Best Places To Invest In Etfs: A Comprehensive Guide

Exchange-traded funds (ETFs) are a popular investment option, offering diversification, attractive returns, and lower risk than individual stocks. They are also tax-efficient and often have low fees.

ETFs are similar to mutual funds in that they are baskets of securities that track broad indexes or smaller market slivers. However, ETFs trade like individual stocks, making them attractive to investors.

When investing in ETFs, it is important to consider factors such as fund selection, diversification, and the platform or broker used for purchasing.

Some popular ETF platforms and brokers include Charles Schwab, Vanguard, Interactive Brokers IBKR Lite, and J.P. Morgan Self-Directed Investing. These platforms offer a range of ETFs with no trade commissions.

Additionally, it is crucial to understand the different types of ETFs available, such as physical ETFs and swap-based or synthetic ETFs, and to consider factors like fund size, age, performance, and tracking difference when selecting a specific ETF to invest in.

Overall, ETFs provide a convenient and cost-effective way to gain exposure to a diverse range of investments.

Brokerage accounts: You need a brokerage account to invest in ETFs

To trade ETFs, you need a brokerage account with an online broker. The good news is that you can open one in about 15 minutes, and the whole process can be done online.

Once you've chosen a broker and opened your account, you can purchase ETFs using their ticker symbol, very similar to the way you buy stocks. You'll place an order on your broker's website or online trading platform with the ETF's ticker, the order type, and the number of shares you'd like to purchase.

Charles Schwab

Charles Schwab is a well-known discount broker and longtime advocate of individual investors. They offer more than 2,400 funds with expense ratios of 0.50% or below, and they have long charged zero commissions on their ETF offerings. They also provide a wide range of educational resources, including some of the best research and user-friendly tools in the market. Their ETF Select List, for instance, details investor-friendly funds, taking into consideration commissions and fees, a fund's track record, and suitability for individual investors.

Fidelity Investments

Fidelity has long been a leader in commission-free ETFs, and now all ETFs on its platform are available at no commission. They offer extensive research and screening tools, allowing you to filter your ETF choices by various criteria such as company size, fund size, expense ratio, etc. They also provide ETF investing ideas based on your goals, such as "investing for income" and "enhanced growth."

Vanguard

Vanguard is best known for being a low-cost fund provider, and they offer a top-notch selection of proprietary, low-cost mutual funds, including many ESG options. In 2018, they made about 90% of all ETFs on their platform commission-free, and today, investors can trade all available ETFs at no cost. Vanguard offers screening tools to help you sort through their ETF options, including the ability to compare ETFs based on factors such as expense ratios, management style (active or passive), average annual return, and more.

E-Trade

E-Trade offers commission-free trading on all its ETFs and has more than 3,000 funds to choose from. Their screener tool allows you to sort funds by key traits such as Morningstar rating, investing strategy, yield, and more. You can also buy prebuilt ETF portfolios, with strategies such as aggressive, conservative, and income, each with varying levels of stocks, bonds, and cash.

Firstrade

Firstrade offers commission-free trading on all its ETFs, with more than 2,200 funds to choose from. They provide free access to Morningstar research to help you make informed decisions about which funds are right for your portfolio. They also have an ETF screener to identify funds based on performance, analyst ratings, or any other criteria you're interested in.

Merrill Edge

Merrill Edge offers zero commissions on trades and has a Select ETFs screener that simplifies the discovery process. Their screener is particularly useful if you know the size of the fund you want, the asset class (stocks or bonds), and the investing style (value, growth, blend). They often recommend iShares and Vanguard funds, but you're free to purchase any ETFs available on their platform.

Ally Invest

Ally Invest now offers tons of commission-free ETFs, including iShares and Vanguard funds. Their screener tool allows you to search for funds by predefined screens such as tech ETFs or S&P 500 index funds. You'll also get performance data, Morningstar ratings, and top holdings data for each fund.

In addition to the brokers listed above, robo-advisors such as Betterment and Wealthfront can also invest in ETFs on your behalf. These "do it for me" options construct a diversified portfolio based on your time horizon and risk tolerance for one low fee.

Diversification: ETFs are a great way to diversify your portfolio without the stress of choosing individual stocks

Exchange-traded funds (ETFs) are an excellent way to diversify your portfolio without the stress of choosing individual stocks.

ETFs are baskets of securities that track broad indexes like the Standard & Poor's 500 or smaller slices of the market, such as social media stocks, gold or healthcare. They trade like individual stocks throughout the day when the market is open, which makes them attractive to investors.

ETFs provide instant diversification, similar to mutual funds, but without the need to purchase multiple stocks individually. This means you can invest in a wide range of companies and sectors with a single ETF purchase. By owning shares in multiple companies across different industries, you reduce the risk of your portfolio being affected by the performance of any one company or industry.

Additionally, ETFs tend to have lower fees and are more tax-efficient than mutual funds. They also offer transparency, as you can easily see what stocks, bonds, or other investments the ETF holds each day. This makes it easier to manage your portfolio and ensure it aligns with your investment goals.

When building an ETF portfolio, you can choose from a variety of options, ranging from ultra-simple to fine-tuned. An ultra-simple portfolio might consist of just two ETFs: a total world stock market ETF and a total bond market ETF. This provides a balanced and diversified portfolio with low trading costs.

On the other hand, a fine-tuned portfolio might include 20 or more ETFs, allowing you to allocate your investments precisely to the parts of the market you expect to perform best. This type of portfolio offers maximum customizability but comes with higher complexity and trading costs.

Whether you prefer a simple or complex approach, ETFs are a great tool for diversifying your investments and managing risk.

Costs: ETFs are known for having lower costs compared to other investments

Costs: Why ETFs are known for having lower costs compared to other investments

ETFs are popular investment options as they offer diversification, potentially attractive returns, and lower risk than individual stocks, all for a reasonable cost. They are also more tax-efficient and less expensive than mutual funds.

The average US equity mutual fund charges 1.42% in annual expenses, while the average equity ETF charges just 0.53%. This is because ETFs are passively managed, and always "no-load", meaning there is no purchase fee. They also have lower operational, marketing, and administrative costs.

ETFs are bought and sold on the open market, so the sale of shares does not require the fund to liquidate its holdings or generate tax implications from capital gains, keeping costs to investors lower. The administrative costs of managing ETFs are commonly lower than those for mutual funds.

ETFs also use in-kind creation and redemption practices to keep costs down. Investors can trade a collection, or "basket", of stock shares that match the fund's portfolio for an equivalent number of ETF shares. This means the fund does not have to buy or sell securities to create or redeem shares, reducing the paperwork and operational expenses incurred by the fund.

Most online brokers now offer ETFs commission-free.

Tax-efficiency: ETFs are more tax-efficient than mutual funds

Exchange-traded funds (ETFs) are considered more tax-efficient than mutual funds. This is because ETFs are structured in a way that minimises taxes for the holder, resulting in a lower tax bill compared to a similarly structured mutual fund.

ETFs and mutual funds are taxed similarly on dividends and capital gains distributions, as well as gains from market transactions. However, ETFs often have fewer "taxable events". This is because ETFs use creation units to accommodate inflows and outflows of investments, rather than selling securities like mutual funds. As a result, ETFs usually don't generate capital gains distributions, which are taxed at the long-term capital gains rate. Mutual funds, on the other hand, tend to generate higher capital gains due to the way they are managed, leading to a higher tax bill for investors.

Additionally, the majority of ETFs are passively managed, resulting in fewer transactions and taxable events. Actively managed mutual funds, on the other hand, experience taxable events when selling assets within the fund.

ETFs also have other advantages over mutual funds, such as greater transparency and liquidity, and generally lower expense ratios.

Risk: ETFs are generally lower risk than individual stocks

Exchange-traded funds (ETFs) are generally considered to be lower-risk investments than individual stocks. This is mainly because they are low-cost and hold a basket of stocks or other securities, increasing diversification.

ETFs are often lauded for the diversification they offer investors. However, it is important to note that just because an ETF contains more than one underlying position, it doesn't mean it is immune to volatility. The potential for large swings will mainly depend on the scope of the fund. For example, an ETF that tracks a broad market index such as the S&P 500 is likely to be less volatile than an ETF that tracks a specific industry or sector, such as an oil services ETF.

ETFs are ideal for investors looking to broaden the diversity of their portfolios without increasing the time and effort spent on managing and allocating their investments. They trade like stocks, which means they can be bought and sold throughout the day, and they provide the diversification of mutual funds.

ETFs are also more tax-efficient than mutual funds. As passively managed portfolios, ETFs tend to realise fewer capital gains than actively managed mutual funds. Mutual funds are required to distribute capital gains to shareholders if the fund manager sells securities for a profit. This distribution amount is made according to the proportion of the holders' investment and is taxable.

ETFs also tend to have much lower expense ratios compared to actively managed funds. This is because, as passively managed funds that track an index, they don't require a fund manager, and so don't incur management fees.

However, it's important to note that ETFs do carry some unique risks. For example, the most popular ETFs trade with more liquidity than most stocks, meaning there are plenty of buyers and sellers and narrow bid-ask spreads. But if an ETF is thinly traded, there can be problems exiting the investment.

Another risk to consider is that ETFs can be more complex than stocks. For example, a leveraged ETF is a fund that uses financial derivatives and debt to amplify the returns of an underlying index. These types of ETFs need to be carefully evaluated as they can lose more than double or triple the value change of the tracked index.

Overall, while ETFs are generally lower-risk than individual stocks, it's important to do your research and understand the specific risks associated with the type of ETF you're investing in.

Frequently asked questions