ETFs for Beginning Investors

If you're on a tight budget, this is one way to build a portfolio.

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Between rent, groceries, loans, and that new Xbox—whatever your poison—you probably don't have an extra $10,000 lying around. Take it from me: If you're looking to invest but have limited cash, exchange-traded funds are one of your better options. I adore index mutual funds, but the upfront investments they require are a huge problem: Most minimums are in the neighborhood of $3,000, and the ones that ask for less tend to charge more in annual fees. So, if you want to build a diversified portfolio with several funds, let's hope you have a generous rainy-day stash.

Of course, there are a few ways to invest on a budget. The most obvious is through an IRA or a 401(k). Other options include target-date or balanced funds, which contain a cocktail of stock and bond funds (the difference is that target dates grow more conservative over time, and balanced funds maintain a static mix). You can also roll the dice with individual stocks.

But if you're looking to invest for mid- and long-term goals outside of a retirement account, ETFs offer hundreds of options for designing your own portfolio. For example, I bought three funds that invest in economies outside the United States, each with a different bent: Vanguard FTSE All-World ex-U.S., which specializes in developed countries such as Japan and the United Kingdom; iShares MSCI EAFE Growth index, which buys large, fast-growing foreign companies; and Vanguard Emerging Markets, a riskier fund that makes up just 5 percent of my overall portfolio. I also own two stateside-focused ETFs, one that invests in the entire U.S. stock market and another that favors small and midsize U.S. companies.

Only one thing, besides cash, stands between you and your new ETF portfolio: a brokerage account. And because ETFs trade like stocks, you'll have to pay a fee each time you place buy and sell orders—which can run as much as $15 a pop, although many discount brokers charge much less. I get around fees by using a discount brokerage, Zecco, which allows 10 free trades a month as long as I maintain a net balance of $2,500. Initially, I invested just over that amount, but I quickly realized that maintaining a balance anywhere near $2,500 would be impossible in this market (I've since contrib-uted enough to clear the hurdle).

Trading tips. Here are a couple of things to keep in mind when setting up your account: First, don't expect to invest a nice, round number—say $500—in an ETF. These things trade in shares, just like stocks, so you'd more likely be buying, say, 11 shares of an ETF trading at $46, which comes out to $506. Also, be sure to pay attention to the difference in the "ask" price and the fund's current trading price. The narrower the spread, the less you'll be surrendering upfront.

If you need more motivation to get started, I'll throw out some numbers. Invest $5,000 today in a portfolio of mostly stock ETFs, and that money could almost double in 10 years (assuming you're in the 25 percent tax bracket, investing via a taxable account, and achieve an 8 percent average annual return). Contribute $5,000 each year and you'd have close to $80,000 by the end of 2018. Maybe you should rethink that Xbox purchase.