The Motley Fool has helped ordinary people become better investors for nearly two decades. This month, we're reaching out to millions of investors to help guide them in their quest toward financial knowledge and independence.
Along those lines, I'm exploring a range of different areas of the investing world. Today, let's turn away from what investments you should buy and instead focus on how to buy them. I'm looking at some stocks and other investments that are often misunderstood.
ETFs and you
Exchange-traded funds have taken the investing world by storm. It's never been easier for investors to get one-stop shopping for a wide range of types of investments, ranging from vanilla U.S. stocks to stock, bond, currency, and commodity plays around the world, just to name a few. It's not much of an exaggeration to say that if there's a type of investment out there, you can find an ETF that owns it.
What distinguishes ETFs from traditional mutual funds is that you buy and sell them in the same way you trade stocks. Rather than going straight to a fund provider and placing an order to buy shares directly, you can purchase ETF shares on the open market at any time during the trading day. That has certain advantages, most notably the ability to get in or out immediately before or after important news events move the markets.
The downside to ETF trading, however, is that you generally have to pay the same commission you would for a stock trade. Sure, with discount brokers charging very little, that's often a small price to pay. But even $7 to $10 commissions add up if you do enough transactions.
The best price: free
That's where commission-free ETF transactions come in. By allowing you to buy and sell shares of certain ETFs at no commission, brokers hope to get you more interested in your account, spurring other types of trading activity. Moreover, for those brokers who have their own ETFs, offering them commission-free transactions boosts sales and assets under management.
Schwab (NYSE:SCHW) started the commission-free ETF trading revolution nearly three years ago, but nowadays you can find similar no-commission deals at most of its competitors. Like Schwab, Vanguard has its own lineup of ETFs, but other brokers turn to outside providers. For instance, Fidelity partnered up with BlackRock's (NYSE:BLK) iShares division, while E*Trade Financial (NASDAQ:ETFC) brought on WisdomTree as an ETF partner. TD Ameritrade (NASDAQ:AMTD) went even further, working with fund giant Morningstar (NASDAQ:MORN) to put together a collection of more than 100 different ETFs that it argues give you maximum flexibility to create exactly the diversified portfolio you want.
Of course, picking a broker involves more than just getting a good deal on ETFs. If you're planning to invest in individual stocks as well, you'll want to make sure that you're not paying extra for stock trades that will wipe out any savings from commission-free ETF trading. Also, take a look at the broker's research tools and other resources to make sure that you'll have the support you need to make smart investing decisions beyond the ETF realm.
Also, make sure that the ETFs your provider offers are really the ones you want to own. Saving a few bucks on buying and selling won't make an ETF with pricey management fees and other costs too much more attractive.
Still, if you can find a provider that has the ETFs you want and are planning to use anyway, there's no reason not to save yourself some money and go with a broker who'll give those ETFs to you at no commission. In a low-return environment, every dollar counts -- and saving a dollar that would otherwise go toward fund fees is increasingly important.
To find out more about commission-free ETFs, take a look at this article on the various programs that different brokers have put in place. Also, check out our Broker Center to help get you moving in the right direction toward the best broker for you.
Please stay tuned throughout the month for other informative articles covering a wide range of important topics. Let me also encourage you to take a look at the special website we've set up at InvestBetterDay.com. On Sept. 25, we're taking a day to celebrate the art of investing, and we encourage your participation. Take a look at the site now and get on the path to personal prosperity.