ETFs or Exchange-traded funds are becoming more and more popular for being low-cost funds. ETFs also have attractive expense ratios, and they bring in tax benefits that traditional mutual funds lack. Also, as ETFs track the market index, it leads to minimal asset turnover and greater portfolio stability. With that being said, let’s sweeten up the pot. The proliferation of ETFs in the investment community has made it far simpler to find an investment option catered to you. Now all that’s left to do is to learn about how to invest in ETF.
How To Invest In ETF In 4 Steps:
Number 1: Get a brokerage account
In order to buy and sell ETFs, you need to have a brokerage account. ETF trades are available during trading hours for the major stock market exchanges but having a broker makes it easier. For example, a good amount of brokers who offer their own ETFs, including some of the best Vanguard funds, allow you to trade their proprietary ETFs with no commission. Then you have Fidelity, TD Ameritrade, and E*Trade brokers who have partnership arrangements with third-party ETF providers who don’t charge an extra commission on ETF trades. Getting a brokerage account helps you see what they offer, which ETFs they have their hands on, and if it matches your requirements.
Number 2: Fees, Fees, Fees!
There are many fish in the sea of ETFs and it can get confusing. One way to identify strong prospects is to look at their relative costs. Other aspects of the financial markets are more costly, and so you might see higher absolute expense ratios in certain areas. For example, investing in international stock comprises more logistical challenges, and so the expense ratios are higher than for U.S. stock funds. When you study ETFs from different fund families, the least expensive will often end up giving you the best opportunity for the highest returns.
How do you pick the least expensive ETFs? Well, ETFs have an annual expense ratio, which represents the percentage of total fund assets that go toward covering the costs that the ETF incurs every year. Lower expense ratios mean more money that you save. Keep in mind that the biggest and most efficient ETF providers have expense ratios for their funds that can be less than 0.1%.
Number 3: Build a broad and diversified ETF portfolio
A lot of ETFs holdings have similar investments, and so just by owning more ETFs, it doesn’t necessarily mean having a diversified portfolio. The underlying holdings on your ETF funds can be almost the same. So what you can do is to look for ETFs that are in different categories.
Incorporating different asset classes, such as stocks, bonds, real estate, etc. can be a good starting point. Such asset classes help to broaden your exposure too. When it comes to stocks, having different ETFs that have different geographical exposure, and different sectors and industry presence will go a long way toward a diverse portfolio. This will reduce your risk too.
Number 4: Figure out how to keep adding to your ETF holdings
Learn to make automatic investments on a regular basis, with the help of brokers. By doing this, when your broker offers commission-free ETF trades, you won’t have to worry about the expense of putting small amounts of money to work for you as soon as they’re available. Paying even a $3 commission doesn’t make sense if you only have $100 per month to invest in an ETF, and if you’re in a situation in which you do have to pay a commission, it can be smarter to make less frequent investments so that your commission costs represent a smaller percentage of what you’re investing.
All in all, ETFs can be an attractive foundation for you to start building a long-term investment portfolio. The steps you take will build you growth and income if you focus on keeping costs down and finding the ETFs that fit best together with your investing strategy. Good luck and hope that you’ll keep improving with your ETF portfolio years into the future.