etfs are the most powerful way to build your wealth in the stock market it's no wonder their popularity has exploded since their inception in 1993 but how do you invest in them this is the guide that i wish i had when i was first getting started with investing i've packed a lot of value into this video and there's gonna be a lot of tips and strategies that i talk about that many of you have probably never even heard of before so let's get started for starters what exactly is an etf etf stands for exchange traded fund and it's basically just a type of investment that trades in the stock market and it holds multiple assets for example one single etf can hold multiple stocks or bonds or commodities or mixture of all of it inside of one single etf just like a farmer holds multiple eggs in one basket so a single etf can hold multiple stocks bonds and other securities in one basket now obviously an etf is different from like an individual stock if you buy an individual share of apple you're just buying one single stock but that's not the case with an etf with an etf one single etf can hold thousands of different stocks or bonds or commodities or a mixture of all of it okay so let's take like 30 seconds to break down what the word exchange traded fund actually means word for word so exchange traded is simply referring to the fact that this investment is traded on the stock market the word fund is referring to the fact that this investment etfs are types of investment funds when you look at other investments like stocks bonds commodities none of those are funds they're just individual investments that trade by themselves on the stock market so for example when you go and buy a share of apple stock you're not buying a fund you're just buying one single share of the stock whereas with the fund right you've got things like etfs mutual funds index funds these are all different types of investment funds that trade in thousands of different assets at once so i've gotten this question before do i need a brokerage account to invest in etfs before you think about buying and selling etfs you're first gonna need to open up a brokerage account i personally use fidelity for all of my brokerage accounts but there are dozens of other great options to choose from i mean you've got vanguard charles schwab e-trade m1 finance now the most important thing about choosing a broker is actually choosing the account type that you open within the broker if you're just doing some like general investing for income or perhaps you're investing to buy a house in the next five to ten years then it's totally fine to go and open up just a standard individual investment account if you plan on using etfs to invest to build your wealth for retirement and you're going to want to open up some type of retirement account right like a roth ira 401k scp ira a traditional ira there's a ton of different options out there and in fact i've actually got a specific video that talks about all this if you're interested in watching it but of course make sure you finish uh watching this video first okay so how do you decide which etfs to actually invest in like which ones are the best did you know that there are over 2 700 etfs currently traded on the stock market 2 700 okay there's only 3 600 stocks traded on the stock market which means there's almost the same amount of etfs trading on the stock market as there are actual stocks things can get overwhelming very fast and so what you need to do as an investor is take this list of 2 700 etfs and narrow it down to a few select etfs that are going to fit your exact investing style and overall objectives for example are you investing long term for retirement and so you want to focus on etfs that are going to give you aggressive growth and perhaps even pay some dividends or perhaps you're somebody who's approaching retirement and so you want to invest in less aggressive etfs and you even want to consider adding some bond etfs to your portfolio as well deciding what your investment goals are first will be what helps you to figure out which etfs to invest in that are going to fit your exact goals a little bit later i will give you a list of what i believe to be the absolute best etfs to invest in for a majority of people depending on your specific investing goals but more on that later but right now you might be asking how do i find the etfs that i want to invest in there are a couple of different ways to do this okay but the absolute best way is going to involve a really powerful free tool let's talk about that how do you actually find the best etfs to invest in so this is where things start to get very juicy because i'm about to show you a very powerful tool that i use welcome to my screen so what you're looking at right here is a website called the etf database this is my favorite website to use to find and sort through different etfs in various categories market sectors and by type as you can see right here on the screen there are an endless amount of different etf categories to choose from you can search for etfs by type and if i click right here it'll bring me to this page and as you can see there are a lot of different options to choose from i mean you can search for etfs by asset class sector industry region country and i mean the list just goes on and on or i could go back to the home page scroll down here and search for etfs by popular content centers for example let's say you wanted to invest in an etf that you knew had the highest paying dividend right you would simply click right here where it says dividend and then it's going to take you to this page with a table that shows you a list of the top dividend paying etfs but for example you can click right here where it says dividends up here and then click on the dividends column to sort by the annual dividend yield and then it'll sort that table by dividends that pay the highest annual dividend yield or if you wanted to sort by the actual dividend payment itself click right here on dividend and then the table's gonna adjust then it'll show you the etfs with the highest paying dividends so this is all great but you're probably thinking joshua how do i actually use this website for my specific etf investing strategy well i'm glad you asked let's say that you are in your 50s right you are nearing retirement and so it's time to start taking a less aggressive approach to investing and so instead of investing 100 of your portfolio into equities like you know stocks you want to start adding a significant amount of bonds into your portfolio and oh look at this popular etfs bonds if i click on that this will give you a list of the top bond etfs to invest in by total assets and i can tell you right now that agg and bnd are some of the best bond etfs to invest in or maybe you're in your 20s 30s and 40s and so you want to still be very aggressive with your investment portfolio well let's take a look at this list right here and oh check this out aggressive growth etfs click on it and look here we have a list of the best aggressive etfs to invest in you've got triple q's bug iwf all of these are amazing growth etfs and i know this because i've done the research myself in the past and i know that these are indeed some of the best growth etfs to invest in so can you kind of begin to see like the value of this resource perhaps you want to invest in etfs that center around blockchain or gaming i don't know or maybe you just have this inclination that semiconductor etfs are going to be huge this year and so as you can see right here if i click on semiconductor etfs it's going to give me a list of the best semiconductor etfs to invest in now i get it some of you are thinking joshua i don't want to invest in semiconductor etfs okay that was just an example in a little bit i'm going to give you a list of the best etfs to invest in depending on your investment goals let's say that after you pick a few different etfs from etfdb.com that you want to further analyze the etfs right kind of just look into the etfs a little bit more like what kind of stocks is this etf holding how much does it return each year does it pay dividends these are all very important questions that can be answered very quickly with what i'm about to show you welcome back to my screen where i am trapped in this tiny little circle against my free will somebody get me out here so what you're looking at right here is known as an etf profile when you're doing your research about which etfs to invest in you'll find that most etfs in fact all etfs are going to have something that looks like this page right here so let's say you found an etf that you like you want to invest in it but you first want to look up the etf profile just to kind of analyze it a little bit further how would you look it up simply go to google.com type in the etf name so for example let's just say vo is the etf i'm going to type in vo and then add the word etf after hit enter and the etf should be the first one on the list of course after the ads but it should be the first organic link on the list okay and so if i click on that i'm gonna click right here it's gonna bring me to the etf profile right here for voo it's gonna be important that you understand some of the basic terminology that's often used on an etf profile there's a lot of information on these pages but not all of it is super important or even necessary okay so let's kind of go through this really quick right so this etf profile like i said is for a vanguard etf now every etf for every company be it ishares or invesco or the spyder etfs by state street each one will have a profile for their specific etfs and they're all going to kind of look different but for the most part the information on these profiles will be the exact same okay so when i'm doing my research i'm looking for a few different things i want to make sure that this etf actually fits my investment strategy and what i'm trying to accomplish the first thing that i look at always is this section right here the summary this section will tell you exactly what you need to know about the etf let's just really quickly look through these bullet points and kind of read through them okay so the first bullet point says that this etf invests in stocks in the s p 500 index representing 500 of the largest u.s companies and so i know immediately that if i invest into this etf that i will get exposure to 500 of the largest stocks in the u.s which is a really good thing next bullet point the goal is to closely track the index's return which is considered a gauge of overall u.s stock returns and so what it's telling me there is that the s p 500 index is considered a gauge of the overall returns within the u.s stock market so i know that if i invest into this etf that i am essentially investing into the entire u.s stock market now technically there are etfs for this purpose such as vti which is the vanguard total stock market etf and that etf actually does invest in all of the stocks within the u.s stock market but the s p 500 is a very close indicator of the entire u.s stock market okay next bullet point offers high potential for investment growth share value rises and falls more sharply than other funds holding bonds okay so right there i know that this etf is going to give my portfolio investment growth and so if that's what you're going for then this etf will give that to you bullet point number four this etf is more appropriate for long-term goals where your money's growth is essential so that tells me that this etf's focus is long-term investing right so if you're a short-term investor maybe you're investing for the next five years this etf is not going to be for you so overall this section will give you a very good summary of what you're about to invest in and honestly if you read that section and it didn't line up with your investing goals then you don't have to waste your time looking at the rest of the etf profile to know that it's not going to be a good fit for your specific investing goals next i look for the expense ratio how much is this etf going to cost me to own and so you can find that right here on vanguard's website and you can think of the expense ratio as the management fee for example with vo it has an expense ratio of 0.03 that means for every 1 000 that you invest in 2vo you will only have to pay 30 cents per year on that 1 000 but you definitely do not want to ignore the expense ratio always look for it and if it's too high then you want to try to find an alternative because there's a lot of different etfs out there for example i personally within my roth ira invest in triple q's but i'm not actually investing in triple q's i'm investing in triple q's m which is another etf by invesco the same company that that founded triple q's but triple q's m just has a smaller expense ratio so you always want to pay attention to the expense ratio because that can really eat into your profit as the years go on the next important place to look at is going to be the performance of the etf so i'm going to click right here on this tab that says price and performance i don't really care about this information up at the top right here i'm investing for the long term right and so the 52-week high and low the the nav or the net asset value means nothing to me i'm going to scroll right down here to the performance because i want to see exactly how well this etf performs if i plan on investing in this etf long term say over the next 10 20 30 40 plus years i want to be sure that this etf is actually going to give me the returns that i want to build my well for example i can see right here that this etf has an average 1 3 5 10 and since inception return what i'm looking at specifically is the sense inception return or sometimes i'll look at the 10-year return but anything else below that is not going to be a good representation of what the etf actually returns on a long-term basis for example right this etf has returned 28.6 over the last year but what you wouldn't want to do is take the one-year return and use that as your average for long-term investing in other words you wouldn't want to look at this etf and assume that over the next 10 to 40 plus years that it's going to continue to give you a 28.6 return just because it gave that return over a one year period does not mean it's going to do that over the long term okay so i can see that vo has returned an average of 16.17 every year since its inception in 2010. whether that continues or not over the next few decades literally nobody knows but all we can do is just use the information that we have at our disposal to make the most educated decisions possible another important place on the etf profile to look is going to be the market sector sections and the largest holdings so the market sector will show you which sectors this etf is investing in by the way and so you can see right here in the case of voo that the information technology sector makes up 30 of this etf and the reason that i'm showing you this is because it will be important for later the next and final place that i look on the etf profile are the distributions right so distributions are the actual dividend payments that you receive for owning shares of the etf and if you have no idea what a dividend is i'll expound on it a little bit later in the video now that you know how to analyze an etf profile how do you avoid what's known as fund overlap perhaps you don't even know what fund overlap is and if it even pertains to you but i promise it's more relevant to you than you probably even know and it could be detrimental to your portfolio's long-term growth fund overlap is when two or more of the etfs in your portfolio have overlapping positions as in the etfs are both investing in the same exact stocks or stocks within the same sector let me give you an example we'll take a look at two different etfs voo and vti so imagine for a second that you're investing in both of these etfs within your portfolio well it just so happens that 99.4 of the stocks in vo are also in vti and so when you invest in both voo and vti that's a perfect example of fund overlap now you may be thinking to yourself what's so bad about that fund overlap is bad because it reduces the benefits of diversification within your portfolio now diversification sounds complex but i promise you it's not it's a strategy that mixes a wide variety of investments within a portfolio to spread out your money as much as possible for example instead of going and investing your entire portfolio into apple stock you can instead invest in voo which is an etf that invests in the entire s p 500 index which contains over 500 stocks including apple because if your entire portfolio is invested in apple then the growth of your portfolio is completely dependent on the growth of apple and while that may certainly not seem like a bad idea right now no one actually knows what the future holds apple could literally just close their doors tomorrow and just like that wipe out your entire portfolio but by investing in etfs that hold hundreds and even thousands of different stocks you limit the possibility of dramatic swings up and down and just overall volatility within your portfolio now there is something called portfolio tilt which is when you purposefully tilt your portfolio into one direction or the other for example let's say that you wanted to expose your portfolio to the tech sector of the stock market more than any other sector then you would want to invest in multiple etfs that have overlap in the tech sector but in general for most people who want just a good balanced diversified portfolio that has consistent growth with the least amount of volatility then portfolio overlap should be avoided so how exactly do you avoid portfolio overlap i want to bring your attention to one of the best tools in my toolbox it is a free tool that i use personally that i've never shared before and i am very excited to share it with you guys right now welcome to the etf research center so this is a very comprehensive etf research website that you can use to compare and analyze basically any etf and the one tool on this website that i really want to focus on is this one right here the fund overlap tool what this tool shows you is how much fund overlap there is between two different etfs and so if we use the example from earlier vo and vti so i can see that 99.4 of the 511 stocks in vo are also in vti and 13.7 percent of the 4 114 stocks in vti are in vo now you may be thinking to yourself joshua 13.7 percent of vo stocks are also in vti that's not too bad i could technically invest in both because there's only a 13.7 percent overlap right in my opinion the most important thing to look at is actually going to be the overlap by weight which are these two overlapping circles that you can see down here and we can see that the overlap by weight is 80 now my personal rule of thumb is to avoid a maximum of a 50 portfolio overlap anything over 50 is gonna put you at an unnecessary risk of being overexposed to a specific stock or stock market sector let's try another example let's do vti and vnq right so as you can see here the overlap by weight is four percent now this makes sense because vnq is a vanguard real estate etf that invests in reits and so it makes sense that there is a small amount of overlap between those two etfs now 99.4 of vnq's holdings are also in vti but like i mentioned you really want to pay attention to the overlap by weight because that's what matters the most so we just finished talking about portfolio overlap and diversification i want to introduce another concept to you now called portfolio correlation it's one thing for your portfolio to be diversified across multiple stocks and stock market sectors but some investors believe that you should also focus on what's called portfolio correlation correlation basically measures the movement of securities such as stocks bonds and etfs in relation to each other in other words when one goes up or down does the other also go up or down sort of like they're dancing or do they not move together their movement has no correlation whatsoever or do they move opposite from one another when one goes up the other goes down in the opposite direction correlation is represented by a very complex sounding formula known as the correlation coefficient it looks like something mr einstein himself came up with basically this formula measures stocks bonds etfs and other investments and assigns them with a number ranging between negative one and plus one when the prices of two or more securities typically move in the same direction the securities are considered correlated and will fall between zero and plus one depending on how closely correlated they are when securities move opposite of one another they have a negative correlation that falls between zero and negative one depending on how not so closely they are correlated and so the goal if you want to maximize diversification when you're investing in etfs or any security for that matter is to not only invest in a broad selection of different stocks by using etfs but also a broad selection of stocks and other assets that are not closely correlated such as stocks and real estate or even more so stocks and bonds i'm going to help to illustrate this point with a very good example and i promise things are going to start making a lot more sense in just a second so hang with me here okay this table that you see right here on the screen shows etf correlations with vti now vti is just one etf that i chose as the example here because it's a very popular vanguard etf that a lot of people include in their portfolio so what this table is showing is the correlation represented by a number ranging from plus one to negative one it also shows the name of the etf and the etf's ticker symbol at the very top of the list this etf here itot or the i shears core s p total u.s stock etf is perfectly correlated with vti and you know that because the correlation number is plus one this isn't good because it means that if vti goes down then itot follows the same exact direction and goes down as well and vice versa and so if you wanted to build a perfectly diversified portfolio you wouldn't want to include both these etfs in your portfolio at the same time so which etfs should you include in your portfolio then well something that will have less of a correlation right and so if i scroll down here on this long long list i'm gonna actually look for a real estate etf because i know that the real estate market will be less correlated with the stock market okay so i found a very popular real estate etf by vanguard vnq and as you can see the correlation is about .66 which is not super bad and that makes sense because in order to have a diversified portfolio not only are you supposed to invest in multiple stocks in the stock market but also ideally multiple sectors but then even more so multiple asset classes in general and so if you want a diversified portfolio then you want to try to include real estate bonds precious metals and all the other assets inside of your portfolio in addition to your equities or like your stocks now i am not saying that you have to go out and buy every single asset to add to your portfolio if your main objective is investing for growth or perhaps dividends then invest in etfs that will give you growth or dividends or both but if you want to limit your portfolio volatility as much as possible then finding investments that have low or no correlation at all and adding them to your portfolio will sort of help to balance it out now one very very important thing to mention about correlation is that you never want to invest in assets that have a negative correlation with one another for example let's say that you're investing in vti right and then i'm going to scroll down this list here to the very last etf which is spxs this etf basically has a negative one correlation with vti which is a very bad thing because let's really look at what's happening here if you're investing in both of these etfs within your portfolio let's just say for example that you're investing in both by the same weight 50 50. when vti is going up and it's growing your portfolio spxs is going down in the opposite direction and so what happens those two movements the up and the down cancel out any money that you make because yes you're making money on vti going up but you're losing the same amount of money on sp xs going down because they have a perfect negative correlation and vice versa when vti is going down and spxs is going up well guess what even though you're making money on sp xs you're losing money on vti and so the two just cancel each other out and so what ends up happening is you have a portfolio that's just going straight the whole entire time and you're never actually growing your money this article here on etf.com written by alan roth does a very good job of dispelling some of the myths with portfolio correlation i'll leave a link to this down below if you're interested in reading do i personally concern myself with portfolio correlation no and yes right now no because i am 100 invested in the stock market with aggressive growth etfs and dividend etfs that's all i'm invested in right now however at some point in the near future i will begin investing in physical real estate like rental properties to further diversify my portfolio but also to create more passive income now if you wanted to diversify your portfolio but you didn't want to go out and buy physical real estate then another really good option is to invest in reits or etfs that invest in reits like vanguard's vnq or if you're willing to give up some gains which i'm not then a bond etf is gonna be your best friend because that's gonna allow you to invest in bonds which tend to have a very negative or low correlation with the stock market i'd like to take a moment now to talk about etf dividends and drip drip is an acronym for dividend reinvestment plan and the significance of that will make a lot more sense in just a second many of the etfs that you'll end up investing in will pay some type of dividend and if you don't know what a dividend is it's basically when a company pays you money for owning shares of their stock and if you own an etf like vti which holds over 4 000 stocks chances are some of those stocks do pay dividends and you will receive those dividends through the etf but the question becomes when you receive those dividend payments where exactly do they go if you choose to do nothing by default those dividends are automatically going to be donated to the irs and their annual christmas party fund no but seriously the dividends will go into your brokerage accounts settlement fund this is an account that every broker has where money that is not being invested goes to sit and wait so to avoid this from happening to avoid having your money just sitting there doing nothing what you should do is set up a dividend reinvestment plan and so what happens with the dividend reinvestment plan is that when you earn a dividend through your etf that money that dividend is automatically reinvested back into buying more shares of the etf and this cycle of you just constantly reinvesting your dividends back into buying more etfs which earn you even more dividends is where the compound growth begins to happen which is what creates the exponential growth of your wealth i'm not going to specifically talk about how to set up drip within your broker but if you simply go to google type in the name of your broker with the acronym drip after it you should see a help article pop right up explaining how to set it up so now that you're an expert at etf investing how do you actually buy your first etf if you haven't done so already you're first going to want to set up a free brokerage account with any of the brokers that i've mentioned in this video since i know this video is going to be very long already i'm not going to walk you through how to actually buy an etf within your brokerage account step by step however i've got a couple of different videos on this channel dedicated to investing and buying etfs one of those videos is about starting a roth ira with one thousand dollars in that video i walk you through the entire process of opening up a brokerage account and then investing your first 1000 or however much you're gonna invest into an etf another question that i see pop up is how much money do i need to start investing in etfs nowadays almost every broker that i know of offers fractional share investing this means that you can basically start investing in etfs with as little as one dollar because even though a popular etf like vti is currently trading a little bit above 200 you could technically just buy a fraction of vti for one dollar and then you technically do own a part of vti now obviously it sort of goes without saying but i'm just going to say anyways you want to be investing as much money as possible and you want to be constantly adding more money into your brokerage account every single month every single year so that you are taking advantage of that compound growth in the stock market and building your wealth exponentially and last as promised i'm going to give you some of the best etfs to invest in in every category growth etfs dividend etfs bond etfs real estate etfs you name it it's going to be on this list right here right now now this is not a comprehensive list but rather a great starting point for example vo which is a very popular vanguard s p 500 etf is not the only s p 500 etf on the stock market there are literally dozens of other s p 500 etfs that you can invest in but i just chose vo for this list because of its low expense ratio and its overall popularity this is not a complete and comprehensive list but rather just a really good starting point for a majority of people now feel free to go back to that list and pause it to take a closer look but any etf on that list if it matches up to your investing goals or your investing style will be a really great place to start anyways that's it for this video hey thank you so much for watching you're amazing and as always i will see you again very soon take care