Want to jump straight to the best ETF broker? Check out Interactive Brokers.
Exchange-traded funds (ETFs) currently make up nearly one-third of all U.S. trading by dollar value and nearly a quarter of all share volume. That’s pretty amazing for a product that has only been around since the 1980s and didn’t really “show up” until the middle-to-end of the last decade.
ETFs at a Glance
ETFs are mutual funds that can be bought and sold during the trading day at the current market price, while mutual fund shares are redeemed at the end of the day based on the net asset value (the worth of the fund’s portfolio at closing prices).
Other key ETF factors include:
- ETFs must disclose holdings daily while active mutual funds do it quarterly or semi-annually.
- Unlike mutual funds, ETFs are less likely to have taxable events, making them more tax efficient.
- ETFs come with stock transaction costs whereas mutual funds may or may not have any transaction costs.
- ETFs are generally based on indexes rather than active management or complex strategies.
Typically, you’ll see ETFs cover sectors like healthcare and technology or commodities like gold and crude oil, or simply track an overall index (like the popular NYSEARCA: SPY on the S&P 500). However, there are some exotic ETFs that use leverage or track the inverse of an index.
ETFs vs ETNs
While most people use ETFs, exchange-traded notes (ETNs) are lesser-known, and there are important differences:
- Fund vs. debt note: ETFs are actually funds that own the underlying assets. ETNs are debt notes issued by an institution, essentially unsecured bond guarantees to the index or asset they’re trying to track.
- Tracking error: Over time, an ETF will not match the underlying index or asset it’s tracking due to a combination of management fees and transactional fees. Example: oil ETFs lose value over time due to the cost of rolling futures contracts plus management fees. ETNs have no tracking errors other than their management fee and tax fees.
Because of these two major differences, the tradeoff between the two is risk. ETNs accept the risk of the underlying product plus that of the issuing institution. ETFs only accept the underlying product risk, but you also get tracking error.
The risk is high with ETNs, though. To date, there are no known ETFs that have closed and weren’t able to be redeemed at their net asset value. However, there are examples of leveraged crude oil products to a recent ETN issued by Credit Suisse (XIV) that crashed 80% in one day.
Why we like ETFs
ETFs provide some of the best ways for retail investors to gain exposure to various sectors of the market without opening numerous accounts and oftentimes are available in self-directed retirement accounts.
- They’re open to investors. Mutual funds can sometimes close to new investors if they have limits on the amount of clients. ETFs are only limited by the number of shares available and someone willing to sell them.
- They’re liquid. ETFs are easy to buy and sell. SPY, which tracks the S&P 500, trades nearly 90 million shares on average every day
- Brokers offer commission-free ETFs. Many brokers offer commission-free ETFs that you can purchase through everything from regular trading accounts to self-directed retirement accounts. Though each broker may have a version of the same ETF, as long as they have decent liquidity they’re all roughly the same.
- They’re diversified. ETFs provide an easy way for investors to expand their product holdings and manage their own portfolios rather than relegate the authority to fund managers.
- Taxes are easier. Without getting into the gory details, the ability to trade ETFs like a stock makes it easier to do taxes and forecast them, while nuances with mutual funds can cause unexpected tax events.
- They carry relatively low fees. Since most ETFs track an index, commodity or simple strategy, they generally have low fees since they require little management.
- ETFs that invest in other countries may be limited to larger companies or a particular set of companies based on the index they track or governmental rules.
- As larger ETFs have great liquidity, some of the newer, niche or smaller ETFs do not have high liquidity. In fact, some trade as few as a few hundred shares a day.
- While an ETF that provides 2x exposure to the S&P 500 may seem straightforward, it may not be. Some of these ETFs track the daily price movements in the index, meaning they quickly decouple from the underlying index. Check out the chart below to see how the math could work out.
How to Invest in ETFs
Buying an ETF works just like a stock:
- Fees and management:
It’s worth understanding management fees, expected fees associated with buying and selling the ETF as well as the fees an ETF incurs to track its index.
- Pick a broker:
Most major brokers in the U.S. provide access to any ETF that is openly traded. Many brokers offer their own ETFs or partner with a company to provide ETFs that don’t have any trading commissions associated with them but may require a certain holding period.
- Decide how much to invest:
Once you understand what an ETF tracks as well as what it holds, you can decide how much you want to invest in an ETF. Keep in mind that if you already own Apple shares and you purchase an ETF that tracks the S&P 500, you’ll get additional exposure to Apple through that ETF.
- Purchase the ETF:
You can buy the ETF you’ve chosen during normal trading hours as you would any stock.
Check out the Benzinga’s picks for the Best Brokerages for ETF Investing.
Best Online Brokers for ETFs
This publicly listed discount broker, which is in existence for over four decades, is service-intensive, offering intuitive and powerful investment tools. Especially, with equity investing, a flat fee is charged, with the firm claiming that it charges no trade minimum, no data fees, and no platform fees. Though it is pricier than many other discount brokers, what tilts the scales in its favor is its well-rounded service offerings and the quality and value it offers its clients.
- Novice investors
- Retirement savers
- Day traders
- World-class trading platforms
- Detailed research reports and Education Center
- Assets ranging from stocks and ETFs to derivatives like futures and options
- Thinkorswim can be overwhelming to inexperienced traders
- Derivatives trading more costly than some competitors
- Expensive margin rates
Webull, founded in 2017, is a mobile app-based brokerage that features commission-free stock and exchange-traded fund (ETF) trading. It’s regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
Webull offers active traders technical indicators, economic calendars, ratings from research agencies, margin trading and short-selling. Webull’s trading platform is designed for intermediate and experienced traders, although beginning traders can also benefit.
Webull is widely considered one of the best Robinhood alternatives.
- Active traders
- Intermediate traders
- Advanced traders
- No account maintenance fees or software platform fees
- No charges to open and maintain an account
- Intuitive trading platform with technical and fundamental analysis tools
- Does not support trading in mutual funds, bonds or OTC stocks
Robinhood is a broker designed for traders who want a simple and easy-to-use platform. It takes out all the bells and whistles that can be confusing to the modern day trader, serving as the perfect place for beginners to learn the markets. The interface is intuitive and easy to master, streamlined to ensure you don’t get distracted as you build a portfolio. Though advanced traders might like more thorough analysis tools, Robinhood gives you everything you need to start trading and learn the ropes.
- Beginner traders
- Mobile traders
- Streamlined, easy-to-understand interface
- Mobile app with full capabilities
- Can buy and sell cryptocurrency
- Fewer analysis tools than most
- Only taxable, non-retirement accounts are available
Interactive Brokers is a comprehensive trading platform that gives you access to a massive range of securities at affordable prices. You can buy assets from all around the world from the comfort of your home or office with access to over 135 global markets. Options, futures, forex and fund trading are also available, and most traders won’t pay a commission on any purchase or sale.
IBKR is geared primarily toward experienced traders and investors but now with the availability of free trades with IBKR Lite, casual traders can also acclimate to IBKR’s offerings.
- Access to international markets
- Active traders
- Sophisticated investors
- Detailed mobile app that makes trading simple
- Wide range of available account types and tradeable assets
- IB SmartRouting provides significant price improvement vs. industry
- Fractional trading allows investing regardless of share price
- Industry’s lowest margin rates
- Earn more by lending your fuly-paid shares
- Beginner investors might prefer a broker that offers a bit more hand-holding and educational resources
Public.com is an investing platform that helps people become better investors. Members can build a diverse portfolio of stocks, ETFs, and crypto within a single platform. Ownership unlocks an experience of content and education, contextual to their portfolio, created by an over million strong community of investors, creators, and analysts.
Public puts investors first and doesn’t sell trades to market makers or take money from Payment for Order Flow (PFOF).
- New investors looking to learn how to invest
- Experienced investors looking to grow even further
- Building a modern portfolio of stocks, ETFs, and crypto on one platform
- Fractional shares and crypto
- Transparency all around, from public portfolios to company beliefs
- Supportive, educational community
- No investing tools like futures, options, or margins
- Day-trading is discouraged
- Mobile app-based platform
TradeStation is for advanced traders who need a comprehensive platform. The brokerage offers an impressive range of investable assets as frequent and professional traders appreciate its wide range of analysis tools. TradeStation’s app is also equally effective, offering full platform capabilities.
- Advanced traders
- Options and futures traders
- Active stock traders
- Comprehensive trading platform and professional-grade tools
- Wide range of tradable securities
- Fully-operational mobile app
- Confusing pricing structure to leave new traders with a weak understanding of what they pay
- Cluttered layout to make navigating TradeStation’s platform more difficult than it should be
Outlook for ETFs
In the last decade and a half, ETFs have grown to global record levels in excess of $4.6 trillion. U.S. ETFs alone topped $3.3 trillion in 2017. The Bank of Montreal noted in its annual report that it expects the industry to continue to grow both in total assets as well as options available. The industry is projected to double to more than $10 trillion in the next five years.
You need to do your homework to understand how ETFs actually function. Many ETFs track the S&P 500, but not all are created equal. If you compared the SPDR S&P 500 (SPY) to Vanguard S&P 500 (VOO) you’d notice that the expense ratio fees for SPY are 0.09% vs 0.04%. However, digging a bit deeper, you’ll see that SPY distributes dividends while VOO reinvests its interim cash. Nuances like these are what you’ll need to hash out.