Compared to their mutual fund brethren, an exchange-traded fund (ETF) is more dynamic in that it can trade like an individual stock. This allows investors to purchase and sell them freely on an exchange like stocks.
How does an investor take advantage of these benefits? The easiest way for investors to access the world of ETFs is to open a brokerage account.
How ETFs Are Created
In order to understand where investors can purchase ETFs, it’s necessary to know how they’re created. 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. 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.
Instead of using a creation and redemption process, shares of a stocks are issued by the company themselves through an investment bank. Furthermore, transactions involving stocks include a counterparty who must purchase or sell the stock at an agreed-upon price.
An ETF trade will involve a liquidity provider as opposed to a counterparty with an opposing viewpoint on the price of a stock.
Where to Purchase 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.
The way an investor goes about purchasing an ETF is by first going through a brokerage. There are several brokerages investors can choose from, but here are some things they can look out for when choosing:
- Costs and incentives: various brokers will offer certain incentives based on the type of investor. For example, certain brokers will lower their fees for buy and sell transactions if the accountholder is a high-volume trader.
- Research: investors who like to utilize fundamental analysis or technical traders who like to use charts will want to choose a broker with robust research capabilities.
- Trading platform: investors who are looking to simply buy and hold ETFs for the long term won’t necessarily need an advanced trading platform. However, high-frequency traders will want a platform with the necessary capabilities to perform quick transactions.
- Support: certain investors will want the face-to-face interaction of speaking with a financial advisor, which will be easy to access if the brokerage where they will purchase ETFs is also their personal bank. Other brokerages can offer technical support in the way of call centers, email or online documentation.
Investing Apps to Purchase ETFs
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.
Investment Costs of ETFs
Because an ETF can track an index, it can be passively-managed. This translates to lower costs to investors when compared to mutual funds, which 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.
Since stocks themselves don’t represent shares of a fund, there are not expense ratios attached to them.
For more educational information on ETFs, click here for Education Central.