Benefits and considerations of ETFs

Have a look at all the advantages of ETFs and learn about the things you’ll want to keep in mind.

Why invest in ETFs?

ETFs (exchange-traded funds) are an increasingly popular investment for many reasons. Here are just a few:

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    Diversification

    • ETFs give you an efficient way to diversify your portfolio, without having to select individual stocks or bonds.
    • They cover most major asset classes and sectors, offering you a broad selection.
    • International ETFs, regional ETFs, and ETFs for specific industries and market niches provide access to sectors where it may be more difficult to buy and sell individual stocks and bonds.
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    Low cost

    • With Schwab, online ETF trade commissions are some of the lowest in the industry, from $0 to just $4.95 per trade1,2.
    • Operating expense ratios (OERs) for ETFs tend to be low—typically lower than they are for actively managed mutual funds.  
    • The asset-weighted average OER for Schwab ETFs is just 0.05%3.
       
  • Trading flexibility

    • ETFs are very versatile, letting you easily move money between specific asset classes, like stocks, bonds, or commodities.
    • They trade like stocks, meaning you can trade them anytime during market hours.
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    Transparency

    • Most ETFs disclose their holdings on a daily basis.
    • ETFs typically hold the same securities as the specific index or benchmark they track, although some may hold a representative sample of the index securities.
       
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    Tax efficiency

    • Due to typically lower turnover and the in-kind creation/redemption process, ETFs typically pass through fewer capital gains to investors.

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What are the considerations when investing in ETFs?

As with any investment, it's important to understand the underlying strategy of any ETF you're considering to ensure it aligns with your goals. Below are some key points to remember:

  • Commissions

    • Typically, you’ll pay a commission when you buy or sell an ETF, just like any exchange-traded security. 
    • Over time, those commissions can really add up and become cost prohibitive.
    • Not all brokers charge you a commission when you trade an ETF online. Always check before you trade.
  • Spreads

    • On top of commissions, investors also pay the "spread" when buying or selling ETFs. 
    • The spread is the difference between the higher price you pay to acquire a security and the lower price at which you can sell it. 
    • Don’t forget: the wider the spread, the higher the cost. 
       
  • Premiums and discounts

    • ETFs are bought and sold at market prices, not at net asset value (NAV) like mutual funds.
    • As a result, 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).
       
  • General liquidity

    • An ETF’s liquidity is based on the number of market makers (firms that stand ready to buy or sell throughout the trading day) interested in buying or selling that ETF at given point in time. 
    • 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. 
    • Similarly, ETFs with lower liquidity tend to have larger bid/ask spreads.
       
  • Market volatility

    • Pay attention to market trends, as market volatility can lead to widening of ETF bid/ask spreads. 
    • Volatility may also affect premiums or discounts to net asset values, resulting in higher costs for the investor.
       
  • Some ETFs are complicated

    • Certain ETFs may be more complex based on their strategies or holdings.
    • Before investing in any ETF, you should carefully evaluate their features, risks, benefits and performance characteristics in comparison to your goals and expectations.

  • ETFs with Schwab

    Choose from 500+ commission-free1 ETFs from Charles Schwab Investment Management (CSIM) and other leading fund companies—including Schwab's low-cost market cap index ETFs.

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