Exchange-traded funds (ETFs) have become wildly popular in their relatively short history because they offer investors large and small the chance to own a diversified portfolio while keeping fees low and trading opportunities flexible.
Investors who want rock-bottom fees and the greatest trading flexibility go for online discount brokers over traditional financial advisory services. The choices available include some apps and robo-advisors whose names you might not yet sound familiar.
- Motif Explorer, from online brokerage Motif Investing, launched in 2012. A unique feature allows users to construct a basket of up to 30 stocks, effectively a homemade ETF. This can be traded for a flat commission of $9.95 per trade, executed on the next trading day, or $19.95 per trade for real-time transactions. The app also enables investors to trade more conventional ETFs or individual stocks on the platform. Trades are free for next-day transactions or $4.95 for real-time trades.
- Robinhood, which launched in 2014, charges zero commissions on stock and ETF trades. The investor pays the usual management fee to the ETF provider, typically an expense ratio under 0.5%. Robinhood makes money in two ways: by charging interest for margin accounts and by investing clients' cash holdings in interest-bearing accounts. The company enjoys the backing of venture capitalists and angel investors as diverse as Google Ventures, Jared Leto, and Snoop Dogg.
- Ally Invest, which acquired TradeKing in 2016, offers 100 commission-free ETFs. It charges $4.95 per trade or $3.95 for frequent traders and portfolios over $100,000. Options cost an additional $.65.
Services that feature robo-advisors are designed for investors focused on the long term rather than trading on a day-to-day basis. Investors are offered a selection of ETF portfolios which are monitored and adjusted automatically over time. They are another low-fee alternative.
Betterment charges management fees that range from 0.15% to 0.35%, compared with 1% to 1.5% for an average financial advisor. Both apps walk users through the process of setting up a portfolio of ETFs based on their answers to a series of questions regarding risk tolerance and investing preferences.
Wealthfront and Betterment offer diverse ETFs, from simple ones that track broad U.S. stock indices such as the S&P 500 to specialized instruments like emerging market and real estate investment trust (REIT) funds.
About ETF Fees
Low fees are a big deal for investors in ETFs, and for good reason. The vast majority of ETFs track an index. If several competitors offer an ETF based on the same index, the returns should not differ significantly. That makes fees and commissions a deciding factor in choosing one over another.
In any case, while deciding on an online broker, look at the range of ETFs offered. Each has a different mix. Today's varieties are almost endless, from ETFs tracking the S&P 500 Index to sector funds, international funds, bonds, commodities and currencies, and even junk bonds.