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Best ETF Brokers 2020 | How To Invest In Etfs | Learnbonds

Know everything about buying and investing in ETFs and ETF brokers in 2020
Maggie Smith
Author: Maggie Smith
Last Updated: April 1, 2020

Investors are joining the passive investing revolution in droves. Fed up with paying high fees to invest in stocks and mutual funds, they are merrily dethroning actively managed funds. The champion of this revolution is the low cost exchange traded fund (ETF). Because ETFs track an index of stocks or other investments, they do not incur the high costs of buying and selling individual investments.

What are ETFs?

An exchange-traded fund (ETF) is a basket of securities chosen to replicate an underlying index. They can be diversified across one type of security or many  (stocks, bonds, commodities etc.). Like mutual funds, ETFs are a pooled investment fund that sell shares in a portfolio of investments. Different from mutual funds, ETFs can be traded intraday like stocks.

Why Invest in ETFs?

When you buy ETFs, you do not have to accept the end-of-day price offered by mutual funds. ETFs are funds with the characteristics of stocks, including:

  • Real-time trading
  • High liquidity
  • Long, short and arbitrage positions
  • Limit and stop-loss orders
  • Fractional trading
  • Trading on margin using leverage

 

But different from stocks and mutual funds, ETFs offer:

  • Lower fees
  • More tax advantages
While both exchange traded funds and mutual funds diversify investment risk across a portfolio of securities, important differences exist. Mutual funds are actively managed by fund managers and thus have higher trading and management costs. Passively managed ETFs track an index and have low expenses.

How to Invest in ETFs

This year, investment in passive equity funds, led by ETFs, will surpass actively managed funds. ETF investing has grown alongside the rise of the robo-advisors. With the convenience of mobile trading, they are now the most actively traded security. If you are not yet part of the ETF investing movement, investing in ETFs is as easy as ordering an Uber taxi. Investors buy ETFs while standing in line at the post office, riding the subway or listening to the opening movement at the symphony.

With an indisputable place in most any diversified investment portfolio, ETF assets have swelled to over $5 trillion. ETFs are sold by online brokers, banks, large mutual fund suppliers, and robo-advisors. Online brokers provide one or all of the following ETF investment options.

🔳 Buy and sell ETFs directly like stocks

🔳 Invest in portfolios of ETFs

🔳 Set up an automated program to invest a specified amount at regular intervals in ETFs

🔳 Automatically buy and sell ETFs to rebalance a portfolio

How to Choose an ETF Broker?

While shopping for an online ETF broker, evaluate:

Number of ETFs – A large number of diversified ETFs makes it easier to develop a diversified portfolio.  More importantly, the ETFs should be from reputable suppliers and have good liquidity.

Credit quality – ETFs are rated like stocks based on their creditworthiness. Morningstar is a reputable assessor of ETFs and mutual funds. The highest rate Morningstar ETFs have low fees and are broadly diversified.

Benchmark alignment – The ETF should closely replicate the index it tracks. When the index component changes, the ETF should be adjusted accordingly.

Costs – In addition to the ETF expense ratio, brokerage commissions will add to your costs.

Tax implications – If an index does a lot of trading or invests in certain commodities, taxes may be higher. Read the fine print in the ETF prospectus.

Tax considerations across countries – If the ETF pays a dividend, remember to check the tax agreements with the country the ETF is registered in. In certain countries like Finland, you have to pay tax in the country where the ETF is registered on top of the taxes you normally pay. Source: sijoitusrahastot.orgsijoitusrahastot.org

Best US ETF Broker for 2020 – M1Finance

Best ETF Brokers |...

Fees: 0.00 pa

Min Deposit: $100

M1 Finance is an ETF supermarket with over 2,000+ exchange traded funds to choose from. Over 4,000 stocks traded on the NYSE, NASDAQ, and BATs are also available. Create your own custom Pie of up to 100 ETFs and stocks (called slices). There are no fees or limits on how many pies you can include in your portfolio. ETF expense fees apply. Once you have chosen your portfolio allocation, this robo-advisor automatically buys and sells your holdings to maintain your ideal portfolio balance. Low cost margin borrowing at 4 percent allows you to trade ETFs with leverage. The M1 Spend checking account with debit card sweeps excess cash into investments.

There are three ways to buy ETFs in M1 Finance – Direct Investing, Expert Pies, Portfolio Rebalancing.

Choose from 2,000 ETFs.1. From the MyPortfolio screen, click on Add Slice.
2. Choose the Funds tab to display the more than 2,000 ETFs available.
3. Click on the fund you want to invest in.
4. Review the ETF performance and expense fees.
5. Click on Add to Pie to buy the ETF.
6. State the percentage of your portfolio you want this ETF to represent.
7. Save the new portfolio.Best ETF Brokers |...
Expert Pies are automatically created based on your investment criteria.
  • 1. Click on the Expert Pies tab.
    2. Choose an investment objective (Plan for Retirement, Responsible Investing, Income Earners, Hedge Fund Followers etc.) or theme (Industry sector).
    3. Choose your investment style, from Ultra Conservative to Ultra Aggressive.
    4. M1 Finance will recommend a customized portfolio of ETFs.The more conservative portfolios will have a larger slice invested in bond ETFs.Best ETF Brokers |...
  • To allow M1 to automatically buy and sell your ETFs to maintain your portfolio allocation:
  • 1. From My Portfolio, select Rebalance.
    2. Select Confirm. M1 will automatically increase the weight of underweight allocations and decrease overweight ones.Best ETF Brokers |...
    • No fees or commissions
    • Free automated portfolio rebalancing
    • Sweeping of cash into higher earning investment accounts
    • Tax efficient allocation strategy

    What to look for in ETFs?

    Diversified Selection

    Some brokers work exclusively with one ETF provider. The ETF selection may be limited and costs higher, but not in all cases. iShares for example, a popular supplier, is among the cheapest ETF providers.

    2. Bid-ask Spread

    The spread is the difference between the bid and ask price. A liquid ETF will have a tighter bid-ask spread and be cheaper to buy.

    3. ETF fees and minimum orders

    Remember that even no fee brokers have to pass on ETF fees. Compare fees and minimum orders. An ETF provider, for example, may have a $25 minimum.

    Types of ETFs

    Exchange traded products track indices (NASDAQ, S&P 500), commodities (the price of gold or oil) and other underlying benchmarks.

  • ETF Investing by Theme

    Here are some popular themes you can track with an ETF:

    Invest in a diversified basket of stocks in a major industry sectors or target a hot sector (self-driving cars, robotics). Information technology and healthcare ETFs are currently outperforming other industries.

    Over concentration in cyclical industries such as retail and energy that do well when the economy is growing can drag down investment portfolio returns in a slow economy. ETFs tracking indices representing multiple indices such as the S&P 500 diversify this risk. The SPDR S&P 500 Low Volatility UCITS ETF has been a top performer over the last year.

    Emerging market stocks benefit from the rapid economic growth of developing economies. By buying a basket of stock indices from different emerging markets, investors can benefit from above average economic growth while reducing price volatility. China A shares and Saudi Arabia are top performing ETFs in the first half of 2020.

    ETFs are a good way for the beginning investor to invest in commodities without having to use more complex instruments like futures. Both ETFs and futures are ways to invest in physical commodities without having to transport and own the good. An exchange traded commodity (ETC) is an ETF that tracks a commodity. ETC shares provide fractional ownership in a commodity. An ounce of gold currently costs USD 1,200. One share of the iShares Physical Gold ETC (SGLN) – a top performer over the last six months – represents a 0.020 share in an ounce of gold.

    Dividend ETFs invest in dividend paying stocks. The ETF collects the dividends and distributes them to investors. The investor can accept a cash payment or have all dividends reinvested in the ETF.
    ETFs are democratizing the bond market for retail investors. Although bonds are a part of any diversified portfolio, the choice of  bonds has been dreary for individual investors, and mostly limited to government bond funds. You no longer need $10,000 to invest in corporate bonds. An ETF share representing a bond index can be bought for a few dollars. More money has flowed into fixed income than equity ETFs so far in 2020, ballooning bond ETF assets to $1 trillion.

    ETF Investing by Factors

    Factor Investing focuses on strategies known over time to contribute to above average investment performance. Single and multi-factor ETFs are available. Here are some examples:

    Style – Value vs Growth

    A value investor buys stocks trading below their fundamental value with the expectation the price will appreciate in line with its true value. An economic downturn, cyclical industry or supply disruption are examples of events that can lead to temporary declines in a stock price.

    Size – Small Cap vs Large Cap

    Small cap growth stocks have historically outperformed large cap stocks.

    Volatility – Low Volatility vs High Volatility

    Low volatility stocks outperform high vol ones over the long term.

    Multi-factor ETFs are growing in popularity. The Xtrackers Russell 1000 Comprehensive Factor ETF (DEUS) is one of the more ambitious multi-factor funds. This ETF covers Quality, Value, Momentum, Low Volatility and Size factors.

    New ETFs

    If it walks like an ETF and talks like an ETF, is it an ETF? Flexible ETFs are always innovating to give investors more control over their investment returns.

    – SoFi’s GIGE fund for the gig economy lets investors in on deals 31 days post-IPO.

    – Salt Financial is paying negative interest rates of 5 percent – in other words, paying you to invest in Salt ETFs.

    But investors also need to be on the look out for imitators. Some new products are disguising active funds in ETF wrappers. These fake ETFs plan to compromise some of the features that have made ETFs popular.

    – Artificial intelligence ETFs say their bots are so smart they can replace indices, but are these smart bots not machine-learning active investors?

    – Non-transparent ETFs aim to report their holdings monthly or quarterly like mutual funds. ETF holdings are always transparent to investors. So you do not have to worry about investing in a value fund and discovering four months later that it has 20 percent of its holdings in declining growth stocks. These opaque hybrid ETFs will be on the market soon.

    As a few pretenders join the ETF revolution, keep in mind, the real ETF is transparent, tradeable like a stock and low fee.

    ETFs  can trade at a slight premium or discount to their underlying indices. Arbitrageurs seek to profit from these discrepancies in prices by taking opposite long and short positions, thereby narrowing any gap in pricing.

    FAQs

    How much are ETF expense fees?

    Low cost index funds and ETFs have pushed the price of investment funds down 40 percent over the last decade. In 2018, the average asset-weighted expense ratio was 0.15 percent for passive funds and 0.67 percent for active funds (Source: Morningstar).

    Are index mutual funds cheaper than ETFs?

    An all out price war among funds has broken out, and investors are the winner. ETFs have the lowest expense fees. But index mutual funds are fighting back. Fidelity has introduced no fee index funds and Vanguard has lowered fees and the minimum investment (to $3,000) to access its lowest cost funds.

    Where can I buy the cheapest ETFs?

    Low and no fee online brokers are lowering the cost of buying ETFs. No matter which broker you buy ETFs from, you still have to pay the expense fees. Following are the cheapest funds managers in 2018 (Source: Morningstar Direct Data). Vanguard 0.09 StateStreet 0.17 BlackRock/iShares 0.30 Fidelity 0.48 Invesco 0.60

    Which ETFs are the cheapest?

    Do ETFs have tax advantages?

    ETFs are considered to be tax efficient if they minimize taxable capital gains contributions and distribute qualified dividends subject to lower taxes. To avoid investments Isley made for tax purposes, ETFs must be held for a specified period for dividend payments to qualify for lower taxes.

    What is a margin account?

    A margin account allows investors to borrow money from a broker to invest in securities. A broker with 5x leverage allows you to trade 5 times the amount in your account. A $1000 account could trade $5,000. Any gains are multiplied by five, but so too are losses. In the case of losses, a margin call requires you to restore the original value by depositing more money and/or securities in your account.

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    All trading carries risk. Views expressed are those of the writers only. Past performance is no guarantee of future results. The opinions expressed in this Site do not constitute investment advice and independent financial advice should be sought where appropriate. This website is free for you to use but we may receive commission from the companies we feature on this site.
    Maggie Smith

    Maggie is an investment expert with 10 years experience in dividend stocks and income investing. She has a PhD in Financial Markets and Investment Strategies and has contributed to a number of financial portals, writing stock market analysis pieces and reports on technology stocks and IPOs.

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