There are few financial experts on the planet with a better reputation for picking winners than Warren Buffett. And one type of investment the former CEO of Berkshire Hathaway says is ideal for beginners is an exchange-traded fund (ETF).
ETFs hold a collection of assets, including stocks, bonds, and commodities. Just like regular company stocks, ETFs are bought and sold on public stock exchanges. What sets an ETF apart from the crowd is the way they give you exposure to dozens, hundreds, or even thousands of assets. In other words, you're not putting all your eggs in one basket, and you're spreading your investment risk.
In a 2013 Berkshire Hathaway shareholder letter, Buffett wrote: "The 'know-nothing' investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results. Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain better long-term results than the knowledgeable professional who is blind to even a single weakness."
Rather than researching individual companies when you may not feel equipped to choose the "right" ones, you can buy into an entire portfolio of shares with a single trade. Not only do ETFs spread your risk, but lower fees also leave you with more money to invest.
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One can summarize Buffett's investment philosophy by highlighting the three factors he believes can build wealth:
There are all kinds of ETFs, depending on your goals. For example:
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Whether you're a novice investor or simply want to provide your portfolio with greater diversification, you may want to heed Buffett's advice by taking a closer look at ETFs.