Investing Classroom

Course 101: Exchange-Traded Funds
In this course
1. Introduction
2. What Are Exchange-Traded Funds?
3. How Do ETFs Work?
4. The Pros of ETFs
5. The Cons of ETFs
6. Are ETFs for You?
7. Do ETFs Perform Better?
8. Conclusion
Quiz
Course Catalog

Are ETFs for You?

To figure out whether an ETF or fund might be better for your situation, let's take an example. Say you have $5,000 to invest. You plan to add $50 to the investment every month, and hold this investment for at least 10 years.

You can enter the following information into Morningstar.com's Cost Analyzer tool, or a similar tool elsewhere on the Web that estimates expenses and returns, so you can identify the best fund for you.

  • Initial investment = $5,000.
  • Monthly investment = $50.
  • Expected return = 10%.
  • Time horizon = 10 years.
  • We entered the tickers for Vanguard 500 Index mutual fund and the SPDRs ETF.
  • Check with your broker to determine what transaction fees may apply, but for the sake of this example, we assume there's no commission to buy the Vanguard 500 Index, but we have to pay an $8 commission when we buy the SPDR. So we entered $8 under Commission $ for the SPDR.
  • We clicked Show Comparison.

In this case, the calculator indicates a final value of $22,629.25 for the Vanguard fund, and $21,193.21 for the ETF, due to the extra cost involved with monthly ETF trading commissions, which outweighed the ETF's expense advantage over the Vanguard fund in this scenario.

Before making your decision, we recommend changing the inputs to reflect a different time horizon, investment amount, expected return, etc., and see if the results change.

Next: Do ETFs Perform Better? >>


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Before investing in investment company securities, be sure to carefully consider the security's objectives, risks, charges and expenses. For a prospectus containing this and other important information, contact the investment company or a
TD Ameritrade Client Services representative. Please read the prospectus carefully before investing.

ETFs are baskets of securities that may track a sector-specific, country-specific, or a narrow/broad-market index. ETFs trade on an exchange like a stock. ETFs are subject to risk similar to those of their underlying securities, including, but not limited to, market, sector, or industry risks, and those regarding short-selling and margin account maintenance. Commission fees typically apply.

Asset allocation and diversification do not eliminate the risk of experiencing investment losses.

Risks of Commodity ETFs
Commodity ETFs may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Commodity ETFs may be subject to greater volatility than traditional ETFs and may not be suitable for all investors. Unique risk factors of a commodity fund may include, but are not limited to the fund's use of aggressive investment techniques such as derivatives, options, forward contracts, correlation or inverse correlation, market price variance risk and leverage.

Risks of Currency ETFs
The value of the shares of a currency exchange traded product relates directly to the value of the foreign currency held by the particular product. This creates a concentration risk associated with fluctuations in the price of the applicable foreign currency. Unique risk factors of a foreign currency include national debt levels and trade deficits, domestic and foreign inflation rates, domestic and foreign interest rates, investment and trading activities of institutions and global or regional political, economic or financial events and situations. Currency products may not be suitable for all investors. Many currency products are not investment companies registered under the Investment Company Act of 1940.For a more complete discussion of risk factors applicable to each currency product, carefully read the particular product's prospectus.

Risks of Bond ETFs
Investments in bond funds are not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Bonds and bond funds will typically decrease in value as interest rates rise.

Risks of Leveraged and Inverse ETFs
Leveraged and inverse ETFs entail unique risks, including but not limited to: use of leverage; aggressive and complex investment techniques; and use of derivatives. Leveraged ETFs seek to deliver multiples of the performance of a benchmark. Inverse ETFs seek to deliver the opposite of the performance of a benchmark. Both seek results over periods as short as a single day. Results of both strategies can be affected substantially by compounding. Returns over longer periods will likely differ in amount and even direction. These products require active monitoring and management, as frequently as daily. They are not suitable for all investors.

Research and planning tools are obtained by unaffiliated third party sources deemed reliable by TD Ameritrade.
However, TD Ameritrade does not guarantee accuracy and completeness, and makes no warranties with respect to results to be obtained from their use. ETFs are baskets of securities that track recognized indexes and trade on an exchange like a stock. Commission fees apply.