Contributor, Benzinga

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As an investor, it’s best to control the amount of risk added to your investments. Rather than lay your savings on a roulette wheel (chance of winning 2.63%, payout 35:1), you can mitigate risk in your portfolio. One way to do that is through exchange-traded funds, or ETFs.

Overview of ETFs

Overall risk can be reduced through investment diversification among asset classes, corporate capitalizations, and industry sectors. Most individual investors cannot afford to own a portfolio of individual securities that achieve adequate diversification. A $4.95 stock commission on a $1,000 trade is only 0.495%, but on $100, it’s 4.95%. If you don’t have tons of money lying around, you must use mutual funds to control costs.

Relationship between risk and return
Source: medium.com

A mutual fund forms to gather, collect and pool investors’ available assets. With the power of large capitalization, the fund can buy diversification. A Standard and Poor’s 500 Index Fund like the Vanguard 500 Index (VFINX) allows you to own a portion of every company in the index, even if you only have $1,000. The SPDR S&P 500 (SPY) is an exchange-traded fund (ETF) that holds the same 500 stocks as VFINX, but whose shares trade like a stock on the New York Stock Exchange (NYSE). Most ETFs are indexed portfolios; they are created to track the return of a market index like the Standard and Poor’s 500. Some ETFs have active managers who adjust the contents of an ETF’s portfolio.

Pros and Cons of ETFs

An exchange-traded fund is liquid. For a stock market commission, you can buy a portfolio of shares of common stock, know the price you paid immediately, sell the portfolio that same day and immediately know the proceeds of the sale. ETFs are known quantities.

The shares of an indexed ETF have a predetermined portfolio and are not subject to the changes by an “active” manager. The net asset value of an ETF is based on the same weightings of the same shares every day.

ETF prices can be subject to the driving forces of the stock market. Because an ETF trades on a national exchange, its market price may not match the net asset value of the fund.

Unlike an open-end fund like VFINX, the shares of the fund may trade at a discount or premium to the value of the underlying investments the ETF holds.

Lack of liquidity at a time of a market rout could cause a smaller ETF to trade at a deep discount to its net asset value. A selling crisis could cause the shares of an illiquid ETF to trade at a greater discount to its net asset value.

Examples of ETFs

SPY was the first ETF listed in the United States and was designed to correspond generally to the price and yield performance of the S&P 500 Index. It is the largest ETF of its type, at over $250 billion in assets under management.

As with all investments, a greater risk may equal greater return. An ETF like SPY spreads risk among 500 companies. The Invesco QQQ Trust (QQQ) spreads risk among fewer companies — the NASDAQ 100 — and thereby achieves the highest returns among large-capitalization ETFs. QQQ’s expense ratio is slightly higher than other indexed ETFs but its concentration of assets into stocks of very few companies may be more worrisome.

QQQ holds over 30% of its assets in the stocks of Microsoft, Amazon, and Apple. Rather than a narrower slice of the market, Vanguard Total Stock Market (VTI) takes a broader look at the market by tracking the  CRSP U.S. Total Market Index of over 3,600 companies of all sizes and industries. Even with that much more expansive scope, VTI has kept pace with the narrower indexes, stayed positive for 2018 and maintained an equally minuscule expense ratio.

Where to Buy ETFs

ETFs are available from any bank or broker that sells securities, but that does not mean that ETFs should be purchased anywhere. Commissions vary widely in the brokerage business, as does the quality of service.

Carefully select the firm you use for ETF transactions. Technical support for a securities account is like financial property and casualty insurance. When it comes time to sell, a little extra expense can mean savings through efficient trading. Also, many brokerages offer commission-free ETFs, like Ally, E-Trade, and TD Ameritrade, just to name a few.

get started securely through TD Ameritrade’s website
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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.

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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.

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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.

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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.

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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).

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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.

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Final Thoughts

ETFs are one step beyond mutual funds in risk and one step toward preferential control by you, the individual investor. Total return is not the only measure of performance for an investment portfolio. You must feel confident that assets are appropriately invested, and ETFs allow you to assert more influence over underlying portfolio contents without owning individual common stocks.

Want to learn more? Check out Benzinga’s guides to free stock trading, the best online brokerages and the best S&P 500 ETFs.