Understanding ETFs

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.

  • E icon

    Exchange

    ETFs are bought and sold like a common stock on a stock exchange.

  • T icon

    Traded

    Like a stock, ETFs are traded and experience price changes throughout the day.

  • F

    Funds

    Similar to a mutual fund, ETFs are a collection of tens, hundreds, or sometimes thousands of stocks or bonds in a single fund.


Why invest in ETFs?

If you’re looking for an affordable, tax efficient way to access a broad range of asset classes, investing in ETFs might be right for you. Here are some of the reasons ETFs work for so many investors:
 

  • Diversification

    ETFs let you access a diverse mix of asset classes, including domestic and international stocks, bonds, and commodities.

  • Lower cost

    ETFs typically have lower operating expense ratios (OERs) than actively managed mutual funds. 

  • Trading flexibility

    ETFs combine the trading versatility of individual securities with the diversified qualities of mutual funds to meet a variety of investment needs.

  • Tax efficiency

    ETFs are widely considered to be more tax efficient than actively managed mutual funds for a number of reasons.


How do ETFs and mutual funds compare?

Both offer advantages but, as with any investment approach, there are also things to consider.

  • balanced scale

    How they are most similar

    In most cases, both ETFs and mutual funds represent "baskets" of individual securities, for example stocks or bonds. 

  • unbalanced scale

    A key difference:

    ETFs are "exchange-traded" and can be bought or sold intraday at different prices. Mutual fund trades are executed once a day, at a single price.


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:
 

  • Trade commissions

    The fees your brokerage company charges each time you buy or sell an ETF which can range from $0-$201 per trade for online trades, depending on number of trades.

    Standard online trades at Schwab range from $0-$4.952,3 per trade.
     

  • 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%4.

    The asset-weighted average OER for cap weighted Schwab ETFs is just 0.05%5.
     

  • 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).


What types of ETFs are there?

As ETFs continue to surge in popularity, their numbers and types are growing every day. And understanding what they offer and how they’re different is key to choosing the right ETF for you.
 

ETFs with Schwab

  • ETFs with Schwab

    Choose from 500+ commission-free2 ETFs from Charles Schwab Investment Management (CSIM) and other leading fund companies—including Schwab's low-cost market cap index ETFs.

  • Ready to start investing?

    Already a Schwab client? Log in 

Need help understanding your ETF options?