ETFs (which mean Exchange-Traded Funds), have become one of the most popular ways to build wealth in the stock market. Why? Because they’re simple, diversified, and accessible even for first-time investors.
Basically, even without much experience, you’re putting the money in the “same box” while is actually a distribution of small little boxes.
Namely, if you invest S&P500 for example, you will be investing in the 500 largest companies listed in the stock market of the US without having to check which companies are there.
This diversification helps to keep a risk lower because even if a company loses value on the stock exchange, there are others within the 500 that will be winning.
If you’re just starting out, don’t worry—I’ve summarized the main principles here. This guide will break everything down step-by-step, just like I’d explain it to a friend or my grandma.
What is an ETF?
Let’s start with the basics. An ETF is like a basket of investments that you can trade on the stock market, just like a stock. But instead of buying one single stock (e.g., Apple), an ETF lets you own small pieces of many stocks, bonds, or other assets—all bundled together.
Think of it like this: instead of putting all your eggs in one basket, you’re spreading them across multiple baskets. This diversification helps reduce risk. For instance, if one stock in the ETF underperforms, others in the basket might still do well.
Why ETFs are a great choice for beginners
ETFs are perfect for beginners for a few reasons:
Diversification made easy: You don’t need to buy hundreds of individual stocks. With one ETF, you can invest in a broad range of companies or assets.
Lower fees: ETFs usually have lower fees compared to mutual funds, meaning you keep more of your returns over time because a lower % is kept for buying the ETFs itself or for keeping them. This also depends on where you buy the ETFs, for example if you buy them from your bank, from Revolut or from an ETF broker. I’ve listed here the main brokers and banks to buy ETFs.
Transparency: Most ETFs publish their holdings daily, so you know exactly what you’re investing in. They also publish the whitepapers or information of the companies.
Accessibility: You can buy and sell ETFs throughout the trading day, just like a stock.
Step 1: Define your investment goals
Before jumping in, ask yourself: What are you investing for?
Retirement? If you’re thinking long-term, you might want to look for broad-market ETFs like those that track the S&P 500 (e.g., VOO or SPY) or the S&P 500 itself. These are designed for growth over decades. The average return of the S&P 500 over the last 20 years it’s 11.9%. This is really good. It means that every 10 years it doubles your amount you invested initially. And if the costs of living increase with an average of 2-8% depending on the inflation you’re still outperforming that.
Income? Dividend ETFs can pay you regular income while still growing your wealth. I have part of my investments in this kind of ETFs because they focus on giving you dividends, which means that a % of the ETF value you buy will be paid out to you, regardless of the value of the ETF at that moment. This is in fact one of the best and safest ways of doing passive income towards achieving financial freedom in my opinion.
Safety? Consider bond ETFs or more conservative options if you’re nearing retirement or have lower risk tolerance.
Sustainable? There are nowadays ETFs for everything, destined to AI, sustainable, etc.
Crypto but don’t want so many risks? There are also ETFs that handle cryptocurrencies for you, especially the Bitcoin ETF and the Ethereum ETF. So if you don’t want to enter into the exchange story, you can aim for this. As you know by now I have some of my assets in crypto but I still bought part of this ETF because I liked the concept.
Pro tip: Write down your goals or preferences now to start taking action. Knowing why you’re investing will help you choose the right ETFs.
Step 2: Open a brokerage account
To invest in ETFs, you’ll need a brokerage account. Think of this as your gateway to the stock market. Popular options include Degiro, Trade Republic, Finanzen.net, or online platforms like eToro, Revolut, or N26. Many brokers today offer commission-free ETF trades, which is a bonus. I use all of the listed ones ^^ so if you want to open an account on one of them you will get some stocks for free with my links.
You can check all my affiliate links here where you can also get more information on which of them are free https://www.byobanking.com/post/comparison-of-14-best-etf-brokers-in-europe-2024-is-degiro-still-the-best.
There are two main types of accounts you can open:
Standard Investment Accounts (my preferred option): Flexible for shorter-term goals, like saving for a house.
Retirement Accounts (e.g., IRA, Roth IRA): Ideal for long-term wealth building with tax advantages.
To be honest, I don’t have much experience with the retirement accounts and I’ve been using standard investment accounts always, which is fine because at the end you can always decide to sell your assets when you want.
Step 3: Research ETFs that fit your goals
With over 2,000 ETFs out there, how do you choose? Here are a few tips to narrow it down. I use youtube videos and websites such as justETF, which is amazing and has many details on the differences of ETFs, including summaries of the return over the last years, the main companies listed there, etc. If you’re in Germany like me, I like the youtube channels Finanztip and Finanzfluss:
Use Tools Like JustETF.com: This site is amazing for comparing ETFs. You can filter by performance, dividend yield, expense ratio, and more. Plus, it’s super beginner-friendly.
For reference, picture taken from justETF showing the monthly returns of s p500 and the returns over 5 and 3 years.
Look at Expense Ratios: This is the fee you’ll pay to the fund manager. Aim for ETFs with low expense ratios (ideally under 0.2%).
For example, at the bottom of the justETF website you can see the information of the TER p.a, which is the total expense ratio (or the price you will pay in %) With this and the cost of the broker, you can decide which prices to pay. Also taking into account the difference between distributing and accumulating, which is very important when paying taxes.
The main advantage of accumulating with respect to the distributing is that the dividends that you get per year on the ETF are actually reinvested automatically into the ETF, which can have tax advantages depending on the country you’re in. With the distributing you get the interests paid out
Check Holdings: Make sure the ETF aligns with your strategy. For example, if you’re investing in clean energy, look for ETFs holding companies like Tesla or First Solar.
If you’re still unsure, here are some beginner-friendly ETF categories to consider. Again, I would rather go to justETF and check it yourself.
Broad Market ETFs: These track major indices like the S&P 500 (e.g., VOO, SPY).
Dividend ETFs: Great for income-focused investors (e.g., VYM, SCHD).
Bond ETFs: Ideal for conservative portfolios (e.g., BND, AGG). I will be transparent and share with you my ETF distribution.
Step 4: Start small and invest consistently
Here’s the beauty of ETFs: you don’t need a fortune to start. Many brokers let you buy fractional shares, meaning you can invest as little as $10 or $20 at a time. I started like this when I was a student and since then I have been increasing my investments as a percentage of my salary.
The real key is consistency. If you invest regularly—say, $100 every month—you’ll take advantage of dollar-cost averaging. This strategy helps reduce the impact of market ups and downs over time.
Step 5: Monitor your portfolio (but don't overthink it)
Once you’ve picked your ETFs and started investing, check in occasionally. Websites like JustETF.com or your brokerage platform can show you how your ETFs are performing. Sometimes it looks green or red but on an average, after a couple of years it starts looking green.
That said, don’t stress about daily market swings. Remember: ETFs are best for long-term investing. The goal is to let your money grow over years, not days. I didn’t sell my ETFs since I acquired them and only if I want to do big investments like buying a house, I would sell part or all my ETFs if they’re doing great.
Let’s make this personal: What this means for you
Alright, now that we've walked through the nitty-gritty (I learned this expression recently so I have to use it from time to time ;)) of analyzing ETFs and understanding portfolio overlap, let’s bring it closer to home. I know all these numbers and concepts like "diversification" and "correlation" can feel overwhelming at first glance—trust me, I’ve been there. So let me break this down with some real-world examples to show you how this plays out in your own investing journey.
Imagine this: You’re building your investment portfolio, and you’re super excited because you just discovered the S&P 500. You feel confident about it because it gives you exposure to 500 of the largest companies in the U.S., all in one place. You’re pumped, and then, you stumble across another ETF—VTI. This one tracks the total U.S. stock market. You think to yourself, “Great! I’ll grab both. More stocks, more growth, right?”
Not so fast. Here's the deal: While VTI includes a wider range of stocks, it heavily overlaps with S&P 500. In fact, nearly all of S&P 500 holdings are also in VTI. If you invest equally in both, you’re not doubling your diversification—you’re doubling down on the same set of companies. Instead of spreading your risk, you’re essentially putting your eggs in the same basket. That’s called a fund overlap by people who know a bit about ETFs.
Now, let’s look at how to avoid that overlap. If you’re already holding S&P 500, instead of VTI, you might consider something like VNQ—a real estate ETF that invests in REITs (real estate investment trusts), or an ETF related to emerging markets, which rely on companies or assets of developing countries. By doing this, you’re adding a whole new asset class to your portfolio. Real estate doesn’t move in sync with the stock market, which helps reduce your overall portfolio’s ups and downs.
Here’s an analogy that might help: Think of your portfolio like a garden. If you plant only apple trees, your entire harvest depends on how apples fare. A late frost or a bad season, and your garden suffers. But if you plant apple trees and a variety of vegetables, flowers, and herbs, a bad apple season doesn’t ruin everything—you’ve got tomatoes, roses, and basil thriving instead. This paragraph I wrote it to explain diversification to my grandparents. It’s never too late ;)
Let’s take it one step further and think about correlation. Correlation measures how two investments move together. For example, if your portfolio is all stocks—like S&P 500, VTI, and QQQ (a tech-heavy ETF)—you’re riding one wave. When the stock market booms, you’ll feel great. But when it crashes? It’s a stomach-dropping rollercoaster. Instead, you might add bonds, the REITs I mentioned, crypto ETFs or commodities, which often zig when stocks zag.
This way, your portfolio isn’t just one big wave—it’s a balanced orchestra. So it’s a diversification of a diversification, or as I like to call it a metadiversification ^^ since I live in Germany I like to combine wordsto make even bigger words. The longest German word is this one btw Rindfleischetikettierungsüberwachungsaufgabenübertragungsgesetz. It’s about a law of the way to label cow meet 😀
Here’s how I personally approach this: Right now, my focus is on growth. That means I’m heavily invested in stocks, especially ETFs like S&P 500, the ones from emerging markets, a little bit of dividend and crypto ETFs, as well as the DAX, which involves the best 30 companies in Germany. But I know there’ll come a time when I want to add more balance. When that day comes, I’ll mix in real estate through VNQ and bonds through something like BND. The goal isn’t just growth—it’s peace of mind, knowing my portfolio is built to weather any storm.
So, if you’re sitting there with a notebook or spreadsheet trying to figure this out, my advice is to start small. Pick one or two ETFs that fit your goals—maybe it’s growth, maybe it’s income through dividends—and then expand thoughtfully. Tools like the ETF Research Center’s Fund Overlap Tool can help you make sure you’re not accidentally doubling up.
If you create an account with Finanzen.net for example, they give you a proposal of a balanced portfolio. You can start with that because in my opinion it’s better to start experimenting than not taking any action. Again, insisting that this is not financial advice and rather reflecting my experience.
By the way, don’t worry if this all feels like a lot. Learning to invest is like learning a new language—it takes time, practice, and patience. But with each step, you’ll get closer to building a portfolio that works for you. You’ve got this! I hope this guide helps you ^^
Common Questions Beginners Ask
1. Can I lose money with ETFs?
Yes, like any investment, ETFs come with risks. However, their diversification helps minimize those risks compared to investing in single stocks.
2. How much should I invest?
Start with what you’re comfortable with. Even small amounts add up over time thanks to compounding.
3. What’s the difference between ETFs and index funds?
Both are similar, but ETFs trade like stocks (you can buy/sell anytime), while index funds only trade at the end of the day.
Final Thoughts
ETFs are one of the easiest and most effective ways to start investing. With low fees, built-in diversification, and flexibility, they're quite nice for beginners. I started investing in ETFs before I went to stocks, real-estate or crypto.
By setting clear goals, using tools like JustETF.com, and starting small, you’ll be well on your way to building long-term wealth.
So, what are you waiting for? Open that brokerage account, find your first ETF, and take the first step toward financial freedom!
I would love it if you opened an account with one of my affiliate links because both you and I would get a reward from 10 to 100 € / USD in stocks.
Finanzen.net (ref code): Best for low cost and high variety of ETFs at 0 cost. The referral program gives you 10€ and 1 random stock.
Trade Republic (ref code): Best for low cost. Great for simplicity, low costs, and the added bonus of earning interest on uninvested euros (2.75%). The referral code gives you 10€.
Interactive Brokers (ref code): Best overall for security, low fees, and extensive market access. Ideal for serious long-term investors who can handle a complex interface. The referral code can give you up to 50€.
Degiro (ref code): Still a solid low-cost option despite some drawbacks, such as mandatory share lending and minor fees. The referral code can give you 10€.
Scalable Capital (ref code): Flexible pricing models and low fees make it a strong contender, especially for those in Germany. The referral code gives you 50€.
Mintos.com (ref code). Invest in REITs ETFs and other real investment options. Get 50€.
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