Learning how to buy and sell exchange-traded funds (ETFs) is a no-brainer once you’ve got the basics down. We delve into a few different aspects of the process as well as address questions about ETF accounts, how long to hold an ETF before selling, and whether you can buy and sell an ETF in the same day.
Where to Buy ETFs
If you’re new to the ETF universe, you may be wondering where to buy ETFs to add to your portfolio. Thankfully, just like stocks, ETFs can be purchased on any U.S. or foreign stock exchange. ETFs are bought and sold throughout the trading day. Just like stocks, you can buy ETFs using any online broker, so make sure to vet the brokerage account you plan to use before choosing the right one for you.
Do I need a special ETF account?
No, you do not need a specific ETF account to get started. Just like investing in stocks, you can use any brokerage account to buy and sell ETFs. With an online brokerage account, you can buy and sell ETFs at a relatively low cost without the need for a special ETF account or additional order fees.
One major difference between ETFs and mutual funds is that investors buy and sell ETFs on a stock exchange through a broker-dealer, much as they would any other type of stock. In contrast, mutual fund shares are not listed on stock exchanges. Rather, investors buy and sell mutual funds through a variety of distribution channels, including through investment professionals (full-service brokers, independent financial planners, bank or savings institution representatives or insurance agents) or directly from a fund company.
Do you need to have a minimum amount to buy ETFs?
Unlike mutual funds, ETFs can be bought without a minimum amount. ETFs do not have any minimum investment size, so you can buy anywhere from one share to thousands of shares. In the past, the minimum that an investor paid to buy an ETF was the price of one share plus any commissions and fees; however, check whether your broker allows fractional share purchases of the ETF you are interested in. Typically, ETFs are much cheaper than mutual funds.
Buying ETFs in a Few Easy Steps
If you’re familiar with investing in stocks, you’ll be relieved to learn that buying ETFs is just as simple. However, before you jump in to buying ETFs and adding them to your portfolio, there are a few easy steps you can take to ensure you make smart purchases.
Open Your Account to Buy and Sell an ETF
The first step to building an ETF portfolio is opening a brokerage account. You’ll want to decide which type of account is right for you based on your individual goals. For example, if you’re looking for a retirement account, you’ll want to decide between a traditional IRA or Roth IRA. If you’re interested in purchasing ETFs for general investing, you can choose between an individual or joint account. Make sure to choose a reputable brokerage firm that has good customer service and technical support in case any issues arise or you have questions about your investments.
You will also want to decide at this point whether you want to manage your own ETF portfolio or have a professional manage your investments. There are pros and cons for both options, so you’ll want to consider how much time you want to spend, how much expertise you currently have on ETFs and whether you want to do extensive research about each fund or not.
Decide on Your ETF investment Strategy
Now that you have opened a brokerage account, it’s time to decide on an ETF investment strategy. The decision as to your primary focus should be based on a few different factors including your:
- Diversification needs as well as gaps in your portfolio,
- Investment management preferences,
- Risk tolerance and
- Future financial goals.
Considering these four important aspects will help you determine which ETF investment strategy is right for you. For example, if your portfolio has gaps such as a need for more small-cap stocks, your focus will be on finding a small-cap ETF fund such as the JPMorgan Diversified Return U.S. Small Cap Equity ETF (JPSE). If you need more international stocks in your portfolio, you may look for a foreign-based ETF such as the Vanguard FTSE Pacific ETF (VPL).
Also, if you have a conservative risk tolerance or are approaching retirement, you may be looking for a short-term bond ETF. There are thousands of different types of ETFs, so you should narrow your search to those that make sense for your personal investment strategy and goals.
Research ETFs You Are Interested In
One of the most important steps to purchasing an ETF is to do your research. Make sure you understand the ins and outs of your fund before investing, such as:
- Who manages the ETF and if it is actively or passively managed;
- Historical performance;
- Expense ratio;
- If it follows an index, which index it follows; and
- Associated fees.
You never want to invest before conducting proper due diligence. Of course, an ETF’s past performance doesn’t guarantee future results, but looking at a variety of financial metrics and data points can help you determine if the ETF will be a good fit for you or not. You can use AAII’s My Portfolio to keep track of the ETFs you may want to purchase.
Begin Buying ETFs
Now that you have a plan and understand the types of funds you may be interested in, it’s time to start buying ETFs. Here are four things you will have to do to buy an ETF:
- Fund your brokerage account by transferring money from your bank account (can take a few days for transfer, so plan ahead);
- Search for the ETF ticker symbol you are interested in purchasing on your brokerage’s website;
- Enter the number of shares you want to buy; and
- Confirm your ETF order.
Buying ETFs is just like purchasing stocks, so any trading fees depend on the broker you use. Many brokers offer a certain number of commission-free, or no-transaction-fee, ETFs.
Develop a Clear ETF Monitoring Process
The final step of buying ETFs is to make sure you know how often to monitor your investments and what your process will be. You don’t want to rebalance too often or look at your ETFs’ performance too frequently because psychological risk can impact you negatively by causing you to sell at the wrong time. Make a plan to review your portfolio at certain intervals, such as once each year, to ensure that your ETFs are still working for you. Some questions you may want to ask yourself when you reevaluate your ETF portfolio are:
- Are the ETFs I hold being managed appropriately?
- Have my investment management preferences changed?
- Have my goals changed since the last time I checked my portfolio?
- Do I need to increase my diversification or are the ETFs that I currently hold meeting that need?
- Has my risk tolerance changed and, if so, do my ETFs meet those new requirements?
These questions can help you stay on track to fund your future financial goals. Having a set monitoring process to make sure your goals, preferences and risk tolerance are being met by your current investments is addressed by AAII’s PRISM Academy.
How Long Should You Hold an ETF?
ETFs can be great building blocks for long-term investors, but it’s important to know how long you should hold them and when you may want to sell. Investing in ETFs can provide investors with many benefits such as broad exposure to various sectors and industries, as well as help in reducing overall portfolio risk.
In an ideal world, long-term investors may hold an ETF that suits their needs for decades, especially if their goal is to fund retirement. However, your monitoring process will guide you in knowing how long you should hold an ETF before selling.
Additionally, it’s important to note that if you plan to hold your ETFs for one year or less, the gain or loss is considered to be short-term and taxed as income. If you plan to hold your ETFs for more than one year, then your gain or loss is considered long-term and is taxed at a more favorable rate. For this reason, you’ll want to make sure you buy ETFs using the right type of account (taxable or tax-deferred).
How to Sell ETFs
There are a number of reasons you may want to sell an ETF, including:
- The ETF’s strategy has suddenly changed and doesn’t reflect your own.
- The associated fees of your ETF have changed without an increase in capital gains.
- There are tracking issues (performance varies from index) due to poor management.
- Your ETF’s liquidity has changed to where the trading volume has significantly decreased.
- You’re approaching retirement and need cash.
- There is duplication in your portfolio and you need to diversify better.
If you’re interested in selling ETFs, you can do it at any time during regular stock market hours, just like a stock. You’ll want to make sure you figure out the best time of day to sell your ETF and the best order type to use. Once you’ve determined those two aspects, you can sell an ETF and expect the applicable cash—if you’re selling for a gain—to reach your account within a few business days (depending on the type of brokerage account as well as your bank).
When Should You Sell an ETF?
Even the most seasoned investors can make mistakes when it comes to selling ETFs. There is no overall guideline for when to sell an ETF because it should be based on your individual goals, risk tolerance and allocation. However, you should never sell an ETF when you:
- Start to feel pressure from sudden market declines or crashes,
- Need cash immediately and want to liquidate before your goals have been met,
- Notice your ETF is not performing well in the short term or
- Have recently heard bad news about an ETF without researching financial metrics or historical data points.
Additionally, it’s important to choose ETFs that have sufficient liquidity and trading volume. This is because it is easy to act hastily and sell an ETF without checking its liquidity. Low liquidity could result in the ETF selling at a share price that is temporarily lower than it should be. This often occurs during increased market volatility, so make sure you avoid as much psychological risk as you possibly can and don’t react negatively to sudden dips in the market.
Can I Buy and Sell ETFs on the Same Day?
Yes, you can buy and sell ETFs on the same day. There are no restrictions on how often you can buy and sell ETFs because they trade similarly to stocks. Additionally, you can even buy and sell the same ETF as many times as you want all in one day. However, it’s important to remember that there will be a settlement period, which means you will not get your cash for a few days after selling an ETF.
When you sell a stock or ETF, you don’t actually receive the cash in your brokerage account instantly. It can take up to three business days, or more depending on the type of brokerage firm you are trading with.
Lastly, just because you can buy and sell ETFs on the same day, doesn’t mean it is recommended. At AAII, we believe in long-term investment strategies rather than day trading.
Resources to Make Buying ETFs Even Easier
Knowing what options you have when it comes to buying and selling ETFs is extremely important, but how do you determine which specific ETFs to add to your portfolio? AAII provides members with resources that help you find the right ETFs for you. Our ETF guide and ETF Ideas area have performance tables, expanded ETF listings, ETF First Cut lists, comparison charts, manager changes and unbiased commentary.
Additionally, you can use our A+ Investor service, or our AAII Platinum bundled package, to filter through thousands of ETFs at the click of a button. Input the specific criteria and characteristics you want an ETF to possess, and the A+ Investor ETF+ screener can help you narrow down the expansive universe. Learn more about A+ Investor’s ETF+ screener and access countless articles on how to find the right ETF for you.
More on Selling, Holding and Buying ETFs
Now that you know how to buy and sell an ETF, you may be interested in learning more about ETFs. Check out the resources below to learn more about adding ETFs to your portfolio.
- Beginner’s Guide to ETFs
- Socially Responsible Stock ETFs
- Considerations for Picking a Mutual Fund or ETF
- ETF Ownership Has Been Beneficial to ADRs
