LemonTrades
TL;DR
- ETF stands for exchange-traded fund: a basket of stocks, bonds or commodities that trades on an exchange like a single stock.
- One share of an S&P 500 ETF gives you a slice of about 500 companies, for as little as 0.03% a year.
- Most investors use ETFs as a cheap way to spread risk. Traders like them because they can be bought and sold all day.
- LemonTrades tells you what moved the ETFs and stocks you follow, and why, as it happens.
An ETF lets you buy a whole market in one trade. Here’s how they work, and what to check before you buy one.
What does ETF stand for?
ETF stands for exchange-traded fund. It’s a fund, because it pools investors’ money to hold many assets. It’s exchange-traded, because its shares trade on an exchange all day, like a stock. The first US ETF, SPY, launched in January 1993.
How an ETF works
- A fund company such as Vanguard, BlackRock or State Street sets up the fund and decides what it tracks, usually an index.
- The fund buys the assets, and issues shares that each stand for a small slice of them.
- You buy and sell the shares through any broker, at the market price.
- Large trading firms keep the price honest. They can create or redeem ETF shares in exchange for the underlying assets, which keeps the price close to the value of what the fund holds.
ETFs vs stocks vs mutual funds
| ETF | Single stock | Mutual fund | |
|---|---|---|---|
| What you own | A basket of assets | One company | A basket of assets |
| When it trades | All day | All day | Once a day, after the close |
| Risk from one company | Low in a broad fund | High | Low in a broad fund |
| Typical yearly fee | 0.03% to 0.75% | None | 0.05% to over 1% |
| Minimum | One share, or a few dollars with fractional shares | One share, or a few dollars | Often $1,000 or more |
Types of ETFs
- Stock index ETFs, the most popular: is VOO a good investment?
- Commodity ETFs that hold gold or silver: the best gold ETFs and SLV
- Sector ETFs, like technology: VGT
- Bond ETFs, which hold government or company debt.
- Leveraged and inverse ETFs for short-term traders, which can lose money fast: TSLL and TZA
- Bitcoin ETFs, which hold the coin for you: why bitcoin is falling
What ETFs cost
The main cost is the expense ratio, a yearly fee taken from the fund’s value. On $10,000, a 0.03% fee costs $3 a year and a 0.50% fee costs $50. You also pay the spread, the small gap between the buying and selling price, which is tiny on big ETFs. Most brokers charge no commission.
How to buy an ETF
- Open an account at a broker, or an IRA for retirement money.
- Add money from your bank.
- Search for the ticker, like VOO.
- Enter a dollar amount or number of shares, and place the order during market hours.
An ETF can still fall as far as the market it tracks: the S&P 500 fell about 57% from 2007 to 2009. New to all this? Start with how the stock market works.
Sources
Education, not financial advice. See our disclaimer.
