It's Shopping Season: Ideas to Help You Choose ETFs

Considering exchange-traded funds (ETFs)? Understand fit, style, and value before you shop.

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Key Takeaways

  • Learn how exchange-traded funds (ETFs) can potentially offer diversification and income 
  • Understand the risks and potential tax consequences of ETF investing
  • Take your investment objectives, risk tolerance, and time horizon into consideration as you research ETFs

Doing a little shopping for your portfolio this season? Perhaps you should consider exchange-traded funds (ETFs) as a potentially lower-cost investment for pursuing your investing objectives.

But before you jump in and start to pick ETFs, 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. (In other words, someone isn’t actively choosing which stocks to buy and sell.) They’re listed on exchanges just like stock, so you can conveniently trade them through your brokerage account. Keep in mind that the risks you face when trading equities are the same risks that you face when trading ETFs. And ETFs can offer some potential benefits:

  • 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 that dividend payments are never guaranteed.
  • Potential tax benefits. The tax implications on ETFs can be complicated and vary depending on the asset class and structure. 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" below). But remember: taxation can depend on how long you hold an ETF. Speak with your tax advisor about your specific circumstance, as TD Ameritrade does not offer tax advice. And if you're assessing the pros and cons of ETFs versus mutual funds, it's important to understand the differences between the two.

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—comfort, style and value. Shopping for an ETF involves pretty much the same considerations. Here are some ideas of what you may want to consider when looking for an ETF.

Shopping for ETFs: comfort

  • Comfort level—risks. The risk of an index ETF is typically the same percentage risk as the index it tracks so some of the risks can be significant. 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 indices 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, or 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 many are intended for very short holding times, often as short as one day.
Shopping for ETFs: Style
  • Style—active and passive. Some of the best ETFs can used by both active and passive market participants. For the active trader: many ETFs 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. Active traders might consider ETFs as a diversifier to help deal with potential “surprises” that can accompany trading individual issues of stock. Passive ("buy-and-hold") investors, too, might consider ETFs. Many ETFs are indexed to a benchmark, making them a popular choice among the buy-and-hold crowd. Also, many ETFs are designed for targeted exposure to specific sectors, industries and geographies.
Shopping for ETFs: Value

  • Value—taxes, expense ratios and transaction costs. ETFs are considered by many to be tax efficient, as you're generally required to pay taxes only on closed positions that realize capital gains. In other words, they are generally treated like stocks for tax purposes. Annual expenses for ETFs are often low, ranging between 0.1% and 0.65%, according to fund-tracker Morningstar. However, each time you buy or sell shares in an ETF, you'll incur transaction fees. So if, for example, you pursue a strategy of dollar-cost averaging—where you build up a portfolio slowly in pre-set increments—you'll incur additional costs each time you trade. Keep that in mind as you consider an investing strategy that includes ETFs.

A Few Shopping Tips

As you look through the investment universe to find the best ETF candidates for you, 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:

As you pick ETFs, first determine what you’re investing for.

  • Is your investment style conservative, aggressive, or somewhere in between?
  • Do you plan to invest for the short, intermediate, or long term?
  • Are you diversifying your portfolio by incorporating various sectors, asset classes, and markets?
  • Are you looking for an alternative way to enter the market?

Do your research.

  • Take advantage of the tools and 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. And keep in mind that there are commission costs associated with buying and selling ETFs.

Time to Hit the Market?

Ready to start your search for the best ETFs for you? TD Ameritrade clients can start with the TD Ameritrade ETF Market Center, which provides a broad selection of ETF research tools and third-party market insights/analyses. And, it’s home to a list of more than 300 commission-free ETFs, which can provide you with a wide range of potentially 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).

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.

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.

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.

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


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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.

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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.

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