Buy, Trade and Invest in ETFs
Regardless of your experience investing in financial markets, you must have heard of ETFs at some point. The Best Trading Brokers has some recommendations for good ETF brokers that can help you invest in ETFs. They are mostly advertised as less risky alternatives to buying individual securities. In most instances, an ETF is promoted for tracking an index with good performance since one cannot actually invest in an index directly. Whether you’re curious about what ETFs are or looking for the best ETFs to invest in, you have come to the right place. Here at BuyStocksEasy, we keep track of the best performing ETFs constantly so you don’t have to. Otherwise, you would have to sort through thousands of options
An ETF is short for Exchange-Traded Fund. From the name, you can tell that ETFs are bought and sold at an exchange, much like stocks. Unlike stocks, though, ETFs contain multiple assets rather than a single stock. The simplest way of defining an ETF is like a (hedge) fund owning a lot of assets. Therefore, the value of the ETF is the net value of the included assets. When you invest in the ETF, that is like buying shares in the fund and becoming a shareholder. As such, you will be entitled to the dividends as well as profits when the value of the fund goes up. The assets in an ETF are usually indices, but an ETF can also include individual stocks, bonds, commodities and any other financial instrument(s).
The first ever ETF was proposed in 1989 but it was not successful even after being traded for a short while. However, when Canada’s proposal became successful in 1990, the Americans were motivated to create their own ETF to track the S&P Index. This was the S&P Depositary Receipts (SPDR or ‘spider’) and it became the largest ETF in the world even to date. From then on, ETF distributors became even more creative by including foreign assets and specializing ETFs to follow specific sectors. For example, there are now 9 ‘sector spiders’ that follow the 9 sectors of the S&P 500. Other ETFs combine multiple assets from different regions to create the most diverse offering, while some focus on specific sectors of the industry. Most recently, Bitcoin ETFs were introduced at the CME and CBOE exchanges while Nasdaq also intends to do the same.
The ETF market exists on two levels – the primary and secondary markets. The primary market is where the authorized participants buy securities from the ETF sponsor, and they are usually institutional investors or brokers such as those listed by The Best Trading Brokers. These participants indicate the specific number quantity of securities they require to create the proportions according to the ETF prospectus. This is the process of ETF creation and how it is made available. ETF sponsors only deal with institutional investors who are able to buy blocks of shares, often in the thousands, called creation units. When the participant wants to redeem the ETF units, the sponsor will not give them cash but rather individual securities. These are called in-kind transactions, and they reduce transaction costs while avoiding capital gains.
Because ETF creation occurs all through the day, the number of ETF units available will vary throughout the day. Nevertheless, individual investors will always be able to buy the ETFs just like when buying stocks, through a broker. The ETF sponsor is the one who dictates the value of the ETF unit through a weighting process. The weighting can be equal or according to the revenue of the individual companies, exchange rate movements (for international investments), etc. When an ETF invests in an index with thousands of securities, for example, they have to use aggressive sampling to invest only tiny percentages of the securities. Further, an ETF has to invest all of its holdings in the securities it buys but instead can choose to allocate a proportion to other asset classes. As long as the ETF achieves its goal, then the allocation of funds can be varied.
To keep the value up to date all the time, an arbitrage mechanism is used to keep track of the value of underlying assets’ value. For example, when an ETF is in high demand by The Best Trading Brokers, its value will rise above the net value asset. The arbitrageurs will then purchase more creation units from the sponsor and sell them at the now increased price. This creates a higher supply of ETF units, generally countering the increased demand. ETFs are able to do this because more units can always be created or eliminated unlike the stock market where this cannot be done; at least not as quickly.
Types of ETFs
There are different kinds of ETFs depending on the assets included in their baskets. The difference between ETFs makes them more versatile as investors can select them based on their needs. Be it speculation, passive income generation from dividends, long-term investing or just hedging against risk, there is always a suitable option.
This was the first kind of ETF and is still the most popular form of ETFs to date. An index can be based on any asset be it commodities, stocks, bonds, currencies, etc. This means there can be ETFs that track the performance of myriad industries. In 2012, there were 1,200 indexes ETFs in the US compared to just about 50 actively managed ETFs. This set the value of the former at $1.2 trillion while the latter at $7 billion. Today, there are over 4,000 ETFs worldwide accessible through The Best Trading Brokers with assets worth $3 trillion, and you can bet much of that consists of index ETFs.
An index ETF does not necessarily have to track all the securities listed in an index. As mentioned before, there is 9 ‘sector spiders’ keeping track of the 9 sectors of the S&P 500. The SPDR S&P 500 (SPY) was the first ETF in the US and is now the largest in the world with almost $250 billion in AUM. There are also smaller SPDR ETFs such as the SPDR S&P Oil & Gas that tracks oil and gas companies and others monitoring other sectors.
Other examples of index ETFs can be found here at BuyStocksEasy such as:
- iShares Core S&P 500 (IVV) – tracks the S&P 500 and has AUM of $179 billion
- Vanguard Total Stock Market ETF (VTI) – tracks the Dow Jones Total Stock Market Index and has $115 billion AUM
- Powershares QQQ (QQQ) – tracks the Nasdaq 100 and has $76 billion AUM
These ETFs mainly track specific caliber of stocks such as, let’s say, small-cap stocks or sector funds. We’ve got all these at BuyStocksEasy for you to analyze. Some of these include:
- iShares Core S&P Small Cap ETF
- iShares Russell 2000 ETF
- Vanguard Small-Cap ETF
Investors are known to buy into bond ETFs when economic conditions worsen and there is uncertainty in the markets. Because of this investor behaviors, the performance of bond ETFs can be used to signal economic conditions as you can find out on BuyStocksEasy. They are known to have low expense ratios such as:
- iShares Core U.S. Aggregate Bond ETF
- Vanguard Total Bond Market ETF
- iShares iBoxx USD Investment Grade Corporate Bond ETF
Actively managed ETFs
This kind of ETF is fairly new in the market, with the first one coming in 2008. Part of the problem is that these ETFs need to be transparent and publish their holdings daily. This allows other traders to copy their positions and make it ineffective. Besides, expense ratios are often higher than other ETFs. Examples are:
- PIMCO Enhanced Short Maturity Active ETF
- JPMorgan Ultra-Short Income ETF
- iShares Short Maturity Bond ETF
Why should you invest in ETFs?
Warren Buffett once advised investors to buy mutual funds and ETFs instead of buying individual stocks. He meant this because ETFs and mutual funds had realized huge returns over the decades. Meanwhile, traders were plagued with inaccurate or misleading information by so-called experts. At BuyStocksEasy, we hire only the best experts with proven experience to ensure information is accurate every time. But there is still no denying that ETFs have many advantages:
As already mentioned, the average expense ratio of ETFs is 0.44% while many others are even lower priced. Recently, some providers have even announced commission-free ETFs and continue to offer them. By reducing the costs involved in trading, the returns from the investment are increased in the long term.
The structure of ETFs makes them more tax-efficient because an investor sells their ETFs on an exchange like a non-taxable redemption of a creation unit. The investor is only taxed when they sell their ETFs for a profit, and even then the returns are usually low and incur fewer capital gains.
In general, volatility is low in ETFs, but there come days of high volatility that make speculation quite profitable. Besides, ETFs can be used for hedging purposes to protect investors from uncertain market conditions.
How do ETFs compare with mutual funds?
The general structure of mutual funds is similar to that of ETFs, but there are several key differences that make ETFs much better. The main difference is that ETFs can be traded all through the day when the markets are open unlike mutual funds that are traded when the trading day is ended. That means it is not possible to use mutual funds for intra-day trading. Furthermore, mutual funds are not as tax efficient because returns are allocated to all investors who are then charged even if they reinvest the gains for more shares of the fund.
How do you buy ETFs online?
Trading ETFs is very much like trading stocks, which means they are acquired through brokers. Also similar to the stock market, ETF brokers have also made their operations accessible online and many stockbrokers also offer ETFs. You still need to be careful when selecting an ETF broker, though, because there are also scammers here. The Best Trading Brokers guides you to finding the best and most trusted brokers only and avoid being cheated. Not only will you be connected to the best possible brokers, but you will also enjoy other advantages like bonuses and trading signals.
However, you have to pick your broker carefully because brokers can only offer ETFs in their region. Consider a broker located in Japan who offers ETFs through the Tokyo Stock Exchange (TSE). Such a broker would probably not have ETFs that track US indices. As such, you have to select your broker based on the ETFs you want to buy. At BuyStocksEasy, we want our visitors to find only the best brokers, and some of these are:
- Charles Schwab – this broker was top-rated by J. D. Power’s study of full-service firms in 2018 for the third year straight, proving that they have achieved their vision of being committed to the individual investor. Additionally, they have many commission-free ETFs to choose from to cut back on expenses
- Fidelity Investments – trading costs are low with this broker without compromising on quality service, and The Best Trading Brokers wholly recommends using them
- TD Ameritrade – for the busy trader on the go, this is the broker for you since they have the best trading apps, even trading with your voice using Alexa. There are some commission-free ETFs, but you would have to hold them for at least 30 days to get this benefit
- Vanguard Group – famous for offering commission-free ETFs, you won’t ever run out of a good option to invest in, plus they have a wide array of options to pick from
ETFs can be traded at any time of day through any of the brokers above recommended by The Best Trading Brokers. Trading of ETFs can be quite profitable if you know how to analyze market conditions especially when volatility is high such as right now due to geopolitical issues. You could use changes in particular industries to either buy or short those industries’ ETFs.
Trading in ETFs will usually incur some expenses. As mentioned in a previous section, these charges are lower than those involved when trading individual securities. For example, the average expense ratio for ETFs is 0.44%. This translates to an annual cost of $4.40 for every $1,000 invested. On the other hand, stock brokers can charge as much $30 per trade in addition to account maintenance fees of about 0.5%. In particular, say, the SPDR S&P 500 Index has an expense ratio of 0.29%.
And even though there may be some commission-free ETFs, you will still have to pay for spreads. A spread is the difference between the buying and selling price, and sometimes it can be very significant depending on the liquidity of the ETF. Generally, more liquid ETFs have lower spreads than less liquid ones and vice versa.
Investing in ETFs
If you intend to invest in ETFs for the long haul rather than mere speculation, then that may be the best decision you have made. Although the returns may seem small in the beginning, compound interest does wonders with your investment. As an illustration, the SPDR S&P 500 ETF has had a 9.7% average annual return since it was created in 1993, with some years being excellent such as 2018 when returns were 19.47%.
Within just a decade, a meager $1,000 investment could turn into $2,435 and that’s even without accounting for reinvestment. With one of the brokers recommended by The Best Trading Brokers, you can become a wise and soon-to-be-rich investor just by putting your money in ETFs.