Investing can be a daunting task for most people. Keeping up to date with all the salient information regarding one company let alone an entire portfolio can be a challenge.
Investors need to keeps tabs with such considerations as whether their stocks are spread across industries adequately to balance risk, whether a company’s financial statements suggest stability, or whether the price is at a point where action needs to be taken.
It’s no wonder that legendary investor Warren Buffett has been quoted saying “the best strategy for the vast majority of people is simply to buy low-cost ETFs”.
In this article, we cover how and where can you buy ETFs, and walk you through our top picks of the best (and cheapest!) ETFs brokers.
Top 3 ETF Brokers
You can read all about the best ETF brokers in-depth further down this guide, but before we get into that, here’s a quick look at the top ETF brokers on the market in 2020.
- eToro – Best all round ETF broker with 0% commission
- Stash Invest – Excellent app for ETF investing
- M1 Finance – ETF broker with Robo Advisor
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What are ETFs & why should I buy them?
Exchange Traded Funds (“ETFs”) are investment funds traded on stock exchanges, much like ordinary shares. These funds invest in a range of securities and often track well-known indices such as the S&P 500 or the FTSE 250. Some have also turned their focus to specific industries, markets, asset classes, or regions of the world etc.
Due to their size, these investment funds offer a level of diversification that most investors could not get themselves, at least without investing vast sums of money and paying large transaction fees.
When you buy a share of an S&P 500 ETF, you own a piece of a fund that itself owns shares in all 500 companies on the index. This way, you not only significantly diversify your portfolio but also get the performance of the S&P 500.
One last advantage of ETFs is their liquidity and very low fees. While active funds and mutual funds may have low liquidity and high performance fees, ETFs are extremely liquid and typically charge fractions of a percentage point in annual management fees called “expense ratios” (vs. 0.50–2% for many mutual or index funds).
Our criteria for selecting our ETF brokers?
- How many ETFs does the broker list?
- How much does the broker charge in transaction fees?
- How user-friendly is the broker’s platform? Does the broker offer mobile trading?
- Does the broker allow you to purchase ETFs directly or through CFDs?
- Where is the broker licensed? Is the broker reputable?
Best ETFs Brokers in 2020
1. eToro: Leading broker for direct and CFD ETFs trading in Europe
In recent years, eToro has become one of the most popular brokers in Europe, with over 5 million users and thousands of financial instruments including hundreds of ETFs offered directly or via CFDs.
Long and non-leveraged orders on ETFs are executed as direct investments and are offered free of commissions. Short and leveraged trades on ETFs are made via CFDs, for which eToro charges a 0.09% spread and overnight/weekend rollover fees that vary between long & short trades.
With its user-friendly web & mobile trading platform, its newsfeed, and handy charting, risk management & comparison tools, eToro makes ETF trading seamless for beginner and seasoned investors alike.
Last, a unique feature of the eToro experience is the CopyTrader system, allowing you to browse the past performance and risk profile of other traders, decide which (if any) of them you wish to emulate, and automatically replicate their trades. This not only allows you to copy experienced ETF traders, but also to get inspiration for ETF trade ideas from other market participants!
- ETFs can be bought directly or via CFDs for more flexibility
- No commissions & competitive ETF CFDs pricing
- CopyTrade platform makes it easier to trade & find ideas
- ETFs unavailable to US clients
2. Stash Invest: The best experience in mobile ETFs trading for beginners
If you are based in the US and new to the world of investing, don’t have a lot of money to invest or are simply looking for an easy & fun way to trade ETFs on the go, look no further than Stash Invest!
Stash Invest is a mobile app that makes ETF & stock investing easy, by offering you dozens of pre-selected ETFs classified by industry or style (e.g. “Inflation Defense”, “Match the Market: Growth”, “Internet Titans” etc.). Stash not only allows you to buy hundreds of popular stocks or curated ETFs, it also makes it possible to buy fractional shares starting at $5: instead of investing in a $2,000 Amazon share, you may simply invest $20 and own 1% of an Amazon share! This makes it easier for people with a tight budget to participate in the performance of specific stocks and ETFs that may be costlier.
Stash does not charge commissions, instead it offers 3 separate plans for $1, $3, and $9 per month that all allow investing in full or fractional shares but offer a differing range of options. The ETFs it offers have relatively low expense ratios on average, and all the relevant information (composition, risk etc.) can be accessed easily via the app.
Last, Stash Invest offers a wide variety of handy tools for the hands-off investor, such as automatic dividend investment, Auto-Stash (specify how much you want to automatically invest, when and in what), and a free bank account with additional perks depending on your plan.
- ETF investing made simple for beginners
- Fractional shares & no commissions
- Auto-invest and dividend reinvestment
- Can be too simplistic for more seasoned investors
- Monthly account fees despite no commissions
- Not available outside US
3. M1 Finance: A hybrid robo-advisor making portfolio management & passive investing seamless
M1 Finance is both a robo-advisor and online broker based in the US and offering over 2,000 ETFs. M1 Finance offers a style of investing called Pie Investing: users build their portfolio as “pies” with up to 100 “slices” representing different investments (specific ETFs, stocks etc.). The pie is simply a visual representation of the content of your portfolio, and you may build your own or choose between over 80 preset pies (e.g. replicate the holdings of Berkshire Hathaway, of famous hedge funds, or build a “green growth” portfolio).
Once you are happy with your pie and have transferred your funds, M1 will do the investments for you. What makes M1 Finance particularly useful is the option to buy fractional shares, allowing you to own very expensive stocks or ETFs without having to put up the money for a full share.
The web platform and the mobile app are very easy to use, and the visual nature of the pies makes portfolio management very intuitive. Over time, the parts of your pie that perform well will take up a larger proportion of your portfolio, and M1 offers automatic rebalancing, automatic dividend reinvestment and recurring deposits options to allow full hands-off investing.
Last, M1 Finance does not charge commissions, account opening fees or management fees, but you will still be charged the ETF expense ratios (outside of M1’s control). Note that M1 only allows to trade once a day as a way to keep low costs, so it is not designed for day traders.
- No account fees & no commissions
- Designed for easy and hands-off investing
- Offers fractional shares
- May not be fully suited to beginners
- Trade only once a day
- Not available outside US
What key information should I look for before choosing an ETF and where can I find it?
With thousands of ETFs traded on dozens of stock exchanges, including ETFs on the same indices offered by different providers (e.g. Blackrock iShares Core S&P 500 vs. Vanguard S&P 500), you may wonder how to understand the key points & differentiating factors of each ETFs.
Thankfully, all ETFs come with a very short Key Investor Information document that makes understanding them much easier.
How to read an ETF’s Key Investor Information document
i) The first section typically involves objectives & investment policy, in other words, what the ETF is trying to do (replicate the performance of the S&P 500, multiply by 2 the inverse performance of the price of gold etc.), how it does it (use of derivatives, frequency of rebalancing etc.), and what it offers on the side (dividend distribution policy, lending shares to short-sellers etc.).
ii) The second section involves risk and returns: The ETF provider will typically show you a sliding scale highlighting the level of risk and of expected return, although you will have inferred this information from the ETF’s objectives.
iii) The third covers fees, and details how much the ETF will cost per year: While ETFs normally do not include performance fees, pay special attention to the “ongoing charges” (or “expense ratio”, the percentage of your investment that will be charged annually to cover the ETF’s costs) and to the conditions & amount of the entry & exit charges (usually, this will not apply to retail investors going through brokers, but it is worth checking).
iv) The fourth will show detailed information about past performance of the fund & of the index it tracks – do not forget that past performance is not indicative of future performance!
v) Last, the fifth section will give a few more indications on the fund’s residence, tax policy, and other relevant terms for investors.
How can I incorporate ETFs into my trading strategy?
You can trade ETFs via a broker in two main ways: via direct investment (i.e. directly owning shares in ETFs in your brokerage account) or via CFDs (i.e. not directly owning shares but “betting” on the direction of its returns with your broker). See our guide for more details on how to trade CFDs.
ETFs alone can be great investments. The cheapest ETFs will often be the ones tracking major indices and will deliver market performance and great diversification in return for very small management fees. As such, focusing purely on ETFs can be a great strategy for passive investors or investors without the time or resources to build their own portfolio.
You could also add ETFs to your existing portfolio of stocks & other assets to further diversify and offer a larger passive performance component to your portfolio. ETFs are not just about tracking the market: they allow you to participate in the performance of specific assets or industries, or match a specific investing style.
For example, pharma & biotech are two industries notorious for their very high return potential and for their high risks. Unless you’re a specialist, you probably should steer clear from picking stocks in those industries: pharma or biotech ETFs will allow you to gain exposure to these markets while limiting the likelihood of losing everything on a single-stock bet. Similarly, if you want to be more focused on small caps or on value stocks, you will easily find “factor ETFs” that will offer you a turnkey investment option with very low fees.
Last, being long or short ETFs can be an active trading strategy allowing you to place directional bets on specific markets or industries without having a view on individual companies. If you think oil prices are likely to tank and airlines are likely to profit, you may want to go short oil companies ETFs and long airlines ETFs instead of going through the process of picking individual stocks to trade in each industry.
Regardless of how your investing style and risk profile, ETFs will be a great addition to your portfolio!
The Bottom Line
Whether you’re a beginner or a seasoned investor, run a hands-on or hands-off portfolio, or prefer to trade on the go rather than from your desktop, our guide to ETFs investing and our recommendations of the best and cheapest ETF brokers will give you the tools you need to start investing in this great asset class!
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Glossary of Forex Terms
A pip or percentage in point is a unit of measuring changes in currency prices.It is the standard unit of measuring the incremental changes in currency prices.. If, for instance, the EUR/USD price changes from 1.1025 to 1.1026, the 0.0001 USD reflects one pip.
Spread refers to the difference between the buy (offer/ask) and sell(bid) prices of a financial instrument.
Leverage is debt. In forex, leverage trading it is the art of using borrowed funds to enter into bigger trades than would have been possible with your own capital. This in effect allows you to take full advantage of tiny market movements by amplifying your small gains.
Margin is the money needed in your account to maintain a trade with leverage.
Slippage refers to the difference between the price at which you expect a trade to be made and the price at which it is actually executed.
In forex trading volume is also referred to as the turnover and it refers to the number of lots traded by an individual trader or within the brokerage platforms within a given period of time. It can also be viewed as a representation of the amount of currency that changes hands between buyers and sellers.
Ask price, also known as the offer price, or ask is the lowest price that the seller of a particular financial instrument is willing to accept to relinquish the ownership of the asset.
Bid price refers to the highest amount of money that a buyer or market maker is willing to pay for a particular financial asset.
A forex trading pair is the two currencies involved in a trade. It is the quotation of one currency’s value against the value of another currency. A currency pair is made up of the national currencies of two countries. The first part of a currency pair is known as the base currency, and the second part is known as the quote currency.
The cross rate refers to the exchange rate of two different currencies when expressed in the currency of another country. For example, cross-rate may be the exchange of the United Kingdom’s sterling pound and the Japanese Yen when expressed in U.S dollars.
What’s the difference between an ETF and a mutual fund?
There are many similarities between the two, but generally the main differences are that ETFs have lower investment minimums (ETF share prices may vary widely), much lower fees (lower management and usually no performance fees) and more liquidity (mutual funds typically only provide liquidity once a day).
How is the market price of an ETF determined?
The market price of ETFs varies continuously throughout the day and is a function of supply and demand. In theory and in most cases, except in highly volatile conditions, the prices of ETFs reflect the net asset value of the underlying stocks, bonds etc. that the ETFs invests in.
How many ETFs are there in the market?
The number of ETFs listed on exchanges around the world increases continuously, with thousands offered around the world. It is also common to find many ETF providers for the same underlying index (e.g. S&P 500)
What are leveraged ETFs?
Leveraged ETFs are funds that leverage their positions to achieve a particular objective, such as replicating 2x the performance of the Nikkei or 3x the inverse performance of the VIX volatility index. These funds are particularly volatile and risky, with higher returns for potentially devastating losses (a 30% one-day decline in the price of the underlying of a 3x leveraged long ETF could imply losing ~90% of the money you invested). They are not suitable for the majority of retail investors.
What are the main factors to consider when investing in ETFs?
We discuss these factors in our guide above, but some of the main ones include objectives, risk profile, fees and jurisdiction.
How can I invest in ETFs?
The simplest way is to go through a broker. You can directly buy shares in ETFs, buy fractional shares if your broker offers them, or use contracts-for-difference (“CFDs”).