ETFs 101, What You Need to Know


ETF’s (exchange traded funds) are the fastest growing investment vehicle right now. And there a good reasons for this.  Whether you are investing through your Roth-Ira or playing the stock market with a brokerage account, you might want to consider investing in ETFs.  ETFs are one of four main ways to invest in stocks, the other three are individual stocks, mutual funds and index funds.  Let’s dive into the details.

So what is an ETF anyway?

ETFs are extremely similar to mutual funds. The most notable similarity between ETFs and mutual funds is that both are made up of numerous market stocks. Conventional mutual funds do not trade throughout the day, whereas ETFs do. Why would you care?  Well, it gives you an added degree of flexibility to trade throughout the day.  With a mutual fund, you can only make a move at the end of the closing day.  With an ETF, you can trade stock at any time you choose while the market is open.

On fees for ETFs…

Although ETFs charge a management fee, fees for ETFs are significantly lower than mutual funds or even index funds.  Look into mutual funds and you’ll start to realize the exorbitantly high fees.  With an ETF, it’s typical to only pay between .1% and .7% of your total assets.  This is music to an investor’s ears if he/she is “cost conscious.”  Personally, I am fundamentally opposed to paying fees higher than .5%.  I mean, think about it, you wouldn’t want to throw money down the drain would you?  Over the long haul, fees can nickel and dime you, and eventually take a significant portion of your retirement portfolio.  ETF’s are also more tax efficient than mutual/index funds.

Greater investing flexibility.

Unlike most index funds or even mutual funds, ETFs do not require an initial investment. This is a selling point, especially for young investors.  I, for one remember being in college and wanting to invest and realizing that most investment choices required an initial amount.  As an example, the index funds that I hold within my Roth-Ira require an initial investment of $3,000.  As a poor college student, it’s hard to meet this initial requirement.  That’s where ETFs come in.

Diversify, diversify, did I mention diversify?

You can pick up a couple ETFs and cover all your market segments.  You can protect yourself as well as make some solid gains in the market.  For example, you can split $1,000 across large cap stocks, small caps, emerging markets, REITs and bonds. You pay a nominal fee for this exposure and flexibility.  Unlike a mutual fund, you can control overlap within your ETF choices.

So, where can I buy ETFs?

Pretty much anywhere really.  Whether it’s a Roth-Ira, 401k, individual broker account, it’s up to you.  I recommend Vanguard for starting out with your ETF investment purchases.  Vanguard offers unlimited free trades for ETFs, so this is a no-brainer.  Sharebuilder, TDAmeritrade, and TradeKing are also great choices. Although ETFs are a great investment choice, make sure to do your own research. Go with reputable funds with long standing performance and low fees.

 

Written by Jon the Saver

This post was written by yours truly, Jon Elder. My mission is to help you succeed in your personal finance life. Join me on the journey to financial freedom! You can subscribe through RSS FEED or EMAIL updates. You can also find me on TWITTER
and FACEBOOK
. Happy investing 🙂

Jon the Saver

This post was written by yours truly, Jon Elder. My mission is to help you succeed in your personal finance life. Join me on the journey to financial freedom! You can subscribe through RSS FEED or EMAIL updates. You can also find me on TWITTER and FACEBOOK . Happy investing 🙂

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