It's Shopping Season. Care to Try On Some ETFs for Size?

Considering exchange-traded funds (ETFs)? Here are some things to consider before you shop.

Print Shopping: Comfort, Value, Style
5 min read

Doing a little shopping for your portfolio this season? Perhaps you should consider exchange-traded funds as a lower-cost route to pursuing your investing objectives.

But before you jump in, take a moment to do a bit of window-shopping and assess the fit, style and value.

ETFs are baskets of securities that typically track a sector-specific, country-specific, or a narrow- or broad-market index and are thus considered to be passively managed (someone isn’t actively choosing which stocks to buy and sell). They list on an exchange like a stock so you can conveniently trade them through your brokerage account. And ETFs can offer some potential benefits as well:

  • Diversification. With ETFs, you can distribute investments across sectors, sub-sectors and asset classes. You can target specific indices, commodities or international markets.
  • Potential income. Many ETFs have historically paid dividends, so some investors choose ETFs as an alternative, or an addition, to other income stocks. But, remember the continuation of these dividend payments is never guaranteed.
  • Potential tax benefits. The tax implications on ETFs can be complicated and vary depending on the asset class and structure, but in general, an ETF investment isn’t taxed at the investor level until you sell it. Mutual funds, in contrast, incur a potentially taxable event, each time a security is sold, and capital gains may be passed through to the investor level (see Value—taxes and turnover section below). But remember: taxation can be dependent on how long you held an ETF. Speak with your tax advisor on your specific circumstance. 

Comparison Shopping: ETFs and Mutual Funds

What features do mutual funds and ETFs have in common and what are the differences? This table might help you get a better sense.

FeatureMutual FundsETFs
Diversified offerings, including the chance to expose your portfolio to a variety of sectors including "value" or growth as well as international exposure.
Ability to trade like a stock.
Offers a more passive managing approach and potentially lower expense ratios.
Sometimes, depending on the fundMost of the time
Imposes various fees.YesYes
Gives a daily update of all the shares or other investments held by the fund.
Managed by professionals.
Same order types available as for individual stocks.
Tracks minute-by-minute trades as the market moves.
Net asset value determined by the total value of the underlying assets, minus fees, divided by the total number of shares.

As You Shop: Comfort, Style, Value

When you hit the shopping mall, say to buy a new suit, dress or pair of shoes, you likely look at three things—style, comfort and value. Shopping for an ETF involves pretty much the same considerations.

  • Comfort levelrisks. The risks of index ETFs are typically the same percentage risks as the indexes they track. The risks of sector-based ETFs depend on the basket of stocks they track, including the weighting of each stock. Because you can choose broad-based indexes or narrower industry choices, index and sector ETFs can be a starting point for some investors. 
  • Comfort level—complexity. ETFs have gotten more specialized—some would say more complicated—over the years. Experienced investors might consider “hybrid” ETFs that are leveraged, inverse, sometimes both. Special risks are associated with these funds. Before trading these very distinctive products, be sure to learn the risks, and keep in mind that most of these are intended for very short holding times, often as short as one day.
  • Style—active and passive.  Contrary to some thinking, ETFs can be a good fit for active market participants too; they can be shorted, hedged (with an offsetting position), bundled (buying several at one time as a potential cost-saver) and many have options traded on them. They sometimes bring less volatility than individual stocks, yet potentially more flexibility than mutual funds. Active traders might consider ETFs as a diversifier to help deal with potential “surprises” that can accompany trading individual issues of stock.
  • Value—taxes and turnover. By construction, ETF investors may have less exposure to capital gains taxes than actively managed mutual fund shareholders. That’s because mutual fund managers frequently buy and sell the fund’s holdings, ideally at a profit, and pass along those tax obligations to shareholders. ETFs occasionally move shares around, too, although much less than most managed mutual funds. Annual expenses for ETFs range between 0.1% and 0.65%, according to fund-tracker Morningstar, Inc. Index mutual funds tend to charge anywhere from 0.1% to an average 1.5% (the high end reflects actively managed), according to the Investment Company Institute.
  • Value—transaction costs.  ETFs aren’t for everyone and certainly, not every situation. For instance, no-load mutual index funds might be a better fit than ETFs if you prefer dollar-cost averaging. That’s where you build up a portfolio slowly and in pre-set increments. ETF trading costs could pile up, eating up your potential profit, if using such a strategy. For instance, the transaction costs associated with buying one share at a time can be prohibitively high.

A Few Shopping Tips

As you look through the universe of ETFs for candidates, you'll want to look at key metrics for each fund you're considering—performance statistics, ratings and expense ratios, to name a few. But it may also help to know yourself—your investing objectives, time horizons and risk tolerance. Here are a few things to consider:

  • Determine what you're investing for.  
            - Is your investment style: conservative, aggressive, or somewhere in-between?
            - Are you investing for short, intermediate or long-term?
            - Are you diversifying your portfolio by incorporating various sectors, asset classes, & markets?
            - Are you looking for an alternative way to enter the market?
  • Do your research.
            - Take advantage of the tools & resources offered by most providers.
            - Look at historical performance, analyst reports, and screeners.
  • Be mindful of fees.    
            - Look at expense ratios within the actual funds.  

Time to Hit the Market?

The TD Ameritrade ETF Market Center provides one of the broadest collections of ETF research tools, third-party market insights/analyses, and ETF products out there. And, it's home to a newly-expanded list of 296 commission-free ETFs, which can provide you with a wide range of low-cost investment opportunities. 

Carefully consider the investment objectives, risks, charges and expenses before investing. A prospectus, obtained by calling 800-669-3900, contains this and other important information about an investment company. Read carefully before investing.

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ETFs are subject to risk similar to those of their underlying securities, including, but not limited to, market, investment, sector, or industry risks, and those regarding short-selling and margin account maintenance. Some ETFs may involve international risk, currency risk, commodity risk, leverage risk, credit risk, and interest rate risk.  Performance may be affected by risks associated with nondiversification, including investments in specific countries or sectors. Additional risks may also include, but are not limited to, investments in foreign securities, especially emerging markets, real estate investment trusts (REITs), fixed income, small-capitalization securities, and commodities. Each individual investor should consider these risks carefully before investing in a particular security or strategy.   Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF. Shares are bought and sold at market price, which may be higher or lower than the net asset value (NAV).

TD Ameritrade does not provide tax advice. Investors should consult with a tax advisor with regard to their specific tax circumstances.

Asset allocation and diversification do not eliminate the risk of experiencing investment losses.

TD Ameritrade and all third parties mentioned are separate and unaffiliated companies, and are not responsible for each other’s policies or services.

Information provided by TD Ameritrade, including without limitation that related to the ETF Market Center and commission-free ETFs, is for general educational and informational purposes only and should not be considered a recommendation or investment advice. 

ETFs purchased commission-free that are available on the TD Ameritrade ETF Market Center are available generally without commissions when placed online in a TD Ameritrade account. Other fees may apply for trade orders placed through a broker or by automated phone. 

Particular commission-free ETFs may not be appropriate investments for all investors, and there may be other ETFs or investment options available at TD Ameritrade that are more suitable. 

Short-Term Trading Fee (Holding Period for 30 Days).  ETFs available commission-free that participate in the ETF Market Center may be subject to a holding period that commences with any purchase and extends through the following THIRTY (30) calendar days.  An account owner must hold all shares of an ETF position purchased for a minimum of THIRTY (30) calendar days without selling to avoid a short–term trading fee where applicable.  There is no limit to the number of purchases that can be effected in the holding period. Any order to sell within THIRTY (30) calendar days of last purchase (LIFO – Last In, First Out) will cause an account owner's account to be assessed a short–term trading fee of $13.90 where applicable. For the purposes of calculation the day of purchase is considered Day 0. Day 1 begins the day after the date of purchase.  The short–term trading fee may be applicable to each purchase of each ETF where such ETF is sold during the holding period. The short–term trading fee may be more than applicable standard commissions on purchases and sells of ETFs that are not commission-free.

Information provided by TD Ameritrade, including without limitation that related to the ETF Market Center and commission-free ETFs, is for general educational and informational purposes only and should not be considered a recommendation or investment advice. 

TD Ameritrade receives remuneration from certain ETFs that participate in the commission-free ETF program for shareholder, administrative and/or other services.

No Margin for 30 Days.  Certain ETFs purchased commission free that are available on the TD Ameritrade ETF Market Center will not be immediately marginable at TD Ameritrade through the first 30 days from settlement. For the purposes of calculation the day of settlement is considered Day 1.

Neither Morningstar Investment Management nor Morningstar, Inc. is affiliated with TD Ameritrade and its affiliates. Morningstar, the Morningstar logo,, and Morningstar Tools are either trademarks or service marks of Morningstar, Inc.


Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.

TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2018 TD Ameritrade.

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