Considering ETFs? Here’s How to Get a Good Deal

ETFs can be purchased practically anywhere you can buy a stock, either through a broker, or a brokerage account. If you want to pay the lowest commissions possible, and online brokerage like Charles  Schwab, Fidelity or E*Trade is your best bet.

Make sure the brokerage firm you commit to use has everything you’re looking for, as some smaller firms offer and edited selection of ETF’s. In most cases however they will offer the most widely used and easy to trade ETF funds.

What you want to find is a high quality ETF that fits well into your investment plans and so, just like you would with any other mutual fund, you must fully evaluate any ETF you plan to purchase. The following questions are important including: What does the fund’s index track, how is it constructed, what’s inside of course and how long has the ETF fund been around?

Although the S&P 500 and Russell 3000 are usually found in the ETF’s that have stood the test of time, the fact is that the definition of indexing is being stretched by many new ETF creators. Some that have decided to track arcane segments of the market with their indexes. If you’re looking to become a long-term investor, avoiding ETF’s the track esoteric benchmarks is a good idea.

Looking at the expense ratio to find out how much an ETF costs is definitely important to consider before you invest. This will tell you how much will be taken off the top to pay for a fund’s annual expenses, but keep in mind that it doesn’t include any brokerage commissions that you’ll pay to buy and sell your ETF shares.

If, for example, your ETF has an expense ratio of 0.44%, you’ll pay $4.40 for every $1000 you invest in annual fees. Some of the new ETF’s that we referred to above are narrowly focused and rather exotic as well as being unproven and usually more expensive. In other words, avoid these.

Life-cycle of funds, also commonly called target-dated retirement funds, are a good idea if you want to invest in a combination of stocks and bonds that will become more conservative as you get closer to retirement. You might, however, be better off in a target date fund that doesn’t charge the extra management fee that life-.cycle funds do, so make sure to do a side-by-side comparison before you make your decision.

Of course you shouldn’t forget to consider the tax consequences of your ETF investment and, while most are relatively tax efficient, some that mimic newer and less static indexes could possibly trigger more capital gains costs. Also be aware that some ETFs invest in precious metals like gold that are considered “collectibles” and, because of that, are taxed at a higher rate. In fact, they have a rate of 28% compared to the regular 15% rate.

It would also behoove you to not forget that trading ETF shares can generate taxable gains just as stocks can.

Lastly, know the key players and their nicknames. Different ETF providers call their ETF wares different things. For example, Barclays PLC brands their ETF shares as iShares., while State Street Corp. calls their products SPDRs (pronounced spiders) and Vanguard Group, Inc. calls theirs Vanguard ETFs.


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