How to Buy ETFs

Introduction

Are you looking to diversify your portfolio without researching individual assets to find the perfect mix? Consider investing in an ETF. Short for Exchange-Traded Funds, ETFs provide multiple benefits. They are readily available on exchanges, and you can trade them whenever the market is open.

Highlights and Key Takeaways

• An ETF comprises numerous assets bundled together and traded on an exchange.

• ETFs play a vital role in diversifying an investor’s portfolio.

• An ideal ETF has high liquidity and low expense ratios.

• Monitoring ETF investments is essential to help you make informed trading decisions.

Understanding ETFs

What are ETFs?

ETFs refer to a bundle of assets that can be traded on the stock exchange. Generally, ETFs track the performance of a certain index, commodity, sector, or other assets like bonds, currencies, or stocks.

• An ETF can feature hundreds or thousands of assets like stocks across different industries as well as be isolated to a single sector. This makes it a good choice for diversification.

• By allowing you to own multiple assets at a go, ETFs help spread your risks. When some assets are performing poorly, the others could be doing well, possibly offsetting your losses.  

Benefits Of Investing in ETFs

ETFs are generally cheaper than mutual funds, making them cost-effective, thanks to their passive management style that mainly focuses on tracking an index. Consequently, their lower expenses allow you to retain a larger share of your returns.

• These funds are associated with transparency. You can easily access the price of a certain ETF on an exchange. Moreover, information on the fund’s holding is revealed to the public daily, so you can keenly track your investments.  

• You will also enjoy the benefit of diversification by investing in ETFs. A single fund can give you access to numerous assets from a certain industry or country, decreasing your overall risk.

• Trading flexibility is another perk on the list. An ETF portfolio comprises a broad range of assets, so you can create a personalized investment strategy that meets your needs.

• ETFs are more tax-efficient compared to mutual funds. Since they generate lower capital gains, ETFs demand lower amounts of taxes.

•  Most funds don’t have minimum investment requirements, making them easily accessible. This means you can purchase them even if you still have little capital. In any case, you can test the profitability of the market without worrying about losing lots of money.
• Unlike mutual funds, it’s possible to place various order types, such as stop loss and limit orders, with ETFs.

How to Buy ETFs

Choosing a Brokerage

Choosing the right brokerage account is essential for trading ETFs successfully. You can select a broker that charges low fees. Although most platforms provide commission-free trading, they require you to pay money to access some of their services. Be sure to check such expenses when you go for brokers offering zero commission fees.

• Is the trading platform user-friendly? It should be easy to navigate and feature a variety of tools and data for researching and analyzing the market. This helps you make more informed investment decisions.

• Evaluate the customer service offered. A good broker provides responsive and helpful services that make trading easier and more efficient. Moreover, customer support is available 24/7, and multiple communication channels like live chat, phone, and email are offered.

• What is the broker’s reputation? Check reviews from reputable sources to find out what traders are saying about a particular broker. This will help you identify legit brokers, as most have positive reviews and a history of happy customers.

• The best ETF brokers are reliable. As such, they adhere to industry standards and are regulated by relevant financial authorities, so they can protect your investments.  

• Security is paramount. Therefore, ensure you work with brokers that apply robust security measures like two-factor authentication and encryption for safe data storage.

Selecting the Right ETFs

The key to selecting the right ETFs lies in considering certain factors. One is the ETF’s underlying index. This will help you understand and align the portfolio’s focus with your trading goals. For example, if you are looking for diversification, select an ETF focusing on a broad, widely followed index for increased market or geographic exposure.  

• It’s also advisable to take the expense ratio into account. This portion of the fund’s assets is utilized to meet administrative, management, and other operating expenses.

• Choose ETFs with lower expense ratios for cost-efficient investing, enabling you to keep more profits.

• Consider purchasing ETFs with a high average daily trading volume, as this suggests better liquidity. More liquid ETFs are associated with tighter bid-ask spreads, which helps you decrease trading costs significantly.

• Remember to assess the tracking error. This determines how closely the performance of the ETF aligns with the core index. Choose an ETF with minimal tracking error because this suggests better tracking efficiency.

Placing a Trade

Trading ETFs is simple, but you need to open a brokerage account first. Once done, follow these steps to understand how to buy ETFs:

• Step 1: Log in to your brokerage account by entering your username and password.

• Step 2: Select the ETF you want to purchase from the many options available.

• Step 3: Choose the order type and enter relevant details. Market orders typically allow you to buy an ETF at the prevailing market price. Limit orders, on the other hand, indicate the exact price you want to purchase the ETF for.

• Step 4: Click the “buy” or “place order” for order confirmation and complete the process.

Monitoring Your ETF Investments

Understanding ETF Performance

Now that you have placed a trade with ETFs, ensure you monitor them to see how they perform in the market. Since ETFs mainly focus on tracking an index, it’s only sensible to monitor their tracking record. Check how well the fund duplicates the performance of its index (factoring in the fees). You will know your ETF is performing well when it tracks its indexes tightly.

• You can leverage ETF price charts to evaluate the performance of the traded assets. Select the timeframe you want to focus on (daily, weekly, or monthly) to gauge how the ETF prices shift under different market conditions.

• There are different chart types used for representing prices, including line, bar, and candle charts, though the latter is the most common.

• Reading the candle chart is easy: the market is considered bullish when the closing price is higher than the opening price. A selling pressure is signified by a lower closing price than the opening one.

• Don’t forget to read the performance reports. You can access them from your brokerage account or the issuer’s website.

• Check the total return – price appreciation plus dividends. This will help you gauge the fund’s overall performance.

• Focus on the Net Asset Value (NAV) as it represents the ETF’s total value after subtracting liabilities from assets. Compare the NAV’s change over time to determine the ETF’s growth.

When to Sell Your ETFs

You should consider selling your ETFs on attaining your investment goals. If you have earned the targeted profits or achieved your portfolio objectives, there’s no reason to hold on to your funds. Check for changes in the performance of the ETF’s underlying index, too. If it underperforms constantly, it is advisable to sell the funds in order to avoid losses.

• You may also want to sell an ETF when its index composition is altered, affecting the fund’s objectives. Significant market shifts that deviate from your strategy and goals can prompt you to sell your ETF.

• The tracking error reaching a significant scale indicates that the fund is not operating at targeted levels. This is the ideal time to sell.

• Rising costs that consume a considerable portion of your investments signify a declining ETF, which is a correct time to sell.

• Is the ETF’s liquidity reducing? Low trading activity reduces the fund’s profitability, so sell it.

Conclusion

ETFs are an ideal investment option, especially if you want to diversify your portfolio. They include various asset classes spanning over different sectors or geographical regions, helping you to spread your risks. To get the most out of your ETF investment, ensure you understand where to buy ETFs. As such, select a broker that charges low fees, while provideing multiple trading resources and tools, among others.

Be sure to monitor the fund’s performance after you buy. This can help you identify potential selling opportunities to prevent unnecessary losses.   

FAQ

How Is an ETF Different From a Stock?

A stock represents an investor’s stake in a company, while an ETF is a fund that comprises a bundle of different assets like bonds, stocks, and commodities. So, when you purchase an ETF share, you buy the assets in the portfolio of said companies.

Do ETFs Pay Dividends?

Yes, but not all. It depends upon the types of assets included in the portfolio. For instance, you can earn dividends if you invest in ETFs consisting of stocks that pay dividends to investors. 

How Do You Make Money From an ETF?

You generate money from an ETF when the prices of underlying assets appreciate. A higher income can result from dividends or interest, depending upon the types of assets involved. Therefore, it’s worthwhile to learn how to buy ETFs.