What is an ETF?
Put simply, an ETF is a mutual fund that trades like a stock.
ETFs are made up of an underlying basket of securities, or “index”; typically stocks, bonds, or commodities. For example, by owning the iShares Core S&P 500 (IVV), an investor owns a percentage of all of the stocks that make up the S&P 500 index, a common index benchmark.
Similarly, if an investor owns the iShares Core US Aggregate Bond (AGG), they own a percentage of the bonds that make up the Barclays US Aggregate Bond index.
Got it? Good!
ETFs are great in that owning one share means owning a diversified basket of securities.
But wait, there’s more!
ETFs typically cost 1/3 of what a comparable mutual fund costs. See more about Expense Ratios here!
Another advantage to using ETFs is their tax-efficiency. When you own shares of a mutual fund, you and all of the other shareholders are responsible for paying a tax bill if the fund manager sells a position at a gain. This can catch even the expert investor off-guard if they pay close attention, but if you’re an average investor, you may not even realize!
ETFs come in lots of flavors, based on their underlying index.
nNow that you have an understanding of ETFs, there’s a few things to consider before buying
The expense ratio of a mutual fund or ETF is the “management fee” charged by asset managers who maintain the products. These costs can vary, but generally they are much lower for ETFs than. For ETFs that track the same index, look to see what the expense ratio is for each before making a decision on which to buy.
How to Trade ETFs?
Many robo-advisors like WealthFront, Acorns, and Stash, automatically invest your assets into a custom allocation of ETFs based on your risk tolerance.
Are you a do-it-yourself investor? Trading ETFs is mechanically the same as stocks.
You can find many online brokerages that allow commission ETF trades. We prefer Fidelity, as it gives investors top-flight investment research and tools, and allows for many free ETF trades of BlackRock’s iShares and Fidelity ETFs
Robinhood, the mobile-only commission-free trading app, also allows you to buy not only ETFs commission free, but also stocks!
Got Questions? Let us know!
We hope this was helpful!
If you have any issues or concerns, leave us a comment, and we’ll be happy to answer any questions you may have!