Personal Finance & Money Asked on September 3, 2021
Trading stocks on Robinhood is free. That’s nice.
But Robinhood also provides various funds and ETFs. They usually have an expense ratio which can range from 0.04% for a Vanguard ETF to 1% range for actively managed ETFs.
As a concrete example, there are SPY (SPDR S&P 500 ETF) and VOO (Vanguard S&P 500 ETF) and possibly others on Robinhood. When there are two ETFs that track exactly the same things (like SPY vs. VOO) on what basis would I make the decision which one to buy?
Think of an ETF company like any other company, they have employees and offer some good/service to the consuming public. The service is managing the ETF(s) and they charge a fee for that service to pay employees/make profit. You pay these expenses by way of reduced returns, not by paying a separate fee through your brokerage.
For example, if you bought a share of an ETF with a 1% expense ratio for $100 and the value of the fund's investments did not change at all, your share would be worth $99 at the end of a year. If the fund's investments grew 5% in a year, you'd see a 4% return on your investment due to the expense ratio.
As for "best" ETF, that's a matter of opinion/goals. A high expense ratio isn't bad if net returns are consistently beating less expensive alternatives. I suggest you start by evaluating ETF's based on what they hold (S&P 500, tech stocks, dividend stocks, etc.). Then how they weight what they hold (market-cap, equal weighting, revenue weighting, etc.). Then historical returns and expense ratios. What you'll likely find is that the most popular are popular for good reason, but you should know what/why you're buying.
Answered by Hart CO on September 3, 2021
When you're looking at the expense ratio of a fund, that "expense" is not from the broker but from the fund itself. Meaning if the value of the constituents of the fund rises 10% in one year but the fund has a 1% expense ratio, your net return for that fund is around 9%. The realization of those fees is not as transparent as a "1%" charge in your portfolio; the management fees are deducted on a daily basis, so the exact fee may not necessarily be 1%.
That's separate from the fees that your broker changes for transactions, which only occur when you buy or sell securities. Look at robinhood's fee schedule to see what fees they change for ETFs.
Which one is the best to pick?
Well obviously the "Best" is the one that makes the absolute highest return over your investment horizon. Unfortunately no one knows which one that will be. You can look at past performance to see what it's done in the past, or decide to invest in a particular market segment. Also remember that risk and reward are tradeoffs - the funds that have the highest potential return also tend to have high risk - meaning that they could also lose a lot. So determine what your risk tolerance is and find funds that have a similar risk level that have the best historical return (net of fees).
If you're comparing funds that track the same index, then most likely the one that has the lower fees will give you the highest net return, but no index tracker is perfect, so there may be slight variations even among ETFs that try to track the same index.
Answered by D Stanley on September 3, 2021
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