• Smart Cash
  • Performance
  • Log in
  • Get Started

Table of Contents

What is an ETF?

How to choose an ETF

Active vs. passive ETFs

How to buy an ETF

ETF transaction costs

FAQs about ETFs

The bottom line

LearnETFsHow to Invest in ETFs

How to Invest in ETFs

Jun 21, 2022

·

7 min read

ETF investing is a relatively simple way to build a diverse portfolio. Investors usually start by understanding the ETF expenses, and figuring out how much to invest.

An exchange-traded fund (ETF) can be an easy way to build a portfolio and manage it for the long term. ETFs generally offer the benefit of built-in diversification, replicating the performance of an index or bundle of assets. Here’s what to know about how to invest in ETFs.

What is an ETF?

An ETF is a basket of securities that tracks an underlying asset such as an index, sector, commodity, or market. Because an ETF contains many securities, it provides diversification, potentially reduces risk in a portfolio, and allows investors to target the kinds of assets they want.

ETFs trade like stocks, so they can be bought and sold throughout the day on the market. The fund uses the pooled money to invest according to a certain objective. For instance, with an S&P 500 ETF, an investor’s money is used to buy shares in the 500 companies in that index.

How to choose an ETF

As of September 2021, there were nearly 2,700 ETFs in the US with assets of $6.67 trillion. Each fund is different, so investors have to decide how to choose ETFs that achieve specific investment goals.

Conduct research

ETFs have many underlying assets, and investors have the option of looking under the hood to find out what each fund contains and how they’re managed. ETFs generally disclose their holdings on a daily basis, so this information should be relatively up-to-date.

Among the information disclosed: what benchmark the ETF tracks, what’s in the fund, how the assets are weighted, whether the fund reliably tracks its underlying assets, and whether the ETF is actively or passively managed. The ETF issuer’s website may provide a list of the fund’s holdings and associated weights. An ETF’s prospectus also provides the fund’s objectives, investment strategies, performance over the years, risks, management team, fees, and distribution policy.

Some investors select funds with low or no commission fees and a low ETF expense ratio because, all else being equal, these costs cut into profits. But the ETF can also cost investors in other ways. For instance, a fund may have a tracking error, which means its value doesn’t align perfectly with the index the ETF tracks. As a result, an investor may overpay for an ETF in some cases.  

Generally, funds that trade at higher volumes and contain more assets under management tend to trade at narrower spreads than funds with less daily trading or lower assets. A tight bid-ask spread can be advantageous for investors who are keeping an eye on costs or have a very short time horizon.

Decide how much to spend

Most ETFs don’t have a set minimum investment, which can be beneficial for investors who  want to spend a small amount. Buyers will need enough to purchase at least one share of the fund, plus any associated fees or commissions, unless the ETF issuer offers fractional shares.

Build a portfolio

ETFs come with built-in diversification, but investors can also buy more than one fund to target different assets, commodities, or industries. For instance, an investor might buy stock ETFs and one that’s focused on real estate or precious metals. With this approach, investors use different methods that work for their timeline and goals.

Over time, investors can set up an automatic investment plan with the help of a brokerage or manually add to their holdings. For instance, an investor might set aside money each week or month and divide it among their ETFs according to the ratio they prefer. Some ETFs pay dividends, which can either be reinvested in the fund or paid out to use it some other way.

Active vs. passive ETFs

ETFs can either be passively or actively managed.

  • Passive ETFs.

    These are designed to match the performance of the index they track. Most ETFs are passively managed and come with lower expense ratios.

  • Actively managed ETFs.

    By contrast, actively managed ETFs hire fund managers to pick investments and try to outperform the market. These typically have higher expense ratios.

How to buy an ETF

Here’s an overview on how to buy ETFs in just a few steps.

  1. Open a brokerage account

Investors need a brokerage account to buy and sell ETFs and other types of investments. Many online brokers offer commission-free ETF trades, though individual ETFs may come with other costs paid through an expense ratio.

  1. Fund the account

The next step is adding money to the brokerage account that eventually will be used to invest. Brokerages usually allow account holders to link a bank account, such as a checking or savings account, and transfer money into the brokerage account from there. Investors may also be able to deposit a check, wire money, or transfer assets from another broker. Some brokerages set a funding minimum before the account can be activated.

  1. Place an order

Depending on what the brokerage offers, an investor may be able to choose an ETF based on asset type, geography, industry, trading performance, or fund provider. The process may vary with each brokerage, though there’s usually a “trading” section where an ETF can be found using its ticker symbol, a set of letters that serve as the fund’s unique identifier. The current trading price will be determined by the “bid,” which is the highest price someone is willing to pay for a share, and the “ask,” or the lowest price a seller will accept.

An investor can plug in the number of shares to buy and place an order. A market order is an order to buy the ETF shares as soon as possible at the best market prices available, while a limit order is an order to buy shares only at a specified price or better.

ETF transaction costs

ETFs may charge two types of fees.

Trading commissions

ETF trading fees are a flat commission paid each time an investor buys or sells shares in the fund. The average trading fee is about $8, but some may range to $20 or more. These can add up when investors buy and sell frequently—and brokerages might also hike up the fee when trading in person or over the phone. Some ETFs are commission-free, but it depends on the ETF sponsor and the brokerage or platform used to buy and sell the fund.

Expense ratios

An ETF expense ratio shows how much of the assets in an ETF will be deducted annually as fees. The fees compensate the fund issuer for expenses related to operating the fund, such as salaries, marketing, and recordkeeping. To calculate the expense ratio, the fund manager divides the fund’s operating expenses by the average assets of the fund. The average ETF expense ratio was 0.54% in 2020, which translates to $5.40 per year in fees for every $1,000 invested. Some funds charge much less, which can help keep costs low.

FAQs about ETFs

How much money is needed to invest in ETFs?

Investors don’t have to spend a set dollar amount on an ETF. But because ETFs trade on a per-share basis, an investor will need enough money to buy at least one share of the fund, plus any ETF transaction costs. Some ETFs offer fractional shares, allowing the investor to purchase stock based on a specific dollar amount rather than the price of a whole share.

Do ETFs pay dividends?

Yes, if the ETF contains underlying stocks that pay dividends. The ETF issuer will collect the dividends and pay them to investors based on the number of shares they own. The issuer either distributes cash to the fund investors or reinvests the money into the fund’s assets. With either method, the investor is responsible for paying capital gains tax on the dividends.

Can ETF investors sell at any time?

Yes. ETF investors can sell their shares anytime throughout the trading day, which allows them to take advantage of intraday price fluctuations.

The bottom line

ETF investing is a relatively simple way to build a diverse portfolio. Once a brokerage accounthas been opened, an investor can buy (or sell) ETFs within and across several asset classes with little more than the touch of a button. Investors usually start by doing research, understanding the ETF expenses, and figuring out how much to invest

At Titan, we are value investors: we aim to manage our portfolios with a steady focus on fundamentals and an eye on massive long-term growth potential. Investing with Titan is easy, transparent, and effective.

Get started today.

Disclosures

Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Titan has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Titan has not reviewed such advertisements and does not endorse any advertising content contained therein.

This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any strategy managed by Titan. Any investments referred to, or described are not representative of all investments in strategies managed by Titan, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.

Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see Titan’s Legal Page for additional important information.

Three Things, a newsletter from Titan

Stay informed on the most impactful business and financial news with analysis from our team.

You might also like

ETF Drawbacks: The Downsides of Investing in ETFs

Every ETF is different: Some come with fees or may lack diversification because they follow one type of asset.

Read More

What Are Inverse ETFs and How Do They Work?

An inverse ETF, often known as a bear or short ETF, is an exchange-traded fund designed to profit from a market decline.

Read More

ETF vs. Mutual Fund: What’s the Difference?

The main differences between the two lie in how they trade on securities markets and the tax liabilities they can create for investors.

Read More

What Are Clean Energy ETFs and How Can You Invest in Them?

Clean energy ETFs offer a diversified fund of stocks in the green energy sector. If you’re thinking of investing in clean energy ETFs, it’s important to know the upsides, downsides, and potential risks.

Read More

Cash Management

Smart Cash

Smart Cash FAQs

Cash Options

Get Smart Cash

InstagramTwitterYoutubeLinkedIn

© Copyright 2024 Titan Global Capital Management USA LLC. All Rights Reserved.

Titan Global Capital Management USA LLC ("Titan") is an investment adviser registered with the Securities and Exchange Commission (“SEC”). By using this website, you accept and agree to Titan’s Terms of Use and Privacy Policy. Titan’s investment advisory services are available only to residents of the United States in jurisdictions where Titan is registered. Nothing on this website should be considered an offer, solicitation of an offer, or advice to buy or sell securities or investment products. Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections are hypothetical in nature and may not reflect actual future performance. Account holdings and other information provided are for illustrative purposes only and are not to be considered investment recommendations. The content on this website is for informational purposes only and does not constitute a comprehensive description of Titan’s investment advisory services.

Please refer to Titan's Program Brochure for important additional information. Certain investments are not suitable for all investors. Before investing, you should consider your investment objectives and any fees charged by Titan. The rate of return on investments can vary widely over time, especially for long term investments. Investment losses are possible, including the potential loss of all amounts invested, including principal. Brokerage services are provided to Titan Clients by Titan Global Technologies LLC and Apex Clearing Corporation, both registered broker-dealers and members of FINRA/SIPC. For more information, visit our disclosures page. You may check the background of these firms by visiting FINRA's BrokerCheck.

Various Registered Investment Company products (“Third Party Funds”) offered by third party fund families and investment companies are made available on the platform. Some of these Third Party Funds are offered through Titan Global Technologies LLC. Other Third Party Funds are offered to advisory clients by Titan. Before investing in such Third Party Funds you should consult the specific supplemental information available for each product. Please refer to Titan's Program Brochure for important additional information. Certain Third Party Funds that are available on Titan’s platform are interval funds. Investments in interval funds are highly speculative and subject to a lack of liquidity that is generally available in other types of investments. Actual investment return and principal value is likely to fluctuate and may depreciate in value when redeemed. Liquidity and distributions are not guaranteed, and are subject to availability at the discretion of the Third Party Fund.

The cash sweep program is made available in coordination with Apex Clearing Corporation through Titan Global Technologies LLC. Please visit www.titan.com/legal for applicable terms and conditions and important disclosures.

Cryptocurrency advisory services are provided by Titan.

Information provided by Titan Support is for informational and general educational purposes only and is not investment or financial advice.

Contact Titan at support@titan.com. 508 LaGuardia Place NY, NY 10012.