When choosing an ETF platform, there are several things to consider – from what kind of investor you are to the functionality that’s important to you.
In this article, we’ll take a look at ten key points that investors should know before signing up with an ETF provider.
How much do I have to invest?
Your investment amount will determine which platform is best for your needs. If you’re investing a considerable lump sum, then a low commission could make a big difference in keeping more money in your pocket, and likewise, if you only have a small amount to invest.
However, it may be worth considering advice from professionals about investing large amounts through one account – it might be better for diversification to spread the money out.
What’s important to you?
You might want a straightforward way to sell or buy ETFs, or perhaps something with extensive research and advice options. It might be that ETFs are just one part of your portfolio, so you don’t need trading capabilities, for example.
If you’re investing on behalf of someone else, then it’s essential to think about their needs too – children will have different expectations from pensioners, for example.
What do I know already?
If you’re entirely new to Exchange Traded Funds (ETFs), there are some initial considerations before moving on to deeper ones.
ETF or Mutual Fund?
There are vital things to think about when choosing between an ETF and a Mutual Fund; for example, Mutual Funds might be cheaper because they don’t incur the exact trading costs, but their average fees are generally much higher. On the other hand, ETFs can offer greater tax efficiency (MFs must pass on any gains to shareholders).
How do I know what my ETF is worth?
You don’t have to worry about the current price of an ETF with Vanguard because they use a fixed $1 net asset value, which means there’s no chance of your investment falling below that value. Their system calculates NAV only twice a day – once at 10:30 NY time and then again at 17:00 – instead of other providers who do it more regularly. While most providers now calculate NAVs this way, some still use last trade prices, which can be good for buyers but bad for sellers.
What’s the trading fee?
ETFs are generally relatively cheap to trade, but some providers charge more than others. If you’re buying ETFs, then it might be worth paying a bit extra for convenience – that way, you can invest instantly without worrying about price slippage or delays in your order being filled.
However, if you’re selling off ETFs instead of cash, which is familiar with MFs, this could wipe out any savings from lower commissions. If you buy low and sell high within five days, Vanguard will refund the difference, which makes them an excellent choice for active traders.
How much do I pay in fees each year?
If you’re investing over decades, slight differences in fees can make a big difference in how much money you have when you retire. The annual portfolio fee covers all the costs involved in running the fund, but some providers are cheaper than others. If an MF charges 0.20%, that’s 20 basis points, which is still very low, but if your investments grow to over £100,000, it could be worth checking out other options.
ETFs, however, tend not to have any set-up or exit fees, so you only pay for the cost of investing.
What kind of ETF do I want?
Once you’ve decided on what platform you want – ETF or MF – there are hundreds of different ETFs to choose from, with new ones being introduced all the time. If you’re looking for a passively-managed fund, then look out for ‘trackers’, and if you think the market might go down within the next five years, then consider investing in an inverse ETF, which goes up when other funds go down.
You can also choose between different asset classes such as equities, commodities and bonds, where some assets will be more volatile than others.