What is an ETF?
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.
How do ETFs work?
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.
ETFs generally hold a collection of stocks, bonds or other securities in one fund or have exposure to a single stock or bond through a single-security ETF.
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:
ETFs let you access a diverse mix of asset classes, including domestic and international stocks, bonds, and commodities.
ETFs typically have lower operating expense ratios (OERs) than actively managed mutual funds.
ETFs combine the trading versatility of individual securities with the diversified qualities of mutual funds to meet a variety of investment needs.
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.
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 a listed ETF which can range from $0-$20 per trade1 for online trades, depending on number of trades.
Standard trades at Schwab are $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 0.19%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).
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.
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