What to Look for Before Buying Your First ETF
Key Points
ETFs can often cost a fraction of the price of some of the underlying stocks they hold.
There are different theme-based ETFs based on the goals of an investor and the needs of a portfolio.
The Vanguard Total Stock Market ETF provides massive diversification and has a strong performance history.
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Exchange-traded funds (ETFs) are great investment vehicles for gaining instant exposure to different sectors at prices often lower than those of some of the ETF's top stock holdings.
For example, Space Exploration Technologies, or SpaceX, closed its first day of trading at just under $161. But the Tema Space Innovators ETF, which holds SpaceX and other space-related investments, is trading below $35 per share.
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That said, with so many different options to choose from, there's one key question to consider before adding the first ETF into any portfolio.
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The biggest question to ask yourself
The question to answer before buying an ETF is, "What role is this ETF going to serve in my portfolio?"
For example, an investor may want to generate more income. With that goal in mind, one investment to consider is the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD), which tracks U.S. companies with high dividend yields. That ETF pays a dividend that yields above 3%. For investors seeking greater access to theme-based investing with higher price appreciation potential, there are ETFs focused on sectors like artificial intelligence (AI).
When it comes to the very first ETF to add to a portfolio, however, the Vanguard Total Stock Market ETF (NYSEMKT: VTI) offers a strong starting point. Its investment philosophy is straightforward and has helped investors build long-term wealth.
How the Vanguard Total Market ETF operates
The Vanguard Total Stock Market ETF is designed to track the CRSP U.S. Market index, which represents 100% of the investable U.S. stock market. Its holdings include large-, mid-, and small-cap stocks, with those holdings totaling nearly 3,500. Nvidia is the top holding, with a portfolio weight of 6.6%.
It's a tech-heavy ETF, however, so this may not be a fit for investors who already have heavy exposure to tech stocks. Still, this ETF offers massive diversification, a history of steady returns, and a dividend payout. As of May 31, the Vanguard Total Stock Market ETF is up over 308% over the last 10 years, and its dividend yield is 1%, boosting that total return potential.
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Jack Delaney has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
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