Exchange-traded funds, or ETFs, are one of the most popular ways to invest in the stock market. They provide diversification, attractive returns, and generally lower risks than individual stocks. They offer all of this at a very reasonable cost.
What is an exchange-traded fund and why are they popular?
Exchange-traded funds have grown significantly since the launch of the first fund in the United States in the early 1990s. ETFs are baskets of securities similar to mutual funds that track broad indices such as the S&P 500 or small slices of the market, like social media stocks, gold, or healthcare.
However, unlike mutual funds, ETFs trade like stocks throughout the trading day when the market is open, making them attractive to investors. These funds provide another way to diversify their portfolios without the psychological stress of picking individual stocks.
“You get the benefits of diversification across a segment of the market or the whole market from the first share you buy, instead of the concentrated risks of buying individual stocks,” says Greg McBride, chief financial analyst at Bankrate. “As [late Vanguard founder] Jack Bogle famously said, ‘Instead of searching for a needle in a haystack, buy the whole haystack.’”
In fact, more than 90 percent of investment professionals either use or recommend ETFs for their clients, according to the 2023 Financial Planning Association survey on investment trends. ETFs are more tax-efficient and less costly compared to mutual funds.
Best online brokers to invest in exchange-traded funds:
Charles Schwab
Charles Schwab has long been an advocate for individual investors and was the well-known discount broker that charged zero commissions on its own ETFs before halving commissions on all ETFs to zero. Trading individual stocks is also free, while opening and maintaining a brokerage account at Schwab is free as well.
Charles Schwab also offers a wide range of educational resources, including some of the best research and user-friendly tools in the market. For example, Schwab’s list for selecting ETFs details investor-friendly funds, taking into consideration commissions, fees, fund performance, and suitability for individual investors. Former clients of TD Ameritrade, which is now part of Schwab, should be pleased with what they find.
Trading commission: $0
Minimum to open a brokerage account: $0
Fidelity Investments
Fidelity Investments has long been a pioneer in commission-free ETFs, and now all ETFs on its platform are available with zero commissions. This investor-friendly legacy is what makes this Boston-based financial giant a strong choice.
If you’re looking for research and screening tools, Fidelity won’t disappoint. You can quickly sort your ETF options by any number of criteria (company size, fund size, expense ratio, etc.). Fidelity also offers investment ideas in ETFs based on your goals, such as “income investing” and “enhanced growth.”
Additionally, Fidelity’s mobile apps allow you to monitor your portfolio, check your account balance, execute trades, view your watchlist, and more.
Trading commission: $0
Minimum to open a brokerage account: $0
Vanguard
Vanguard, which launched its first ETF in 2001 and manages trillions in global assets, is known for being a provider of low-cost funds. In 2018, this powerhouse pushed the boundaries of retail investing by making about 90 percent of all ETFs on its platform commission-free. Investors today can trade all available ETFs at no cost.
To sort
All of these options for exchange-traded funds offer Vanguard screening tools, including the ability to compare mutual funds based on factors such as expense ratios, management style (active or passive), average annual return, and much more. You can even have a Vanguard representative execute the trade on your behalf at no extra cost if you’re purchasing a Vanguard mutual fund. Once you select your funds, you can turn to Vanguard’s planning tools to help you create your financial game plan.
Trading commission: $0
Minimum to open a brokerage account: $0
E*TRADE Financial
E*TRADE offers multiple ways to invest in mutual funds, even beyond the traditional purchasing process. Of course, all available mutual funds are offered commission-free. But you’ll also be able to sort through more than 3,000 funds using E*TRADE’s screening tool by key attributes such as Morningstar rating, investment strategy, and yield, among many other options. You can click the buy button directly from the search screen and proceed to add the fund to your portfolio.
E*TRADE also gives you the option to purchase a pre-built mutual fund portfolio, with strategies such as aggressive, conservative, and income, each containing varying levels of stocks, bonds, and cash, and you can see the types of stocks available in each fund. You can also search by theme – think of the strength of energy stocks or very large companies. E*TRADE allows you to trade some mutual funds – those with high volume – 24 hours a day, five days a week, giving you liquidity even when the market is closed.
Trading commission: $0
Minimum to open a brokerage account: $0
Fidelity
Fidelity offers commission-free trading on all of its mutual funds, with customers having access to over 2,200 funds to choose from. You will also receive free access to Morningstar research to assist you in screening the wide array of mutual funds and pinpointing the right funds for your portfolio. A mutual fund screening tool is also available to filter funds based on performance and analyst ratings or any other criteria that matter to you.
Customer service representatives can also assist you in answering any questions you may have and are available by phone Monday to Friday during extended business hours. Fidelity’s seamless mobile trading app will also allow you to track your portfolio on the go and execute any necessary trades when you are away from your desk.
Trading commission: $0
Minimum to open a brokerage account: $0
Merrill Edge
Merrill Edge brings investors into the mutual fund game with commission-free trades, simplifying the mutual funds screening tool to assist in the discovery process, making it especially easy if you know the size of the fund you’d like, asset class (stocks or bonds), and investment style (value, growth, blend). If you’re looking to fill a specific fund – such as large-cap U.S. growth stocks, for instance – the screening tool can help you do that quickly. It often recommends iShares and Vanguard funds, although you are free to buy any mutual funds available on the Merrill platform.
You can search for a broader range of mutual funds using pre-set screens, such as five-star rated stocks from Morningstar, although these screens don’t return much data about the fund right away, but once you click on them you will find everything laid out in an easy-to-read format, including the fund’s top holdings, performance, ratings, and key statistics.
Commission
Trading: $0
Minimum to open a brokerage account: $0
Ally Invest
Ally Invest was not initially one of the leaders in commission-free exchange-traded funds. But since the major shift in the industry to zero commissions, the brokerage now offers many of them, including iShares and Vanguard funds, to name a few. With the screening tool at Ally, you can search for funds by predefined screens like technology ETFs or S&P 500 Index funds. You will receive performance data, Morningstar ratings, and key property data for each fund.
Ally is a great choice if you are already a client of the prestigious Ally Bank and looking to easily and quickly expand your relationship to its brokerage arm.
Trading commission: $0
Minimum to open a brokerage account: $0
Other Options: Best Robo-Advisors
Robo-advisors, like Betterment and Wealthfront, may invest in exchange-traded funds on your behalf – so don’t overlook these digital providers as a potential option. These “do it for me” options build a diversified portfolio based on your time horizon and risk tolerance. They will do everything – including adding some added features like tax harvesting – for a single low fee.
Frequently Asked Questions
What is the difference between an ETF and a mutual fund?
The main difference between an ETF and a mutual fund is that an ETF can be bought and sold throughout the trading day, similar to how individual stocks are traded, while a mutual fund is priced at the end of the day based on its net asset value. Therefore, an ETF is generally more liquid than a mutual fund.
Should I choose actively or passively managed ETFs?
You can purchase ETFs that allow you to follow many different investment strategies. Passive strategies include buying ETFs that track an index like the S&P 500 and come with very low fees. Over the long term, passive strategies have been shown to outperform active management, which involves selecting companies, sectors, or geographic regions that the portfolio manager believes will exceed market indexes. However, some active managers have been able to outperform passive indexes over long periods of time.
Do ETFs have minimum investment requirements?
ETFs typically do not have minimum investment requirements other than the cost of a share and any fees or commissions associated with buying it, although many brokers now allow you to buy a small fraction of an ETF. This is an advantage over mutual funds, which often have minimum investment thresholds ranging from several thousand dollars.
Do I have to pay taxes on ETFs?
Yes, you are likely to be required to pay taxes on the gains you realize from ETFs unless those gains are within a tax-advantaged account like a 401(k) or IRA.
What is the difference between an ETF and a stock?
Although ETFs and stocks trade similarly throughout the trading day, there are key differences between the two assets. A stock represents a share of ownership in an individual company, while an ETF contains a basket of stocks or other assets that give investors exposure to a specific market index, sector, or geographical area.
What are leveraged and inverse ETFs?
Leveraged ETFs are designed to provide a multiplied return on a benchmark index, usually double or triple the daily performance of the index. For example, an ETF tracking the S&P 500 should rise 2% on a day when the index rises 1%, while a 3X ETF should rise 6%. Although the best leveraged ETFs are considered a high-risk play, they offer the potential for high returns.
Fund
Reverse exchange trading is designed to provide an opposite return to a benchmark index. For example, an inverse ETF should rise by 3% on a day when the S&P 500 index falls by 3%. Similarly, if the index rises, the inverse fund should decline.
Due to the way these performance outcomes are achieved, leveraged and inverse exchange-traded funds are riskier than their regular counterparts.
Note: Brian Becker from Bankrate also contributed to this story.
Source: https://www.aol.com/best-online-brokers-etf-investing-041402950.html
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