Exchange-traded funds have been on the market for over 25 years and have proven very popular with investors of all levels.
Owning an ETF is an ideal investment for both young and old because you can change your market spread depending on your needs. As a younger person, you may want to focus on growth, while as you become older, you might want to focus on returns. Owning an ETF allows you the flexibility to do this.
An ETF is a collection of securities, such as stocks, that tracks a specific index. Like stocks, you can trade ETFs on stock exchanges. A commission-free ETF makes an ideal investment for asset allocation and growth, unlike the near-zero interest received on a savings account.
As with stocks, you can buy and sell ETFs at any time during trading hours. As a way of developing your portfolio, an ETF could be the ideal product for you. With its reduced risk, low cost, and tax benefits, it can be the perfect way to start or further grow your investments. The extra funds from ETF trades can provide a nest egg for you and your family’s future.
Are Commission-Free ETFs for You?
An ETF, or exchange-traded fund, is a tax-efficient, low-cost way of investing and trading equity. Many exchange-traded funds allow you to make smaller regular investments rather than lump sums. Your ETF also offers reduced risk by spreading your investment over a market sector rather than putting all your eggs in one basket by investing in a single stock.
You can hold a diverse portfolio by keeping just a few inexpensive ETFs. The flexibility offered reduces the effect of market volatility on your investment. A commission-free ETF does not have any associated trading costs, such as a transaction fee. By avoiding these costs, you get the full benefit of your growing investment. According to the Financial Planning Association, a recent survey found that 80 percent of financial advisors either use or recommend ETFs to their clients. The low fees and simplicity of an ETF make it ideal for a retirement plan. A commission-free ETF is an excellent way to manage the costs of your investment. One of the significant advantages of an ETF is that you can sell it at any time.
For investment purposes, investing in an ETF is treated the same as buying stocks and bonds.
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How Can You Start Trading ETFs?
Commission-free ETF trading is made easy with online brokers. You will need to open a brokerage account with your chosen ETF broker. When you buy an ETF, you are not purchasing the stocks or bonds directly; you are buying into a fund that purchases them on your behalf. First, you would discuss with your broker what market sector you would like to invest in. Your broker can also offer investment advice. An easy way to start your first investment and develop your portfolio is by investing an affordable fixed amount each month. Buying in fixed-value units averages out fluctuations in the market. However, you do have to pay management fees for a broker’s services as your account is actively managed.
The easiest way to get started is to pick a broker like one of those listed below, all of whom offer commission-free ETFs. These firms will be able to advise you on the ETF investment plan best suited for your budget. Your commission-free ETF could incur a brokerage charge.
However, some brokerage services may waive it, depending on the number of transactions you complete in a given month. Some brokerage firms even provide an app for easy management of your funds. ETF firms are not protected by the FDIC, meaning they have no insurance protection if something were to happen to your funds.
Your Best Options for ETF Providers
- Vanguard Total Stock Market ETF: Vanguard ETFs is the largest mutual fund company and is one of the best overall ETF issuers for beginners.
- TD Ameritrade Institutional: With TD Ameritrade, there is no minimum investment. You can invest as little or as much as you like. They offer an ETF program that is open 24 hours a day, five days a week.
- E*Trader: To open an account with E*Trader, you will need an initial investment of $500. They allow trading research online without the need to interact with your broker.
- Ally Invest: Ally Invest offers zero commission on all U.S.-listed ETFs with no account minimums. The lack of fees makes Ally an excellent option for small, private investors, such as retail investors.
- Fidelity: Fidelity requires no minimum investment. Even if you don’t have a large amount saved up, you can still start building an investment portfolio. They also have an extensive collection of educational articles and videos that is free to use for their customers.
- iShares: iShares is the global leader when it comes to ETFs. iShares ETFs is also a subsidiary of Blackrock, which is the largest asset management company. With those kinds of accolades, it is safe to assume that they know what they are doing.
For a first-time investor, a good ETF to start your investment portfolio could be one that tracks S&P 500 index futures. Buying into this fund brings the security of ETF investing with the 500 most prominent companies in the United States’ economy. You can also use Morningstar categories to assess your potential investment before placing your assets under the management of a broker.
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ETF or Mutual Fund: Which Is Better for You?
Although ETF and mutual funds might both track the same indexes, the structure of an ETF does give it a cost advantage over mutual funds. Unlike mutual funds, ETFs do not incur capital gains tax until the point of sale. For that reason, an ETF can reduce your long-term investment tax liability. Your ETF does not need a substantial upfront investment and is ideally suited for a first-time investor or for if you want to make regular investments.
Unlike mutual funds, ETFs get traded throughout the day, so you know the price at the point of purchase. As a buyer, you don’t have to wait for the trading day to close before making a purchase. Such buying and selling terms are great for active traders. Another bonus of owning a commission-free ETF is that it pays out the full dividend on the stocks in your fund. You will typically find these dividends paid out quarterly. If you so wish, your dividend can be paid in shares, thus growing your portfolio further.
An additional benefit of an ETF is the transparency it offers. The fund’s value is available on the internet daily. However, you may only know the value of a mutual fund monthly or even quarterly. Despite the benefits, you should always examine the prospectus of an ETF before you invest.
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The Law of Averages
By spreading your ETF investment over a selection of stocks in a market sector, it averages out your risk and returns. It can be crucial to average out the risk of a longer-term investment. It evens out any sudden short-term volatility in the marketplace. These short-term losses can be balanced and exceeded by longer-term gains made by your ETF.
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Benefits of an ETF
Your ETF will have several benefits over a more traditional single-stock investment:
- The way ETFs are traded offers greater flexibility, as they can be bought and sold throughout the trading day. This flexibility of trading makes it much easier to manage your portfolio.
- You can diversify your portfolio. With a small number of ETFs, you can have a very diverse portfolio. This diversity also spreads your risk.
- The costs of operating your managed funds are much lower, with brokers offering commission-free ETFs.The capital gains tax is only due at the point of sale and not through the life of the investment. Holding on to your shares is a great way to reduce your tax liability.
Is an ETF Risk-Free?
Like all investments, an ETF does come with an element of risk. Despite that, one of the features of an ETF is to reduce investor risk where it can. As we have said, one of the main risks, market volatility, is reduced by spreading your investment over a selection of stocks rather than focusing on just one. Another kind of ETF is leveraged and inverse ETFs, which, while offering the potential of a higher return, does come with more risk.
As a low-cost investment, a commission-free ETF can be an ideal way for you to begin or grow your investment portfolio. Not needing a large amount of initial capital can be an attractive feature for the first-time investor. An ETF can be tailored to meet your financial situation. Another feature of the ETF is that is it spreads the risk. With over 5,000 ETFs to choose from, you and your broker will be able to pick the ideal product for you and help you set out an investment strategy.
Having read all the information, do you think an ETF investment is for you?