SMI's core investment strategies now make regular use of exchange-traded funds (ETFs), so it's important to know how to buy and sell them.
Using ETFs isn't difficult, but there are some differences when compared to buying or selling traditional mutual funds. The information below will guide you through the process.
In essence, ETFs are a subclass of mutual funds — they are similar to mutual funds in many ways, but also different in some key ways. One main difference is when they may be traded. Mutual funds are priced at the end of each day. So, if you enter a buy order at 11:00 a.m., the order won't be filled until the very end of the day. ETFs are priced throughout the day, therefore trading like stocks. If you enter a "market order," it will be filled at the earliest opportunity.
The other key difference is how ETFs are bought and sold. With a mutual fund, you can buy fractional shares. If you want to buy $500 worth of XYZ mutual fund, you can (unless is has a higher minimum required investment amount). ETFs can only be bought in whole shares. To buy $500 of XYZ exchange-traded fund, you'd have to divide $500 by the price per share to see how many shares your money could buy.
Here are the key steps.
- Go to your broker's website. Open the stock and ETF trading page, rather than the usual mutual funds trading page.
- Get a price quote. Each broker's process is different, but there's likely a "Quote" or "Symbol" box available somewhere on the screen. Enter the ticker symbol. While writing this article, entering the symbol for the Vanguard S&P 500 Index ETF (VOO) produced a quote that showed the last trade took place at $214.77 per share. That was also the current "Ask" price.
- Determine how many shares to buy. Let's say I have $5,000 to invest in this ETF. I would divide $5,000 by the Ask price of $214.77. Doing so results in an answer of 23.3 shares. Since I used Fidelity for this example, I need to account for a $4.95 commission (check at your broker to see how much is charged for stock/ETF commissions), so I'll round down to 23 shares. I enter that in the "number of shares" field.
- Choose the type of order. Choices are normally "Market" (the trade will be filled right away at the next available price), "Limit" (the trade will be made at a specified price or better within a specified time frame), or some variation of "Stop" (the trade will be made when the security's price surpasses a certain point). A market order is fine. There's no need to do anything fancy here.
That's it! While you have to pay commissions to buy and sell many ETFs, some do trade for free. For those that charge a commission, the fees have become so low that most readers will be able to buy and sell an ETF for less than they would pay to invest in a comparable transaction-fee mutual fund.