFs) were launched as a more liquid alternative to index funds.

ETFs can be traded throughout the day like regular stocks, making them more accessible to retail investors. Unlike many mutual funds and index funds, ETFs don't have any minimum investment requirements. Let's see why they're still the best investments for new investors.

Don't look for the needle in the haystack

Vanguard's founder, John Bogle, launched the first S&P 500 index fund in 1976. Since most actively managed funds and individual stocks couldn't outperform the S&P 500 over the long term, Bogle believed it was smarter to simply match the market rather than try to beat it.

Bogle once told investors, "Don't look for the needle in the haystack. Just buy the haystack." To make it even easier for investors to follow that strategy, Vanguard launched the Vanguard S&P 500 ETF (NYSEMKT: VOO) in 2010. With $1.8 trillion in assets under management, VOO is now the world's largest S&P 500 ETF by a wide margin. It charges a low expense ratio of 0.03%.

Another solid choice is Invesco's NASDAQ 100 ETF (NASDAQ: QQQM), which passively tracks the Nasdaq-100. It holds $104 billion in assets and charges a low expense ratio of 0.15%. The QQQM holds many of the same stocks as VOO, but the biggest names -- including Nvidia, Microsoft, Amazon, Apple, and Broadcom -- account for larger slices of its portfolio. QQQM also excludes the S&P 500's slower-growth stocks and rate-driven financial stocks.

Why should new investors buy ETFs instead of individual stocks?

The S&P 500 and Nasdaq-100 should keep rising over the long term because they're constantly rebalanced to include only the largest companies in America. So while some individual stocks might outperform those indexes, you could also end up with a lot of losers.

Many investors sell their winners too early but hold their losers for too long. Warren Buffett once told investors that if you buy an individual stock, you must be prepared to "have it go down 50% -- or more -- and be comfortable with it." He also said that some people "shouldn't own stocks" because they "can't handle it psychologically" and would "buy and sell them at the wrong time."

Therefore, if you don't have the time to research individual stocks or have the stomach to ride out the volatility, it's smarter to simply invest in a low-cost ETF that tracks the S&P 500 or Nasdaq-100, tune out the near-term noise, and reinvest their dividends. Over the long term, you'll likely outperform many investors who actively trade individual stocks.

Leo Sun has positions in Amazon and Apple. The Motley Fool has positions in and recommends Amazon, Apple, Broadcom, Microsoft, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.