Hundreds, if not thousands, of people start investing every day. In fact, some 30 million new retail investors have opened brokerage accounts in the U.S. over the last two years.
With the ease of online brokerages, among other factors, there has been a retail investor revolution in the past five years or so. For many new investors, it can be downright daunting to get started, with so many options out there, but it doesn’t have to be — thanks to exchange-traded funds (ETFs).
The best ETFs for beginners make it easy for new investors to get started. Depending on the ETF, they include tens, hundreds or even thousands of stocks in one investment that trades like a stock.
Thus, a single ETF provides access to some of the best companies in the world. Whether you’re just out of college or well into your career, you can easily get started by investing in these three excellent ETFs.
1. The SPDR S&P 500 ETF Trust
The SPDR S&P 500 ETF Trust (NYSEARCA:SPY) could be called the granddaddy of all ETFs as it was the first ETF in the U.S. when it launched in January 1993. Some 31 years later, it is the largest ETF in the country with $535 billion in assets under management.
As the SPDR ETF invests in the 500 stocks that make up the S&P 500, you are essentially investing in the biggest companies in the U.S. at any given time.
Thus, it provides access to companies like Microsoft (NASDAQ:MSFT), NVIDIA (NASDAQ:NVDA) and Apple (NASDAQ:AAPL) — the three largest holdings — along with the rest of the S&P 500 stocks. Like the S&P 500, the SPDR S&P 500 Trust is market-weighted, so the largest stocks have the highest weighting in the portfolio.
Since its inception in 1993, the ETF has recorded an average annualized return of 10.3% as of May 31, and over the past 10 years, it has notched an average annualized return of 12.6%. Year to date, it has gained roughly 15%, mirroring the return of the benchmark.
As is typical of SPDR funds, the S&P 500 ETF Trust has a low expense ratio of 0.09%.
2. Invesco QQQ
The Invesco QQQ (NASDAQ:QQQ) ETF has been one of the best-performing ETFs over the long term. It tracks the performance of the Nasdaq 100, so it is far more concentrated than the S&P 500 ETF.
In addition, the Invesco QQQ ETF is focused primarily on the technology sector, as about two-thirds of the stocks in the Nasdaq 100 are in the technology or communication services sectors.
The top three holdings are the same as the SPDR S&P 500 fund. However, the positions in Microsoft, NVIDIA and Apple are slightly larger, as there are only 100 overall holdings. Additionally, the Nasdaq 100 does not include financial stocks, so it is tech-heavy.
As a result, it will often be more volatile than the S&P 500, but over the long term, the concentration of aggressive growth stocks has generated higher returns.
Over the last 20 years, the QQQ ETF has posted an average annualized return of 14%, while the S&P 500 has returned 8.4%. Over the last 10 years, the ETF has posted an average annualized return of 18.3%, which beats the S&P 500’s 10.9% return over that stretch. Year to date, QQQ has gained about 17%.
The ETF has a slightly higher expense ratio at 0.2%, but its performance more than makes up for it.
3. Invesco S&P MidCap Quality ETF
The first two funds on this list include a fair bit of overlap as they are both large-cap ETFs. However, the Invesco S&P MidCap Quality ETF (NYSEARCA:XMHQ) invests in a different universe: mid-cap stocks.
Importantly, the ETF focuses on mid-cap stocks that are deemed “high quality” because they generate higher revenue and cash flows than their counterparts.
The high-quality stocks in this portfolio are based on three primary screens: return on equity, accruals ratio, and financial leverage ratio. The stocks within the S&P MidCap 400 Index are given a score based on these screens, and the 80 with the highest scores are selected for the index, and thus, the portfolio.
While there are just 80 stocks in the ETF, a modified market-cap-weighting system is deployed so that the exposure to any one stock or industry is not too high. The idea is to create a portfolio of high-quality, mid-cap stocks that generate revenue and cash flow, providing the ability to not only generate returns but navigate difficult markets.
Currently, the top three holdings are Williams-Sonoma (NYSE:WSM), Manhattan Associates (NASDAQ:MANH) and Carlisle Companies (NYSE:CSL).
The ETF has been around since December 2006 and has posted an average annualized return of 9.8% since then. Over the past 10 years, it has generated an average annualized return of 12.5%. Year to date, the fund has returned about 17% as of June 17. It has an expense ratio of 0.25%.
Diversifying with the best ETFs for beginners
Combining these funds will give a new investor the best of both worlds: the stability of the largest companies in the world, the growth of the best technology companies, and the balance of the best mid-cap stocks on the market at any given time.
By investing in one, two or all of these ETFs, new investors gain access to hundreds of the best stocks in the world with proven track records of success.
