Beginners Guide to ETF Investing

Beginners Guide to ETF Investing

Are you new to ETF Investing? Are there several questions in your mind about ETF investments?

  • Are ETFs a good investment?
  • How do I choose an ETF?
  • Is ETF better than mutual fund?
  • Do ETFs pay dividends?
  • Are ETFs better than stocks?
  • Are ETFs safe? What happens if an ETF fails?
  • What ETF to buy now?

If these are a few questions whose answer you're looking for, then your search ends here because TradingKart has got the answer to all the questions that a budding ETF investor will be looking for.

Beginner friendly guide to understand basics of ETF.

Is it better to buy ETFs or stocks?

ETFs are baskets of various securities, whereas stocks refer to the ownership of the company. Their returns are subjected to market risks; hence, no one can predict or guarantee the returns from ETFs and stocks.

ETFs offer the luxury of diversification and on the other hand, stocks give control over investments. But it depends upon the investment goals and risk appetite; the investors can choose the right one.

What is the difference between ETFs and stocks?

The primary difference between ETFs and stocks is diversification. While buying the shares of a particular company, the investors' access is limited only to that company. But when investors purchase the shares of an ETF, they get exposure to index, industry, sector, or even to market; depends upon the nature of the underlying asset.

The cost of acquiring individual stocks is lesser than that of ETFs.  ETFs are taxed according to the underlying assets, whereas shares are taxed according to the type of capital gains.

What are the pros and cons of investing in ETFs?



Diversity: Diversification is easy through ETFs as they contain a basket of various securities.

Lower Returns : ETFs are expected to give returns in line with that of the index or the underlying assets. They are not likely to outperform the index. Usually, passive returns are not enough to beat inflation.

Liquidity: ETFs are traded in exchanges. So, investors can convert their holdings into money easily.

Lower Volume : There are some ETFs, which are not traded very often. It may lead to lower trading volume and a wide bid-ask spread. It reduces the liquidity and cost-effectiveness of ETFs. Many investors find it challenging to sell ETFs due to lower volume.

Volatility : ETFs are less volatile compared to other financial assets as it contains several stocks rather than just one.

Inactivity : Due to issues related to specific sectors or regions, a few ETFs remain inactive for an extended period.

Tax-Friendly : ETFs are passively managed funds. So, they have low turnover (less buying and selling). A low turnover implies a lower tax because, due to fewer sales of the holdings, fewer capital gains passed to the ETF holders.

Limited Diversity in International Funds : Outside the U.S., investors can rarely find small-cap and mid-cap ETF products. Most of the international ETFs are large-cap products. Thus reduces diversity.

Flexibility : ETFs are traded like equities. It means short selling; margin buying, options trading, etc. are possible in ETF trading.

Product Complexity : ETFs are more complex than other investment options. Many investors find it challenging to understand the operational mechanism of ETFs and, thus, stay away from it.

Transparency : Since ETFs are traded in the exchanges, the pricing activities are transparent. The holdings of ETFs are disclosed each day, whereas those of the mutual funds are published at the end of a quarter.

Longer Settlement Days : The settlement date of ETFs is two days after the trade, while mutual funds settle the trades on the next day.

Lower Fees : The expense ratio of ETFs is less compared to mutual funds. At the same time, there are no entry fees in ETFs.

Tracking Error : The performance of ETFs should be in line with the index that they follow. Due to various reasons, the ETF performance can stay away from that of its intended index. Tracking error is the divergence between ETF performance and index performance. The major reasons for tracking error can be transaction and rebalancing cost, cash drag, security lending, etc.

Why should I invest in ETFs?

ETFs are one of the most popular investment options available today, especially in the developed markets due to their flexibility in trading, lower management fees, superior transparency, and better tax effectiveness. Yet, your risk appetite is the significant deciding factor for investment.

Do ETFs pay dividends?

ETFs pay dividends to their shareholders. ETFs payout all the dividends that come with the stocks held within the funds.

There are two types of ETF dividends. These are qualified dividends and non-qualified dividends. If the investor holds the ETF for more than 60 days before the issue of the dividend, then it falls under qualified dividend and else it's called a non-qualified dividend. The tax treatments for these two types are different.

How often ETFs pay dividends?

ETFs usually pay dividends quarterly. However, there are a few ETFs that pay dividends monthly. It makes ETFs the right choice for people who look for regular monthly income.

Are ETFs a good investment?

ETFs are good investment options for retail investors as they are low-cost investments and due to passive investment strategy, they require minimum monitoring.

ETFs are less risky when compared to investing directly in stocks as the risk is diversified across the companies and sectors.

Which is the good ETF to invest in? or What is the best performing ETF?

The 7 top ETFs of 2019 are:

  • Vanguard S&P 500 ETF (VOO)

    It invests in the stocks of the S&P 500 index, consists of 500 of the largest U.S. companies and has an expense ratio of 0.03%. This ETF offers a high potential for investment growth and is appropriate for long-term goals.
  • Fidelity ZERO Total Market Index Fund (FZROX)

    If you're looking for a no-fee and no minimum investment amount to start, then this ETF is an interesting option. This large blend category ETF is a good option for retirement accounts as well as for new investors.
  • SPDR S&P 500 ETF (SPY)

    SPY is one of the heavily traded ETFs on the market. It tracks the S&P 500 and the active traders prefer this ETF very much. Managed by State Street Global Advisors, this ETF has an expense ratio of 0.09%.
  • iShares Russell 2000 ETF (IWM)

    IWM has exposure to small public U.S. companies and access to 2000 small-cap domestic stocks in a single fund. The expense ratio of IWM stood at 0.19%.
  • Schwab U.S. Dividend Equity ETF (SCHD)

    SCHD focuses mainly on large companies with a stable dividend. This passively managed fund tracks Dow Jones U.S. Dividend 100 index and is made up of 100 top dividend stocks. The expense ratio of SCHD stood at 0.06%.
  • SPDR Gold Trust (GLD)

    GLD is a cost-effective and secure way to access the gold market. It has an expense ratio of 0.40%.
  • Vanguard FTSE Developed Markets (VEA)

    VEA gives access to companies of all sizes located in Canada and the major markets of Europe and the Pacific region. The expense ratio of VEA stood at 0.05%.

Do you pay taxes on ETFs?

ETFs attract tax and their taxation depends upon the underlying asset. If the holding period of an ETF is more than 12 months, then on redemption, the profits will be taxed as per capital gains tax else the profits will be treated as ordinary income. On the other hand, precious metals ETFs are taxed as collectibles.

What are the tax advantages of ETFs?

The capital gains tax on ETF is paid only at the time of sale of ETF, while in mutual funds, capital gains taxes must be paid on every profitable sale of shares through the life of the investment.  

As ETFs are passively managed funds, they have lower capital gains compared to actively managed mutual funds.

Are ETFs taxed like stocks?

If the underlying assets of an ETF are stocks, it will be taxed like stocks. For example, the portfolio of SPY consists of the large-cap stocks of the S&P 500.

Are ETFs better than stocks?

ETFs have a few advantages compared to stocks. ETFs provide easy diversification compared to stocks. While, it's challenging to have a diversified portfolio of stocks.

ETFs give access to different markets, sectors, as well as companies, whereas stock provides access only to a particular company. ETFs enable investors to do pair-trading.

Can ETF be traded daily?

Investors can trade ETFs during the trading hours on every working day. ETFs are traded like shares and their prices move up as well as down throughout the trading hours depending upon the supply and demand.

Which are better, mutual funds or ETFs?

Both mutual funds and ETFs are used for diversity. But, mutual funds are actively managed and give better returns than the market indexes. At the same time, ETFs are passively managed and their returns are in line with the index return.

The other significant difference between them is their way of trading. ETFs are traded during the market hours in exchanges like stocks, while mutual funds are traded only once in a day, i.e., after the market hours based on a calculated price.

ETFs are less risky than mutual funds. Thus, the choice of investment depends upon the investment goals and risk appetite of the investors.

Do ETFs make money?

Nowadays, ETFs are gaining popularity among investors due to its attractive yield. The income from an ETF depends totally on the kind of the underlying asset.

For example, in bond ETFs, the profit comes from the interest income and in the stock ETFs, the gains come from the price rise in the stocks owned by the ETFs as well as from the dividend paid out by these stocks.

Which ETFs pay the highest dividends?

The best dividend ETFs are:

  • Vanguard High Dividend Yield (VYM)
  • Vanguard Dividend Appreciation (VIG)
  • iShares Select Dividend Index (DVY)
  • iShares Core High Dividend (HDV)
  • Guggenheim Multi-Asset Income (CVY)

Are ETFs good for beginners?

ETFs are best suitable investment option for beginners as they offer good diversity, lower expense ratio, enough flexibility as well as liquidity. The beginners can select the appropriate ETF from a wide variety of funds.

How much should I invest in ETF?

The amount of ETF investment varies from person to person. It depends upon factors like investment goals, risk appetite, monthly income, etc.

What ETF pays monthly dividends?

There are a few ETFs that pay monthly dividends.  Wisdom Tree U.S. Total Dividend Fund (DTD) and SPDR Dow Jones Industrial Average ETF (DIA) are good monthly dividend-paying ETFs.

Does QQQ pay a dividend?

QQQ or Invesco QQQ (formerly Powershares QQQ) has a long-term history of paying dividends. The dividend yield of QQQ stood at 0.77%.

The dividend yield is the ratio between the annual dividend payout and the current share price. QQQ pays dividends quarterly and its current dividend payout stood at $1.54.

What is the most popular ETF?

The top 5 heavily traded ETFs are:

  • SPDR S&P 500 ETF (SPY)
  • Vanguard S&P 500 ETF (VOO)
  • Invesco QQQ ETF (QQQ)
  • iShares MSCI Emerging Markets ETF (EEM)
  • SPDR Gold Shares ETF (GLD)

Are ETFs safe? or Are ETFs high risk?

An ETF is an investment asset and all investment assets carry a certain degree of risk. The risk of ETFs depends upon the risk of the underlying assets. So there are less risky ETFs and at the same time, there are a few ETFs that are riskier than others.

Index ETFs are considered as the safest bet as they invest only in the securities of a specific index. In the long run, indexes are expected to gain the most, so the index ETFs are also likely to gain. Hence, it's essential to understand the product before investing in it.

Does Dave Ramsey recommend ETFs?

Dave Ramsay doesn't recommend ETF as he believes in buy-and-hold than buy-and-sell all the time. He doesn't believe in the strategy of ETFs, and according to him, it's like timing the market.

Which Nifty ETF is best?

The top 3 performing Nifty ETFs are:

  • Kotak Nifty ETF (Category: Equity Large-Cap; Expense Ratio- 0.11%)
  • Nippon India ETF Nifty BeES (Category: Equity Large-Cap; Expense ratio: 0.05%)
  • ICICI Prudential Nifty ETF (Category: Equity Large-Cap; Expense ratio: 0.05%)

Do ETFs ever fail?

There are plenty of ETFs that failed in the past. The primary reason for the failure is that they fail to accumulate the assets necessary to cover the expenses. In 2018, a total of 186 ETFs closed and in 2019, till the end of October, about 100 ETFs shuttered.

What happens if an ETF fails?

If an ETF closes, the investors never lose all their investments. Normally, the ETF providers send a notice to the investors mentioning the date of last trading and that of liquidation.

Usually, there will be a gap of 30 days between the announcement and the expiration date and during these days, the ETF will be traded as usual in the exchanges. But, there will be an impact of the news on the price as well as in the volume.

On the liquidation of an ETF, investors usually receive cash distributions equivalent to NAV. Investors who fail to sell their shares before the last trading date will be forced to sell over the counter. However, the process is not smooth and attracts more expenses than trading in the exchanges.

How do I choose an ETF?

how to choose etfs

Why are ETFs so cheap?

ETFs are cheaper than mutual funds because they are passively managed. A passively managed fund doesn't need research on securities as they track a benchmark and they trade very rarely. So their trading expenses are very less. These factors make ETFs cheaper than mutual funds.

What are the five most actively traded ETFs?

The 5 most actively traded ETFs are:

  • SPDR S&P 500 ETF (SPY)
  • iShares MSCI Emerging Market ETF (EEM)
  • Financial Select Sector SPDR Fund (XLF)
  • VanEck Vectors Gold Miners ETF (GDX)
  • Invesco QQQ (QQQ)

Which is better, an ETF or index fund?

Both ETFs and index funds are passively managed and they have a lower expense ratio. They both are efficient diversification tools and are managed by professionals.

ETFs are traded in exchanges like a fund, whereas index funds are a type of mutual fund. Hence, they are traded in the same way as that of mutual funds. Flexibility and transparency are higher in ETFs.

ETF transactions take three days to settle, while index funds take only one day. Depends upon the risk appetite and investment horizon, the investors can make a choice. However, index funds look better for the retail investors and ETFs are best for the institutional investors.

What are the cheapest ETFs?

The 5 low-cost ETFs are:

  • JP Morgan BetaBuilders U.S. Equity ETF (BBUS) ---> Expense Ratio 0.02%
  • Vanguard Total Stock Market ETF (VTI) ---> Expense Ratio 0.03%
  • Schwab U.S. Large-Cap ETF (SCHX) ---> Expense Ratio 0.03%
  • Vanguard S&P 500 ETF (VOO) ---> Expense Ratio 0.03%
  • Schwab U.S. Broad Market ETF (SCHB) ---> Expense Ratio 0.03%

Why are ETFs so popular?

ETFs give investors access to a basket of securities like stocks, bonds, commodities, etc. Unlike mutual funds, ETFs can be traded easily traded and it offers excellent liquidity.

ETFs provide a high level of transparency, i.e., it's easy for the investors to know the price, cost as well as the holdings of the ETFs. The cost-effectiveness of ETFs is another factor that attracts people towards it.

Are ETFs good for retirement accounts?

ETFs are good for retirement accounts. Including carefully selected ETFs in Roth IRA is an efficient and effective investment for retirement savings.

Select those funds that give the most dividends and interests for the retirement accounts. S&P 500 Index ETFs and Growth Stock ETFs have the potential to maximize the returns.

What is the oldest ETF?

S&P 500 ETF Trust (SPY) is the oldest ETF available on the market. Launched in 1993, SPY tracks the S&P 500 index and has an AUM of $280.05bn. The expense ratio of SPY stood at 0.09%.

How many ETFs are there 2019?

At the end of March 2019, there are more than 2,238 ETFs listed in the U.S. markets and together, they hold $3.8 trillion assets.

The average daily value of the ETF transactions stood at $9.6bn, with an average daily trading volume of 1.5bn shares.

Who is the largest ETF provider?

The amount of assets determines the size of the ETF providers. In terms of the assets under management (AUM), the biggest ETF provider in the U.S. is Blackrock's iShares. Vanguard and State Street's SPDR follow it. Together, these three ETF providers handle more than 80% of all ETF activities.

What are the top 10 ETFs on the S&P 500?

The top 10 ETFs on the S&P 500 are:

ETF Name



Expense Ratio


SPDR S&P 500 ETF Trust


State Street Global Advisors


Equity: U.S. Large-Cap

iShares Core S&P 500 ETF




Equity: U.S. Large-Cap

Vanguard S&P 500 ETF




Equity: U.S. Large-Cap

Direxion Daily S&P 500 Bull 3X Shares


Rafferty Asset Management


Leveraged Equity: U.S. Large-Cap

Direxion Daily S&P 500 Bear 3X Shares


Rafferty Asset Management


Inverse Equity: U.S. Large-Cap

PortfolioPlus S&P 500 ETF


Rafferty Asset Management


Leveraged Equity: U.S. Large-Cap

Direxion Daily S&P 500 bear 1X Shares


Rafferty Asset Management


Inverse Equity: U.S. Large-Cap

Direxion Daily S&P 500 bull 2X Shares


Rafferty Asset Management


Leveraged Equity: U.S. Large-Cap

ProShares UltraPro Short S&P 500




Inverse Equity: U.S. Large-Cap

ProShares UltraPro S&P 500




Leveraged Equity: U.S. Large-Cap

Can you reinvest ETF dividends?

Reinvesting of dividend is possible in ETFs. A few ETFs allow automatic reinvestment while in the others, the investors have to do it manually by purchasing additional shares with the dividend amount. It makes the dividend reinvesting a little bit complicated in ETFs compared to mutual funds.

What is the best ETF in Canada?

Top 3 Canada ETFs are:

ETF Name


Expense Ratio


Vanguard FTSE Canada All Cap Index ETF



Tracks Canadian large-, medium- and small-cap companies

iShares Core S&P/TSX Capped Composite Index ETF



Tracks Canada's best know indexes

Horizons S&P/TSX 60 ETF




Can you lose money in ETFs?

You can lose money in ETFs. ETF is a basket of securities like stocks, bonds, commodities, etc. The price of these securities moves up and down depending on the demand and supply. Thus, the price of the ETFs also fluctuates. The potential loss is the entire invested amount.

Are ETFs good for beginners?

ETFs are a good investment option for beginners due to high liquidity, low fees, diversity, and stable growth. Beginners can select the most suitable ETFs from a wide variety of choices. Two best suitable ETFs for the beginners are Vanguard S&P 500 ETF (VOO) and iShares Core S&P Total U.S. Stock Market ETF (ITOT).

What is the best ETF to invest in Australia?

The best Australian broad-based ETFs are:

  • BetaShares Legg Mason Real Income Fund
  • Vanguard MSCI Australian Large Companies Index ETF
  • iShares Edge MSCI Australian Minimum Volatility ETF
  • UBS IQ MSCI Australian Ethical ETF
  • iShares Edge MSCI Australian Multifactor ETF

What is the best Fidelity ETF?

Fidelity MSCI Information Technology Index ETF (FTEC) is the best Fidelity ETF. The expense ratio of this ETF stood at 0.08% and its AUM stood at $2.73bn. FTEC is the largest Fidelity ETF in terms of AUM.

Is SPYD a good ETF?

SPYD is a good option for long-term investment. The portfolio of SPYD consists of the highest dividend-paying stocks in the S&P 500 and its dividend yield stood at 4.25%.

What is the best index fund to invest in 2019?

The 5 best index funds to invest in 2019 are:

  • Fidelity ZERO Large Cap Index (FNILX)
  • Vanguard S&P 500 ETF (VOO)
  • SPDR S&P 500 ETF Trust (SPY)
  • iShares Core S&P 500 ETF (IVV)
  • Schwab S&P 500 Index Fund (SWPPX)

What is the best ETF to short the market?

The 5 best ETFs to short the market are:

  • ProShares Short S&P 500 (SH)
  • ProShares UltraPro S&P 500 (SQQQ)
  • ProShares UltraShort S&P 500 (SDS)
  • Direxion Daily S&P 500 Bear 3x Shares (SPXS)
  • Direxion Daily Gold Miners Bear 3x Shares (DUST)

How long should you hold an inverse ETF?

Inverse ETFs are designed to take advantage of the intra-day bearish moment of the market. So it's not advisable to hold inverse ETF for more than a day. Holding an inverse ETF over-night may attract losses as any piece of news can impact the behavior of the market.

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