Combining the flexibility of stocks and the portfolio-diversifying strengths of mutual funds, ETFs give you an affordable way to access a wide variety of asset classes.
What are ETFs?
ETFs or "exchange-traded funds" are exactly as the name implies: funds that trade on exchanges, generally tracking a specific index. When you invest in an ETF, you get a bundle of assets you can buy and sell during market hours—potentially lowering your risk and exposure while helping to diversify your portfolio.
ETFs are bought and sold like a common stock on a stock exchange.
Like a stock, ETFs are traded and experience price changes throughout the day.
Similar to a mutual fund, ETFs are a collection of tens, hundreds, or sometimes thousands of stocks or bonds in a single fund.
What are potential benefits when investing in ETFs?
ETFs give you an efficient way to diversify your portfolio without having to select individual stocks or bonds.
With Schwab, online ETF trade commissions are US$0 per trade.
ETFs are very versatile, letting you easily move money between specific asset classes, like stocks, bonds, or commodities.
Most ETFs disclose their holdings on a daily basis.
Due to typically lower turnover and the in-kind creation/redemption process, ETFs typically pass through fewer capital gains to U.S. expatriates.
What are the considerations when investing in ETFs?
Some brokerages charge you a commission when you buy or sell an ETF.
However, Schwab doesn't charge commissions for online ETF trades.
On top of commissions, investors also pay the "spread" when buying or selling ETFs, the difference between the higher price you pay to acquire a security and the lower price at which you can sell it.
Premiums and discounts
Investors may pay more for an ETF than the value of its underlying stocks or bonds (a premium). Conversely, investors may sell an ETF for less than the value of its holdings (a discount).
ETFs with higher liquidity can shrink bid/ask spreads since the more interested market makers there are, the closer the highest and lowest offered prices to sell are likely to be.
Volatility may also affect premiums or discounts to net asset values, resulting in higher costs for the investor.
Some ETFs are complicated
Because certain ETFs may be more complex based on their strategies or holdings, you should carefully evaluate their features, risks, benefits, and performance characteristics in comparison to your goals and expectations.
Types of ETFs.
There are a vast number of ETF choices on the U.S. market today. To determine which ones are right for your portfolio, it's helpful to look at common ETF types, the investment strategies associated with them, and their benefits, risks, and costs.
Let's take a closer look at the three main categories of ETFs: equity ETFs, ETFs with complicated strategies, and non-equity ETFs.
TypeEquity ETFs>DescriptionThere is a wide array of equity ETFs to choose from, so knowing about the various subtypes can help you find one that fits your portfolio. Depending on the index tracked by the ETF, it may own stocks issued by companies from around the world or it may limit its investable universe to companies in the United States. Some ETFs allow companies of all styles and sizes, while others limit their holdings based on the particular characteristics of a company. Because there are so many variables, the number of stocks held by an ETF can range from less than 25 to over 7,000.>Examples
- International ETFs
- Sector ETFs
- Dividend ETFs
- Market-cap index ETFs
TypeETFs with complicated strategies>DescriptionThe number of strategies offered by ETFs has proliferated in recent years. While an ETF with a particular strategy may be exactly what you want in your portfolio, keep in mind that some strategies can be quite complex. It's a good idea to make sure you understand the process an ETF uses to select and weight securities before you make an investment decision.>Examples
- Smart beta ETFs
- Factor-based ETFs
- Fundamental ETFs
- Socially conscious ETFs
TypeNon-equity ETFs>DescriptionIn addition to stocks, an ETF can hold non-equity securities, such as bonds, commodities, and currencies.>Examples
- Bond ETFs
- Commodity ETFs
- Currency ETFs
TypeNon-U.S. ETFs>DescriptionUndertakings for Collective Investment in Transferable Securities (UCITS) are a packaged investment product authorized in the E.U. They meet relevant E.U. requirements and offer investment strategies similar to those of their U.S. counterparts. U.S. residents can NOT purchase non-U.S. ETFs.>Examples
- UCITS ETFs
What do ETFs cost?
Many ETFs can be inexpensive, but as with all investments, you should be aware of the costs. Here are the costs most commonly associated with ETFs:
The fees your brokerage company charges each time you buy or sell an ETF, which can range from US$0-US$20 per trade1 for online trades, depending on the number of trades. Standard trades at Schwab are US$0 per trade online.2
Operating expense ratio (OER)
The ongoing management fee charged for an ETF by the fund's sponsor. This can vary widely, with the industry asset-weighted average** OER for passively managed ETFs being 0.21%3.
The asset-weighted average OER for cap weighted Schwab ETFs*** is just 0.05%.4
Bid/Ask spreads and premiums
Trading costs can also include two misunderstood and sometimes overlooked items: Bid/Ask spreads and changes in discounts and premiums to an ETF's net asset value (NAV).
Why trade ETFs with Schwab?
US$0 online equity commissions
Build the core of your portfolio from over 2,000 commission-free2 ETFs.
Trade ETFs using our web, mobile, or advanced platforms.
Get real-time trade analysis and focused support from investing professionals.
Sharpen your instincts with actionable stock trading research and insights from Schwab and third parties.
- How can I use ETFs in my portfolio?
- How do I trade ETFs effectively?
- What are the potential tax benefits?
- What are the risks?
- How do I pick an ETF?
Start investing in the U.S. today.
Start investing in the U.S. today.
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