Exchange-traded funds, or ETFs, are among the most popular ways to invest in the stock market. They offer diversification, potentially attractive returns and generally lower risk than individual stocks. And they do it all for what often amounts to a very reasonable cost.
Here are the best online brokers for ETF investing and why you should consider them.
What is an ETF and why are they so popular?
ETFs have skyrocketed in popularity since the first one in the U.S. was launched in the early 1990s. ETFs are baskets of securities similar to mutual funds that track broad indexes like the Standard & Poor’s 500 or smaller slivers of the market, such as social media stocks, gold or health care.
However, unlike mutual funds, ETFs trade like stocks throughout the day when the market is open, which makes them attractive to investors. These funds provide another way for investors to diversify their portfolio without having the stress of choosing individual stocks.
“You get the benefit of diversification over a market sector or an entire market from your very first share, rather than the concentrated risk of buying individual stocks,” says Greg McBride, CFA, chief financial analyst at Bankrate. “As [the late Vanguard founder] Jack Bogle famously said, ‘Rather than look for the needle in the haystack, just buy the whole haystack.’”
In fact, more than 90 percent of investment professionals “use or recommend” ETFs to their clients, according to the Financial Planning Association’s 2023 Trends in Investing survey. ETFs are more tax-efficient and less expensive when compared with mutual funds.
Here are the best online brokers for ETF investing:
Overview: Top online brokers for ETFs in October 2024
Charles Schwab
Charles Schwab is a longtime advocate of individual investors, and the well-known discount broker had long charged zero commissions on its own ETF offerings, before lowering commissions on all ETFs to zero. Individual stock trades are also free, while opening and maintaining a brokerage account at Schwab is, too.
Charles Schwab also provides a wide breadth of educational resources, including some of the best research and user-friendly tools in the market. Its ETF Select List, for instance, details investor-friendly funds, taking into consideration commissions and fees, a fund’s track record and suitability for individual investors. Former TD Ameritrade clients who are now part of Schwab should be impressed with what they find.
- Trade commission: $0
- Minimum amount to open a brokerage account: $0
Fidelity Investments
Fidelity has long been a leader in commission-free ETFs, and now all ETFs on its platform are available at no commission. It’s that investor-friendly heritage that makes the Boston-based fund giant a solid pick.
If you want research and screening tools, Fidelity won’t disappoint. You can quickly filter your ETF choices by any number of criteria (company size, fund size, expense ratio, etc.). Fidelity also provides ETF investing ideas based on your goals, such as “investing for income” and “enhanced growth.”
Additionally, Fidelity’s mobile app will allow you to monitor your portfolio, check your account balances, make trades, view your watch list and more.
- Trade commission: $0
- Minimum amount to open a brokerage account: $0
Vanguard
Vanguard, which introduced its first ETF in 2001 and manages trillions in global assets, is best-known for being a low-cost fund provider. In 2018, this powerful player pushed the boundaries of retail investing by making about 90 percent of all ETFs on its platform commission-free. Today investors may trade all available ETFs at no cost.
To sort out all of those ETF options, Vanguard offers screening tools, including the ability to compare ETFs based on factors such as expense ratios, management style (active or passive), average annual return and many more. And you can even have a Vanguard representative place the trade for you at no extra charge if you’re buying a Vanguard ETF. Once you’ve selected your funds, then turn to Vanguard’s planning tools to help you get your financial game plan in place.
- Trade commission: $0
- Minimum amount to open a brokerage account: $0
E-Trade Financial
E-Trade offers quite a few ways to invest in ETFs, even beyond the traditional purchase of the funds. Of course, it offers all available ETFs on a commission-free basis. But you’ll also be able to sort more than 3,000 funds using E-Trade’s screener by key traits such as Morningstar rating, investing strategy and yield, among many other options. You can click a buy button straight from the search screen and be on your way to adding the fund to your holdings.
E-Trade also gives you the option of buying a prebuilt ETF portfolio, with strategies such as aggressive, conservative and income, each with varying levels of stocks, bonds and cash, and you can see the kinds of stocks available in each fund. You can also search by theme — think energy power houses or mighty mega-caps. E-Trade lets you trade a few ETFs — highly traded ones — for 24 hours, five days a week, so you have liquidity even when the market’s closed.
- Trade commission: $0
- Minimum amount to open a brokerage account: $0
Firstrade
Firstrade offers commission-free trading on all its ETFs and customers will have more than 2,200 funds to choose from. You’ll also have free access to Morningstar research to help you sift through the vast ETF offering and decide which funds are right for your portfolio. An ETF screener is also available to identify funds based on their performance, analyst ratings or any other criteria you’re interested in.
Customer service reps can also help answer any questions you might have and are available on the phone Monday through Friday during extended business hours. Firstrade’s slick mobile trading app will also allow you to track your portfolio on the go and place any necessary trades when you’re away from your desk.
- Trade commission: $0
- Minimum amount to open a brokerage account: $0
Merrill Edge
Merrill Edge gets investors into the ETF game with zero commissions on trades, and its Select ETFs screener simplifies the discovery process, making it particularly easy if you know the size of fund you want, the asset class (stocks or bonds), and the investing style (value, growth, blend). If you’re looking to fill a specific box – large American growth companies, for example – the screener can help you do that quickly. It often recommends iShares and Vanguard funds, though you’re free to purchase any ETFs available on Merrill’s platform.
You can search for a wider variety of ETFs using predefined screens, such as Morningstar 5-star stocks, though these screens don’t return as much data on the fund immediately, but click through and you’ll find it all laid out in an easy-to-digest format, including the fund’s top holdings, performance, ratings and key statistics.
- Trade commission: $0
- Minimum amount to open a brokerage account: $0
Ally Invest
Ally Invest wasn’t exactly a leader in commission-free ETFs at first. But since the industry’s big shift to no commissions, the broker now offers tons of them, including iShares and Vanguard funds, just to name a couple. With Ally’s screener, you’ll be able to search for funds by predefined screens such as tech ETFs or S&P 500 index funds. And you’ll get performance data, Morningstar ratings and top holdings data for each fund.
Ally is a great pick if you’re already a customer of the highly rated Ally Bank, and you’re looking to expand your relationship quickly and easily to its sister brokerage.
- Trade commission: $0
- Minimum amount to open a brokerage account: $0
Other options: Top robo-advisors
Robo-advisors, such as Betterment and Wealthfront, will also invest in ETFs on your behalf — so don’t forget about these all-digital providers as a potential option. These “do it for me” options construct a diversified portfolio based on your time horizon and risk tolerance. They’ll do it all – including throwing in some extra features such as tax-loss harvesting – for one low fee.
FAQs on ETF investing
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The main difference between an ETF and a mutual fund is that an ETF can be bought and sold throughout the trading day, similar to the way an individual stock would trade, while a mutual fund is priced at the end of the day based on its net asset value. So ETFs are more liquid than mutual funds.
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You can purchase ETFs that allow you to pursue numerous different investment strategies. Passive strategies involve purchasing ETFs that track an index such as the S&P 500 and come with very low fees. Over time passive strategies, on average, have been shown to outperform active management, which involves identifying companies, sectors or geographies that a portfolio manager thinks will outperform a market index. But some active managers have been able to outperform passive benchmarks over long periods of time.
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ETFs do not typically come with minimum investment requirements beyond the cost of a share and any fees or commissions associated with its purchase, though many brokers now allow you to even buy a fractional share of an ETF. This is an advantage over mutual funds which often have investment minimums of a few thousand dollars.
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Yes, you will likely be required to pay capital gains taxes on any profits you earn from ETFs, unless those gains come within a tax-advantaged account such as a 401(k) or an IRA.
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While ETFs and stocks trade similarly throughout the day, there are key differences between the two assets. A stock represents an ownership stake in an individual business, whereas an ETF typically holds a basket of stocks or other assets that gives investors access to a specific market index, sector or geography.
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A leveraged ETF is designed to provide a magnified return on a benchmark index, usually two or three times the index’s daily performance. For example, a 2X S&P 500 index ETF should rise 4 percent on a day when the index rises 2 percent, while a 3X fund should rise 6 percent. Even the best leveraged ETFs are a high-risk play, though they have a potentially high return.
An inverse ETF is designed to provide the opposite return of a benchmark index. For example, an inverse S&P 500 index ETF should rise 3 percent when the index falls 3 percent. Similarly, if the index rises, the inverse ETF should fall.
Because of the way they achieve these kinds of performances, leveraged and inverse ETFs are more risky than their normal ETF counterparts.
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