What to look for in an ETF

Personal Finance & Money Asked by Rhonda on November 26, 2020

I wish to invest in an ETF.

Sure, I can see what companies it comprise of.

Sure, I can open brokerage account in my bank, etc.

How do I know the ETF I purchase is legitimate? What if the ETF is fooling the public (perhaps listed on NASDAQ) and will take the investor’s money and run?

I am trying to teach myself these things, and unfortunately many people see me as easy to fool, so I wish to arm myself with knowledge.

For instance, I cannot even find dividend amount an ETF pays (spent the last 30 minutes searching this). For instance NASDAQ says QQQ pays cash dividends and on 12/16/16 it paid 0.35494. Is this a percentage or what? Very unclear.

3 Answers

If you are absolutely dead set on investing in an ETF and nothing else will be satisfactory to you, then go ahead and invest in an ETF following the advice of whichever broker you trust to give you good advice regarding this matter as to which of the many different ETFs you should invest in. You will, of course, have to pay for such advice, directly as cash in the form of transaction fees for purchasing shares of the ETF (and later for selling the shares), and indirectly in the form of the annual fee that brokerages charge each client. (Many brokerages do waive transaction fees for buying and selling ETFs that they themselves sponsor, but not for ETFs sponsored by others) In contrast, advice given on money.SE is free, but it can be worth exactly what you pay for it, and in many cases can even be harmful to your financial health. In my opinion, for a beginning investor with small amounts of money to start with, the advice to invest in ETFs falls in this last category.

My personal advice to beginning investors whose ears have been filled by back-fence talk and cocktail-party chatter and calls from financial advisors about brokerages and the advantages of investing in ETFs and how investing in ETFs is the best thing to do is contrarian:


It is far far better for the beginning investor starting out with small amounts of money to invest in a low-cost non-exchange-traded mutual fund such as one that tracks the S&P 500 Index or the Total Market Index or a MidCap Index or a Small-Cap Index etc instead of the corresponding ETF. Shares of such mutual funds can be bought and sold directly on the mutual fund's website without going through a brokerage. Also, one can buy fractional shares of mutual funds (down to a thousandth of a share) whereas only integer numbers of ETF shares can be bought and sold. Thus, all one's money can be fully invested in a mutual fund instead of some being held for a future purchase because it is not enough to buy one full share of an ETF. Similarly, when the mutual fund makes a distribution, it can be fully reinvested in additional shares of the fund (one doesn't have to reinvest, but it is an available choice), whereas a distribution from an ETF is a cash payment that might not be fully reinvestable in the ETF because the amount cannot buy an integer number of shares. True, the minimum investment to begin investing in an ETF is one share and so the minimum investment in an ETF is usually much smaller than the minimum investment in a mutual fund (typically, in thousands of dollars); and ETF shares can be bought and sold at any time the markets are open, but these are minor issues compared to extra brokerage fees for buying and selling "odd lots" of shares: brokerages like to trade in "round lots" of 100 shares (or multiples of 100 shares) and charge more if you want to buy or sell 37 shares, say. Also, for a beginner, making an investment and holding it for a long time is far better than chasing performance and buying and selling ETF shares at 11:30 a.m. just because one can, instead of waiting for the trade to be executed that evening when the markets have closed and the mutual fund has figured out its price.

Correct answer by Dilip Sarwate on November 26, 2020

I agree pretty much with Dilip's comments. You don't mention it, but I assume you wish to do this in a taxable account rather than in an IRA?

I would recommend you do this on-line or via 1-800 with Vanguard. Now, I have absolutely NO connection to Vanguard (I use another brokerage), but Vanguard is the place for newbies. Lots of choice, lots of on-line consumer help, absolutely NO commission people (Vanguard is a non-profit where everyone is on salary and was founded by John Bogle who is a rabid consumer advocate) and razor thin expenses on their funds. There are certain starting minimums, but you'll find this just about anywhere today.

Take your time. Learn the basics. Make regular contributions. Learn more. Pretty soon you'll be fully in charge and confident of your investing ability. Just remember and never ever, ever, ever forget. Neither you, nor me nor anyone else is smarter than the market. Nice run-ups happen, but this has NOTHING to do with your fund picking ability....and sharp declines or corrects will also happen and again, this has NOTHING to do with you. These things just happen. Stay the course and NEVER do anything based on emotion.

Best wishes

Answered by BruceM on November 26, 2020

Several questions here, you primarily will have to be familiar with the regulatory structure that deters ETF non-compliance and also the various insurance schemes for reimbursal in the event of non-compliance.

Answered by CQM on November 26, 2020

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