Understanding ETFs

Common questions

How can I use ETFs in my portfolio?

There are several ways you can use ETFs:

• To achieve broad portfolio diversification.
• To fill an asset-class gap in your portfolio. 
• To invest in a specific part of the market (as part of an overall balanced portfolio strategy). The path you choose should be determined by the target asset allocation you've identified for your portfolio. 

What are some general trading principles that may be helpful when trading ETFs?"

• Consider a limit order. Placing a limit order may be helpful to balance both execution and price. A limit order is an order to buy or sell an ETF with a restriction on the maximum price to be paid or the minimum price to be received (the "limit price"). If the order is filled, it will only be at the specified limit price or better. However, there is no guarantee of order execution.
• Be cautious about trading at market open or close. Markets can be unpredictable early and late in the day, and you may find yourself buying high or selling low. Also, consider when the markets for the underlying securities in the ETFs are open, especially if you're trading international stock and bond ETFs.
• Consider reaching out to a professional for trading assistance, especially on large orders. For example, if you ever need to trade a substantial number of shares of ETFs (such as tens of thousands of shares), call us and we may be able to assist you with our specially trained traders.

Why am I unable to purchase U.S. registered exchange traded products?

Schwab clients who are resident in the European Economic Area (EEA) or United Kingdom are not able to purchase U.S.-registered ETFs in order to comply with local regulations related to PRIIPS (Packaged Retail Investment & Insurance Products).

 

These rules govern the sale of certain investment products to residents in the EEA and UK. As a result of these rules, residents in these countries may only hold or liquidate existing U.S. exchange traded product positions. Initial or additional purchases are not permitted.

 

As an alternative, Schwab offers ETFs that have been authorized as Undertakings for Collective Investment in Transferable Securities (UCITS) under EU and UK rules. These funds meet relevant regulatory requirements, offer investment strategies similar to those of their U.S. counterparts and are available to EEA and UK resident investors. Many UCITS rules are aimed at reducing the risk by safeguarding the way investment products are managed and controlled. UCITS rules also require an ETF to be liquid, and always accessible. UCITS ETFs are subject to a US$50 foreign transaction fee and must be placed by phone with the help of a Schwab Global Investing Services specialist.

What are the potential tax benefits?

Because of the unique structure of ETFs and the majority of ETFs being passive investments (although actively managed ETFs are also available), capital gains distributions can be lower and there tends to be less portfolio turnover.

 

This information is general in nature and is not intended to be a substitute for specific individual tax advice. Investors should consider the implications of taxation in their jurisdiction based on their own individual circumstances and bear in mind that rules on taxation can change at any time. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor.

What are the risks?

Investing in U.S. securities is not without risk. Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost.

 

If the index that your ETF tracks experiences a downturn and you decide to sell, you will likely lose money on your investment. Not all ETFs carry the same risks; some ETFs, including inverse, leveraged, and futures-linked ETFs, carry additional risks and are not appropriate for all investors.

How can I identify an ETF to choose?

There are over 2,000 ETFs available. Utilize the Schwab tools to help select an ETF.

• If you're looking for commission-free ETFs, consider listed Schwab ETFs. Each of these Schwab-created ETFs provides exposure to an asset category, and offers low expense ratios and US$0 online trade commissions through a Schwab account.¹ Learn more about Schwab ETFs.
• If you know what type of ETF you want—traditional (domestic, international, or bond), specialty, or sector—take a look at the ETF Select List^®. This carefully compiled list represents our experts' top ETF picks based on criteria that include cost of ownership, risk, fund structure, and how well it fits in its category. Use the ETF Select List^®.
• If you're looking for a specific ETF, consider using Schwab's ETF Screener. You can select from a range of different criteria or use our predefined screens to filter the entire marketplace of over 2,000 ETFs to find the one that's right for you. Use Schwab's ETF Screener.  Learn more about what to keep in mind when choosing an ETF.
• If you're looking to create your own portfolio, consider using the Schwab ETF Portfolio Builder^®. ETFs used in this tool are from the ETF Select List^®.