How To Buy Good ETFs

How To Buy Good ETFs

After we have set up our brokerage accounts, we need to figure out what ETFs should we actually purchase. The reality is there are thousands of ETFs out there, and it can be mind-boggling to seek out good ETFs from the array of choices. Once again, the key is really to determine what your investment objective is. Trading ETFs short term and investing ETFs long term have vastly differing strategies. For the purposes of this mini-course, we will cover the mid-long term investment objective.

Here are some factors you may wish to consider when you are trying to find a good ETF:

1. Trading Volume – The volume of shares traded is an accurate indicator of its liquidity. Generally speaking, an investor or trader will prefer ETFs with high liquidity. The reason is because ETFs with high volume traded will decrease the bid-ask spread of the share. Bid-ask spread is the difference between the price at which a buyer wants to buy and a seller wants to sell. If the difference is vast, this means that you are less likely to move your shares when you want to sell them in the future. This is also one reason why the good ETFs will remain popular for long periods of time.

2. Size of ETF – You do not want to plow your money into just any ETF. It should also have a large amount of assets in holding. An ETF that has a net asset value of below $10 million likely means that it is not very popular with investors. This will eventually turn into illiquidity and wide spreads.

3. Diversification – One of the key advantages of investing in ETFs is its ease of diversification of assets. Whenever you buy an ETF, think about how this would add diversification to your current portfolio. For example, if you would like to diversify your portfolio greatly, you might want to purchase an ETF that covers a broad index.

4. Expense Ratio – Before you make your investment, you need to consider your costs. An average ETF carries an expense ratio of 0.44%. This means that a $100,000 invested in ETFs will cost you $440 in fees per year. Mutual Index Funds on the other hand can roll up to as high as 1-3%. When choosing your ETF, it is advisable to pick one that has a low expense ratio. However, not all ETFs are the same. There are many unproven, unorthodox ETFs which might incur high expense ratio. New investors should generally avoid such plays.

This introduction covers the 4 basic ways to find good ETFs. Of course, as you become more experienced, there may be other attributes of an ETF which you might include into your selection criteria. The bottom line is you have be familiar with the ETF which you are investing so that it is aligned to your long term objectives. An investor needs to take the holistic approach and be tolerant of short term volatility to take full advantage of exchange-traded funds.

How To Buy and Sell An ETF

Buying exchange-traded funds is quite different than purchasing your standard mutual fund. ETFs can only be purchased via a broker and the process is similar to trading a stock. You can think of it as mutual fund that is traded like a stock. As with all stocks, you need to open up a broker account before you can actually start buying and selling ETFs. We will run through the breakdown of steps that help a new trader get started:

1. Find a broker

While you cannot personally buy a share of an ETF, you can find someone else to do it for you. This is the broker. To find a decent broker that is beneficial to your cause, you want to insure that it provides reasonable price rates. Look at various brokerages and compare the pricing; commission structure, maintenance fees and trading software fees are just some components you want to look at. It should also provide good customer service and a high quality trading platform. A broker that has good service will provide you with good advice and feedback. This is crucial in your development as a new investor/trader. If your looking for some top brokers in Canada, check out our article on the top discount brokers in Canada

2. Deposit money into your trading account

More often than not, you will be asked to deposit a set amount of money into the trading account of the broker before you are allowed to start trading. You should take some time to decide the optimal amount of money you want to invest or trade. Brokers usually have a minimum sum of money in which you need to put in, take this into consideration when choosing a broker.

3. Learning the trading platform

After you have secured a broker, you need to have trading platform/software that you use to communicate with the broker. Traditionally, this was done via telephone; a trader would call the broker and place orders over the phone. Today, this can be done immediately through trading platform software. There are many software solutions out there and once you have chosen one, familiarize yourself with it so that you will be adept at navigating through the various functions.

4. Placing the order

Since ETFs trade like stocks, the mechanics behind buying and selling a piece of ETF is similar. It usually involves market order and limit order. It is also important to note that ETFs can be bought on margin if you have maintained a margin account with your broker. This also means that for every trade you want to execute with your broker, you can borrow a certain percentage from the broker to buy the ETF. However, buying on margin is usually not encouraged for long term investment because of the high interest rates charged by the brokers. In intraday trading however, interest rates are not charged.