ETF Trading – Top 5 Best Online Brokers for Trading ETFs

RankNameCommissionsRatingMore Info
1TDAmeritradeStock: $9.99
Options: $9.99 + $0.75/contract
3SogotradeStock: $3.00
Options: $5.00 + $0.65/contract
5ETradeStocks: $9.99
Options: $9.99 + $0.75/contract

What are ETFs?

You know what stocks are. You know what bonds are. But you may not be familiar with the popular and relatively new investment vehicles known as ETFs. ETF stands for ‘Exchange Traded Fund’ which may sound complicated, but is actually fairly simple. ETFs are investment funds that trade on stock exchanges and have symbols like ordinary stocks. This allows the average investor like you and me diversify our portfolio without dealing with management fees and minimum deposits.

The ETF is Born
An ETF can hold stocks, commodities, or bonds. The very first ETF was born in 1989 and simply tracked the S&P 500 index. For many years, ETFs generally served as a way for investors to buy into indexes. ETFs really exploded onto the investment scene in 2008 when the US Securities and Exchange Commission authorized the creation of actively managed ETFs. This change in regulation allowed for thousands of new ETFs that tracked the performance of specific commodities like gold, silver, and oil. It also allowed for ETFs that track the performance of particular sectors like telecoms or financials. There are now well over 1,500 ETFs tracking everything from Australian small-cap stocks to platinum.

Diversification on the Cheap
ETFs are particularly attractive because they offer an easy way for investors to diversify their exposure. Interested in oil exploration stocks, but not sure which oil exploration company to invest in? Just buy PowerShares Dynamic Energy Exploration & Production (PXE) which holds Hess Corporation, Occidental Petroleum, Anadarko Petroleum, and many other companies in the same sector. Unlike Mutual Funds, Hedge Funds, or other managed funds, ETFs have very low expense ratios and no minimum investment requirements. Since they are traded on stock exchanges, they also tend to be very liquid and transparent. Besides low management fees, ETFs are also tax efficient. ETF funds don’t have to sell securities to meet investor redemption.

ETF Trading For Advanced Investors
For the more advanced trader, its worth mentioning that ETFs have all the features of ordinary stock. This means they can be sold short, and that they support options trading. Savvy investors can buy or write call and put options for ETFs. Even players who don’t want to sell short or deal with options can place leveraged bets for or against entire countries, sectors, or commodities using ETFs. As an example, the ETF ProShares UltrShort Silver (ZSL) replicates twice the inverse daily performance of silver bullion. Many new ETF instruments are released every year. The level of diversity and flexibility ETFs offer make them attractive options for long-term investors, and short-term traders. Trading ETFs has been growing in popularity over the last few decades with one of the most popular ETF by volume being the SPDR S&P 500 ETF (SPY) which tracks the performance of the S&P 500.

Let’s take a quick look at the benefits ETFs offer:Low Cost – Unlike other managed funds, ETFs don’t have to buy or sell securities to accommodate investor purchases and sales. They don’t have marketing, distribution, or accounting expenses to worry about either This means. ETFs have much lower management fees than traditional managed investment trusts. The underlying assets of an ETF have low turn over which means lower capital gains taxes.

Flexibility – ETFs can be bought and sold on stock exchanges at any time during the trading day. Many large ETFs have large volumes, making them very liquid investments. ETFs can also be purchased on margin, sold short, and support options trading.

Diversity – ETFs allow the average investor a level of diversification previously unavailable to the general public. There are thousands of ETFs that allow investors to buy into baskets of commodities, specific sectors, international markets, bonds, and even to bet against those same markets.

Transparency – Both indexed funds and actively managed ETFs have transparent portfolios that allow potential investors to research their holdings.

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