April 24, 2019

Understanding ETF’s and Robo Advisors

Written By Mary Beth Eastman
Last updated November 22, 2019

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When it comes to your personal finances, investments are critical to the overall health of your financial portfolio. Saving money is great, but with the very low interest rates available at traditional banks, you will never be able to yield impressive returns without investing. If you are just starting to invest a small amount of money for the first time or are ready to try your hand at DIY investments, robo advisors and ETFs are an excellent combination to try that costs very little and is excellent for all investor experience levels, including beginners. Here we provide a basic overview of what you need to know about ETFs and robo advisors.

An ETF, or an exchange-traded fund, is a group of securities you can buy or sell through a stock exchange. Like corporate stocks, ETFs are assigned ticker symbols and traded like common stock, unlike mutual funds. ETFs also tend to have lower fees and are more tax efficient than other types of investments on the stock exchange. You can purchase ETFs through any online investing site; we round up the very best online investing sites here.

Be aware that since ETFs trade like stocks, you may have to pay a brokerage commission. Online commissions can be as low as a few dollars per trade, depending on the broker.

A robo advisor is a computer financial planner that can help you manage your investments online. Technically, there is no person on the other end reviewing your accounts and goals to make financial recommendations to you. Instead, a computer software program automates the process of investing at a relatively low cost compared to traditional financial advisors.

For example, compare the automated investing sites Wealthfront vs Betterment. Wealthfront focuses on financial planning and auto-investing, and Betterment focuses its robo advisor power on ETFs, using an algorithm to pick the best investing options for your needs. They each charge different fees for their services and also try to reduce your costs in regards to taxes. See our full list and review of the top robo advisors here.

When you first sign up with a robo advisor, you will take a survey that asks about your age, family, goals, and comfortable risk level. The more aggressive your portfolio, the more likely the computer algorithms will recommend and invest in the stock market. ETFs are ideal for moderate risk. For safe, long term investments with little risk, the robo advisor may not recommend an ETF. Some robo advisors make the investments for you without input from you, while others require your input to proceed.

A robo advisor can be an excellent way for people who don’t have a financial advisor to make serious investments. It is cost effective and will likely help you to invest in ETFs. Since a robo advisor is a computer algorithm, it can help investors make sound decisions instead of emotional ones.

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