One of the key features of an exchange-traded fund (ETF) is that it has the ability to trade like an individual stock. It’s one of the dynamic abilities investors can take advantage of when buying and selling ETFs.
Like stocks, investors can purchase and sell them freely on an exchange like the New York Stock Exchange. However, how does an investor go about buying and selling ETFs?
ETF Creation and Redemption
In order to understand how ETFs are bought and sold, it’s necessary to know their creation process.
The process of creation and redemption is what regulates the supply of ETFs in the marketplace. This process will involve an authorized participant (AP) who can redeem shares of an ETF via sale to the fund’s sponsor.
The authorized participant comprises a part of a larger ecosystem for ETFs. Click here for more information on this ETF ecosystem.
Market demand will be the primary determinant for the amount of redemption and creation activity for an ETF. Demand for the ETF will also drive the price of its shares, which in turn, determines whether the ETF is trading at a discount or premium relative to the value of its underlying assets.
As opposed to stocks, which involve a counterparty, an ETF trade will involve a liquidity provider.
Buying and Selling ETFs
Like stocks are shares or fractional ownership of a company, the ETF owns underlying assets and divides ownership of those assets into shares. As such, these shares can be bought and sold on a major exchange.
Through a broker, an investor can simply specify the number of shares he or she wants to purchase. That order is then fulfilled at the particular exchange where the ETF trades.
Just like stocks, ETFs will had a bid price and an ask price. The difference between these two prices represents the spread, and once the order is fulfilled, the investor owns the specified number of shares in the ETF.
An ETF shareholder is also entitled to income earned through dividends. In the event the fund is liquidated, ETF shareholders may also receive a portion of its residual value, which is the value determined at the end of an asset’s useful life.
Because of their flexibility, investors can buy and sell ETFs using the latest investment apps. Below are five examples of investing apps:
- Robinhood: Robinhood is an attractive option in that it offers commission-free trading with no minimum balance. It’s a minimalistic approach to mobile investing, which means it doesn’t offer vast research and analysis capabilities. Nonetheless, it offers a barebones option for the beginning or advanced investor.
- TD Ameritrade: TD Ameritrade offers over 100 commission free trades for certain ETFs from market movers, such as iShares and Vanguard. On top of that, TD Ameritrade does not carry a minimum account balance requirement and no maintenance fee IRAs. In addition, the mobile app also offers extensive research capabilities at your fingertips, including charts and portfolio analysis.
- Acorns: Acorns is a micro-investing option that allows you to purchase shares incrementally and make recurring investments over time. It is perfect for the beginning investor without access to a large initial capital investment. Acorns charges $1 per month, but is free for college students.
- Stash: Stash is another micro-investing option for beginners that requires an account minimum of only $5. Stash’s investment philosophy consists of offering hand-picked investments on its platform, which can be tailored based on the investor’s risk profile and objectives.
- E*TRADE: E*TRADE has been around since 1982 and has been one of the purveyors of online trading since the technology’s early inception. Their mobile investing app is suitable for all types of investors and comes with commission-free ETF trading, but there is a cost–$6.95 commissions on individual stock trades and a $500 account minimum.
ETF Costs
Investors must also be aware that certain ETFs have costs associated with them. Because an ETF can track an index, it can be passively-managed, which translates to lower costs when compared to mutual funds that are typically actively-managed.
Actively-managed mutual funds carry greater operating costs because they have to pay analysts and other research specialists. The lower costs of ETFs show in their expense ratio, which is the cost to run the fund.
For more educational information on ETFs, click here for Education Central.