Written by Kay Ng at The Motley Fool Canada
New investors who are just starting their investing journey may be overwhelmed by all the information that’s available — especially if you want to explore stock investing. Where should you start? How do you decide which key sectors to invest in, select quality businesses, and read financial statements? As you can see, it can get complicated very quickly.
The good news is that you don’t necessarily need to do all that. A simple way to start building wealth is by buying a basket of stocks via exchange-traded funds (ETFs) that allow for immediate portfolio diversification. ETFs are much easier versus individual stocks to build positions in over time.
Diversify your investments with ETFs
An excellent start would be buying an ETF that provides broad market exposure. In this aspect, SPDR S&P 500 ETF Trust (ASX:SPY) is a better buy than iShares S&P/TSX 60 Index ETF (TSX:XIU). The former is a proxy for the U.S. stock market, while the latter is a proxy for the Canadian stock market.
Currently, SPY’s sector weightings are about 25% technology, 14% healthcare, 14% real estate, 14% financial services, 10% consumer discretionary, 8% communication services, 7% consumer staples, 5% energy, 3% in utilities, and 2.5% in basic materials.
Compare that to XIU’s sector weightings: 35% in financial services, 35% in real estate, 18% in energy, 11% in industrials, 10% in basic materials, 7% in technology, 6% in communication services, 5% in consumer discretionary, 3% in utilities, 3% in consumer staples, and 0% in healthcare.
Of course, there’s nothing stopping you from buying multiple ETFs or even complementing your ETF portfolio with individual stock positions once you’ve learned enough and feel comfortable dabbling in.
For now, we’ll continue with the ETF discussion.
Since small companies grow faster than large companies (if the former group survive and thrive), you could potentially build wealth faster by investing in small-cap ETFs like Vanguard Small-Cap Growth ETF (NYSEMKT:VBK).
Small-cap stocks have underlying businesses that have a bigger chance of going bankrupt than large companies. Consequently, if you invest in individual small-cap stocks, you have a higher chance of losing your entire investment if not a massive chunk of it compared to investing in large caps.
So, it’s much safer to diversify your risk across a basket of small-cap stocks (such as via small-cap ETFs) to aim for higher long-term growth. Currently, VBK has about 695 holdings. Its top four sectors have the following weightings: 20.5% in healthcare, 19.0% in industrials, 18.9% in technology, and 15.7% in consumer discretionary.
The Foolish investor takeaway
In the long run, the stock market has gone up and created wealth for its investors. Additionally, the stock market has historically beat other asset classes. However, buying individual stocks is a lot of work and can lead to concentration risk, especially when you initially start your portfolio.
To create solid wealth over time, you can invest in ETFs like SPY. There are bond ETFs as well for greater diversification. In any case, it’s easy to build positions when you buy a few ETFs that create a diversified portfolio. If you take care to buy more units during bear markets, your wealth should increase at a good clip over time.
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Fool contributor Kay Ng has a position in Vanguard Small-Cap Growth ETF. The Motley Fool recommends Vanguard Index Funds - Vanguard Small-Cap Growth ETF. The Motley Fool has a disclosure policy.