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A condo is a privately owned unit in a community of other units, often with shared areas or amenities. If you’re considering whether to buy or rent a condo, you’ll want to think about the costs, benefits, and responsibilities of each option.

Of course, those who are deciding whether or not to rent have much less riding on their choice, but it’s still worth delving into the pros and cons of this kind of property and if it suits your needs.

Here, you’ll learn about the characteristics that define condos, the pros and cons of these units, and what it’s like to rent or buy a condo.

What Is a Condo?

As noted above, a condo is a privately owned unit that is part of a community of other units, whether that means there are a couple of other residences or dozens. Typically, a condo owner only possesses their unit, unlike the situation with a single-family homeowner, who owns the home and the land under it.

You may be familiar with condos that are rented out for income. If you’ve ever rented an apartment in, say, a complex by the beach, with a shared pool and patio, there’s a chance you’ve been in a condo. Real estate investors often buy condos and rent them out in this way.

💡 Quick Tip: You deserve a more zen mortgage. Look for a mortgage lender who’s dedicated to closing your loan on time.

Characteristics of a Condo

Individual condo units are owned by private owners, while common areas are owned and maintained by an association or organization. This might be called a condo association (CA) or a homeowners association (HOA). These groups are not identical, but they do manage a multi-unit residential community.

Your ownership rights may be limited to the space within your condominium, as is the case with most condo high-rises, or you may own an entire standalone structure within a larger community. In a condo situation, the CA or HOA owns the land. In a planned unit development, the homeowners own their lot and share the common area.

Maintenance and Finances of Condos

Condos are popular starter homes, thanks to their low maintenance, relatively cheap purchase price, and general convenience. They may also appeal to investors and people who are downsizing.

With detached single-family homes, you’re on the hook for the bill if any repair issues arise, whether it’s a broken water heater, leaky roof, or malfunctioning air conditioner. This generally isn’t the case with condos, as the property management company employed by the CA or HOA maintains common areas and shared amenities.

Convenience comes with a price, though. Condo owners share maintenance costs, and the expense of a master insurance policy, by paying dues monthly or quarterly. It’s important to budget for these costs. HOA fees,for example, have recently been rising 10% per year. Atop those fees, special assessments can be levied if the HOA needs to pay for a major project.

Condos tend to appreciate at a slower rate than traditional single-family homes, but they cost less. So buyers may want to take both realities into consideration when deciding on house vs. condo.

Recommended: First-Time Homebuyers Guide

Types of Condos

Condos vary widely in structure and appearance, ranging from high-rise buildings to communal developments. Take a closer look:

Condo Developments

These are communities of standalone homes where maintenance of both the interior and exterior are carried by the condo owner, but services like the maintenance of common areas and snow removal are typically handled by a property management company.

All properties within a condo development are bound by the rules of the CA or HOA, so it’s similar to a traditional neighborhood with fixed rules and less upkeep.

Condo Buildings

These are high-rise apartments consisting of individual condo units. The maintenance of the structure, shared utilities, and common areas are the responsibility of the property management company.

If you’re looking at buying or renting an apartment in a large metropolitan area, make sure you understand what it means to choose between a condo and a co-op.

High-rise condo buildings are more common in urban areas and may have higher fees in order to cover the greater costs of maintaining an apartment building and often the salaries of full-time maintenance staff members and doormen.

Pros and Cons of Condos

Next, take a look at the pros and cons of a condo.

Pros of Condos

Here are the upsides of condo life:

•   Less maintenance since the CA or HOA is responsible for many aspects of upkeep.

•   Affordability. Since you don’t own the land, the price can be lower.

•   Possible investment opportunity; can use a condo for rental income.

•   Security. Some people appreciate having a condo staff and neighbors nearby.

•   Social life. You’re part of a community and will likely know and connect with your neighbors to some extent.

•   Amenities. There are often such features as gyms, pools, dog run, coworking space, party rooms, and other perks to enjoy.

Cons of Condos

Next, consider the potential downsides of a condo:

•   Association rules. You have to adhere to the guidelines of the community, which may or may not suit you. This can include everything from the appearance of your home’s exterior to when and for how long you may rent your place out.

•   Higher interest rates. If you are shopping for a condo to purchase, you may find that the mortgage rates are somewhat higher than what you’d be quoted if you were buying a single-family home.

•   Investment risk factor. If you are buying a condo, its value could depend to some extent on other residents and how well they maintain their property.

•   Lack of privacy and land. You will have neighbors…so the experience is different from being in your own single-family home on your own land. And you likely won’t have acres of property to plant and use as you wish.

•   Rising costs. Your association payments can rise considerably, and assessments are possible as well. That can throw a wrench in your budget.

Recommended: Most Affordable Places to Live in the US

Buying or Renting a Condo: Which Is Better?

Whether you’re better off buying or renting a condo — or any of the other types of houses, from modular home to manufactured home, tiny house to townhouse — depends as much as your own circumstances as it does the cost of buying vs. renting in an area.

•   Buying: Assuming you’ve decided to settle down in an area for the next three to five years, you might be better off buying a condo if you have a stable income stream and can cover the down payment and closing costs without emptying your emergency fund.

Given how real estate values have risen in the past few years, buying a condo may be a good choice if you’re looking for long-term investment and a chance to build home equity over time.

•   Renting: You may be better off renting if there’s a chance you’ll need to relocate within the next few years, or if any upcoming life events might require you to upsize your residence, like having children.

Here’s a closer look at these scenarios.

Pros of Renting a Condo

Renting a condo gives you all of the benefits of living in a private condo unit without the long-term commitment and upfront costs.

•   Few maintenance responsibilities: If you’re renting a condo unit in an apartment building, the association is responsible for maintenance, or in the case of an individually owned HVAC system, the owner is.

•   More leeway for negotiation: Reliable renters are hard to come by; some condo owners may be more willing to negotiate your monthly rent than professional property managers are.

•   Flexibility to end or extend your lease: As a renter, you can often decide whether to end or continue your lease. This makes it easy to cut ties if needed.

Pros of Buying a Condo

Taking out a mortgage to buy a condo more or less freezes your living costs into the future. This will help you avoid rising rents, though association fees can certainly rise.

•   More affordable than single-family homes: The price of a condo is usually lower than a single-family home in a given area. This makes it attractive to homebuyers on a budget.

•   Freedom to make it your own: Owning a condo gives you more freedom over such features as the appliances and color palette than you’d likely have with a rental.

•   Rental potential: Depending on the rules of your association, you may have the right to rent out your condo to generate income.

Finding a Condo

If you’re ready to go out and shop for a condo, you’ll want to assemble a list of must-haves to narrow your search. This applies whether you’re looking to rent or buy.

Are you looking for a more affordable apartment condo or something with more space like a community development? Browse local listings for condo units that match your requirements.

For those seeking to buy a condo, it’s a good idea to find a real estate agent who’s well versed in condo sales. They know the area and can obtain vital info regarding association rules and financials. It’s important to review the rules and fees, and check for any special assessments and their frequency over the years.

Condo Tips

A few more suggestions as you start your hunt:

•   If you are planning to buy, it’s also a good idea to thoroughly understand mortgage basics and have financing lined up with a mortgage company so you’re ready to make a bid on a property.

•   Know your budget. A mortgage calculator is an excellent tool for helping you figure out your costs.

•   Consider checking this HUD site for FHA-approved condos as your primary residence if you are seeking financing with an FHA loan.

💡 Quick Tip: Keep in mind that FHA home loans are available for your primary residence only. Investment properties and vacation homes are not eligible.1

The Takeaway

What is a condo? A condo is a privately owned unit within a community that can be a good starter home or a place to downsize. Or it might be a wise investment property that can bring in rental income. If you’re able to rent a condo, it’s much like renting an apartment, except your landlord may be the owner.

If you’re interested in buying a condo, realize that condo buyers are able to access the same kinds of loans available to buyers of single-family homes, though rates may be slightly higher.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

What’s the difference between an apartment and a condo?

A condo can be a kind of apartment, which is a residential unit that’s part of a larger building. An apartment can be owned or rented, as can a condo. However, a condo is a specific kind of unit ownership in which there are communal facilities and shared maintenance charges.

What is the difference between a condo and a townhouse?

With a condo, you own your unit but not the land under and around it. You pay for your unit (rent or mortgage). Association charges cover maintenance and repairs, and property taxes apply to owners. With a townhouse, the property includes the residence and the land it sits on and that surrounds it. You will pay your rent or mortgage and real estate taxes, but may not be part of an association or obligated to pay those fees.

Is a condo the same as a flat?

Many people use the terms condo, apartment, and flat interchangeably. While an apartment and a flat are the same thing, a condo refers to a style of ownership of a dwelling unit that’s part of a community. It may be an apartment, but the way it’s bought or rented can differ.

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Photo Credit: iStock/Edwin Tan

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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As a student, you must submit a new FAFSA each school year. It’s the only way to learn the types of federal aid you qualify for, including student loans, grants, and work-study programs. Plus, other student aid programs piggyback off the FAFSA, so it’s worth submitting even if you’re not expecting federal aid.

Keep reading to find detailed instructions on how to complete the 2025-2026 FAFSA. We’ll walk you through the required fields and highlight changes from previous forms.

Documents You’ll Need

Before you sit down to fill out the online FAFSA application , it’s best to have the following documents or information handy, especially if you want to fill out the FAFSA as quickly as possible. Documents needed include:

•   Completed tax returns

•   Parents’ SSNs if you’re a dependent student

•   Child support records

•   Cash, savings, and checking account balances

•   Investment, business, or farm net worth

How to Fill Out the FAFSA in 6 Steps

Ready to file the FAFSA? First, check your watch.

Ensure you have at least an hour to fill it out. Most people find that it takes around one hour to complete, including gathering the personal and financial information you need.

Here’s how to fill out the FAFSA step by step.

Step 1: Create an Account

The preferred way to complete the FAFSA is online, as you’re likely already aware.

But where do you fill out the FAFSA?

You can do so for free at fafsa.ed.gov — remember that you should never pay any site to file the FAFSA.

Create a StudentAid.gov account before you start the FAFSA. Ensure your name and Social Security number (SSN) look exactly as they do on your Social Security card.

The individuals who must include information on the form — a spouse, a biological or adoptive parent, or your parent’s spouse — must all have an FSA ID (account username and password). However, contributors without an SSN can create an account to fill out their portion of the 2025-2026 form.

A contributor is anyone required to provide information and approval to have their federal tax information transferred directly into the FAFSA form. This person, while not required to pay for a student’s college education, may include a student’s spouse, a biological or adoptive parent, or a stepparent.

Step 2: Provide Personal Information

After logging in, select either “student” or “parent,” depending on whether you are the student or parent filling out the form. We’ll assume that you’re filling it out as a dependent student for the next few steps.

What is a dependent student vs. independent student? Check out the full list of dependent vs. independent qualifications . Independent students will also answer the same basic set of questions and add spouse information if they are married.

You’ll start by filling out basic personal information, such as:

•   Name

•   Birthdate

•   SSN

•   Email address

•   Mobile phone number

•   Mailing address

Next, as a dependent student, you’ll indicate personal circumstances, such as marital status, college or career school plans, and any unusual personal circumstances.

You’ll answer questions about your parents and “invite” your parents to fill out the FAFSA information. You’ll also answer questions about:

•   Gender identity (though you can select “prefer not to answer”)

•   Race and ethnicity (you can also select “prefer not to answer” here)

•   Citizenship status

•   Parent education status

•   Whether a parent was killed in the line of duty

•   Student’s high school completion status

•   High school information

Step 3: Add Dependent Student Financials

Next, you’ll fill out information about your tax returns and assets (including any cash, savings, and checking accounts you have, or businesses, investments, farms, and/or real estate).

Step 4: Select Colleges

In this section, select colleges you’re considering. You can choose up to 20 colleges or universities where you want your FAFSA recognized. You can search based on city, state, or college name.

Step 5: Review Page and Add Signature

The review page shows the responses you’ve added to the FAFSA. You can review all responses by clicking “Expand All” or show each section individually. Select the question’s hyperlink to edit. Once you invite a parent to the form, you can see the status of the parent invitation.

Finally, you acknowledge the terms and conditions of the FAFSA form and sign, which means you’ve submitted your section of the FAFSA form. It’s not considered complete, however, until a parent signs their portion.

Recommended: Who Qualifies for FAFSA? FAFSA Requirements

Step 6: Parents Add Information

Once a dependent student invites a parent and they log in, the parent will receive information about onboarding. They will add their:

•   Name

•   Birthdate

•   SSN

•   Email address

•   Mobile phone number

•   Mailing address

The parent must provide consent to transfer federal tax information directly from the IRS into the Parent Financials section.

The FAFSA form will also ask the parent about:

•   Demographic information

•   Marital status

•   State of legal residence

•   Finances

•   Federal benefits

•   Tax filing status

•   Family size

•   Number of kids in college in the household

•   Tax return information

•   Assets

Next, the FAFSA will prompt questions about that parent’s spouse or partner, walk through a review page similar to the student review page, and ask for a signature where the parent acknowledges the terms and conditions of the FAFSA form. Finally, the parent signs that section.

Can a parent fill out the entire form on a student’s behalf, without student consent or signature?

Yes. A parent can fill out the entire FAFSA on behalf of the student indicating from the very beginning that they are filling it out as a parent.

If You Need Additional Help Filling Out the FAFSA

If you need help filling out the FAFSA form, you can click on the white question mark icon next to each FAFSA question to reveal a tip on how to answer that question. You can also visit the FAFSA Help Center to learn more about the recently updated form, look at our FAFSA guide, or watch the FAFSA tutorial video .

You can also chat with Aidan, the virtual assistant, or access the Federal Student Aid Information Center .

Finally, you can get help through the financial aid office at the college or career/trade school you plan to attend. They will often walk through the form with you.

Recommended: Avoid These Common FAFSA Mistakes

What Happens After You Submit the FAFSA?

After you hit the “submit” button, you should receive an email version of the submitted confirmation page and a notification via email that your FAFSA form was processed and sent to the schools you requested.

Finally, the government calculates your Student Aid Index (SAI), which lets schools determine the amount of aid you can receive. It also helps schools determine the financial aid you can receive from that particular institution. The financial aid office at each school will send you a financial aid award letter, which may include types of government aid such as:

•   Direct Subsidized Loans

•   Direct Unsubsidized Loans

•   Work-study

•   Pell Grants

•   TEACH Grants

•   Federal Supplemental Educational Opportunity Grants (FSEOG)

Recommended: How Financial Aid Works

Who Should Complete the FAFSA?

Anyone who could benefit from college financial aid has nothing to lose by filling out the FAFSA. Many students leave money on the table every year by failing to complete it, and low-income families are often less likely to complete the form than wealthier ones.

Even if you’re not eligible for federal aid, it’s worth your while to complete the FAFSA because most schools and states use FAFSA information to award non-federal aid. Non-federal aid includes private student loans, scholarships, state aid, employee-sponsored aid, and more.

To qualify for federal grants, work-study, and different types of student loans, you must be a U.S. citizen or an eligible noncitizen. You’ll need a valid SSN, with few exceptions, and a high school diploma, GED, or another recognized equivalent. You’ll also need to enroll in an eligible educational program and maintain satisfactory academic progress.

You may become ineligible for federal aid if you owe money on a previous federal student grant or are in default on a previous federal student loan.

Some types of federal aid are available only to people who demonstrate financial need. This includes the Federal Pell Grant and Direct Subsidized Loans. For the latter, the government pays the accrued interest while the borrower is in college or during most of their deferment periods.


💡 Quick Tip: Fund your education with a low-rate, no-fee SoFi private student loan that covers all school-certified costs.

What If I Don’t Qualify for Any or Enough Aid?

The amount of FAFSA money you receive depends on a variety of factors, including the institution you’re applying to, your assets, your parents’ assets, and more.

Merit aid, based on academic excellence, talent, and/or certain achievements, is also available. Some colleges won’t consider you for any of their merit scholarships until you’ve submitted the FAFSA, according to the Department of Education. Businesses, nonprofits, cultural organizations, and local groups also offer merit scholarships.

You can also look into state grants and scholarships. Every state has its own money and process for distributing aid. Some only require a completed FAFSA; others, a separate application.

Then, there are private student loans, which are issued by banks, credit unions, and online lenders (as opposed to the government). You can check to see what various lenders offer and what types of student loans you’d qualify for.

Although private student loans don’t come with the benefits and protections that federal student loans have — like income-driven repayment plans and federal forbearance — they may help bridge funding gaps.

Recommended: Cash Course: A Student’s Guide to Money

The Takeaway

The bottom line: Learning how to complete the FAFSA application doesn’t have to take hours of your time. In fact, it typically takes less than an hour to complete from start to finish. Use our guide to walk you through how to fill out the FAFSA step by step in order to see how much federal aid you’ll qualify for and what types of aid you’re eligible to receive.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

FAQ

What’s the due date for the new FAFSA?

The FAFSA form must be submitted by 11:59pm central time (CT) on June 30, 2025. You can submit corrections or updates by 11:59pm CT on Sept. 14, 2025.

Can I fill out FAFSA myself?

Yes, students can and should complete the FAFSA on their own. The new FAFSA application instructions are much easier to understand, making it easier than ever for students to fill out. You can then invite your parents to enter information like their Social Security numbers and income figures.

How long does it take to fill out the FAFSA?

It takes less than an hour to fill out the FAFSA, including absorbing the FAFSA application instructions. However, it may take you longer to complete if you don’t gather important information ahead of time, such as your family’s Social Security cards.

What disqualifies you from getting FAFSA?

To file the FAFSA, you must meet certain FAFSA requirements. For example, you must demonstrate financial need for need-based federal student aid programs, be a U.S. citizen or eligible noncitizen, have a valid SSN except in certain situations, be enrolled or accepted at an eligible institution as a regular student, maintain satisfactory academic progress, provide consent for federal tax information to go to the FAFSA, sign the certification statement on the FAFSA, and show you qualify to obtain higher education.

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SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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An exchange-traded fund, or ETF, bundles many investments together in one package so it can be sold as shares and traded on an exchange. The purchase of one ETF provides exposure to dozens or even hundreds of different investments at once, and there are numerous types of ETFs on the market.

ETFs are generally passive investments, i.e. they don’t have active managers overseeing the fund’s portfolio. Rather most ETFs track an index like the S&P 500, the Russell 2000, and so forth.

ETFs are an investment vehicle that allows even small and less-established investors to build diversified portfolios, and to do so at a relatively low cost. But before you start buying ETFs, it’s important to understand how they work, the risks of investing in ETFs, as well as other pros and cons.

What Is an ETF?

An ETF is a type of pooled investment fund that bundles together different assets, such as stocks, bonds, commodities, or currencies, and then divides the ownership of the fund into shares. Unlike mutual funds, ETFs give investors the ability to trade shares on an exchange throughout the day, similar to a stock.

Unlike investing in a single stock, however, it’s possible to buy shares of a single ETF that provides exposure to hundreds or thousands of investment securities. ETFs are often heralded for helping investors gain diversified exposure to the market for a relatively low cost.

This is important to understand: Just like a mutual fund, an ETF is the suitcase that packs investments together. For example, if you are invested in a stock ETF, you are invested in the underlying stocks. If you are invested in a bond ETF, you are invested in the underlying bonds. Thus you are exposed to the same risk levels of those specific markets.

Recommended: Active vs Passive Investing

Passive vs Active ETFs

Most ETFs are passive, which means to track a market index. Their aim is to provide an investor exposure to some particular segment of the market in an attempt to return the average for that market. If there’s a type of investment that you want broad, diversified exposure to, there’s probably an ETF for it.

Though less popular, there are also actively managed ETFs, where a person or group makes decisions about what securities to buy and sell within the fund. Generally, active funds charge a higher fee than index ETFs, which are simply designed to track an index or segment of the market.


💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

How Do ETFs Work?

As discussed, most ETFs track a particular index that measures some segment of the market. For example, there are multiple ETFs that track the S&P 500 index. The S&P 500 index measures the performance of 500 of the biggest companies in the United States.

Therefore, if you were to purchase one share of an S&P 500 index fund, you would be invested in all 500 companies in that index, in their proportional weights.

What Is the Difference Between an ETF and a Mutual Fund?

ETFs are similar to mutual funds. Both provide access to a wide variety of investments through the purchase of just one fund. But there are also key differences between ETFs and mutual funds, as well as different risks that investors must bear in mind.

•   ETFs and mutual funds have different structures. A mutual fund is fairly straightforward: Investors use cash to buy shares, which the fund manager, in turn, uses to buy more securities. By contrast, an ETF relies on a complex system whereby shares are created and redeemed, based on underlying securities that are held in a trust.

•   ETFs trade on an open market exchange (such as the New York Stock Exchange) just as a stock does, so it is possible to buy and sell ETFs throughout the day. Mutual funds trade only once a day, after the market is closed.

•   ETF investors buy and sell ETFs with other ETF investors, not the fund itself, as you would with a mutual fund.

•   ETFs are typically “passive” investments, which means that there’s no investment manager making decisions about what should or should not be held in the fund, as with many mutual funds. Instead, passive ETFs aim to provide the same return for the benchmark index they track. For example, an ETF for environmental stocks would mimic the returns of green stocks overall.

What Are the Advantages of ETFs?

There are a number of benefits of holding ETFs in an investment portfolio, including:

•   Ease of trading

•   Lower fees

•   Diversification

•   Liquidity

Trading

ETFs are traded on the stock market, with prices updated by the minute, making it easy to buy and sell them throughout the day. Trades can be made through the same broker an investor trades stocks with. In addition to the ease of trading, investors are able to place special orders (such as limit orders) as they could with a stock.

Fees

ETFs often have lower annual fees (called an expense ratio) — typically lower than that of mutual funds — and no sales loads. Brokerage commissions, which are the costs of buying and selling securities within a brokerage account, may apply.

Diversification

Using ETFs is one way to achieve relatively cheap and easy diversification within an investment strategy. With the click of a button, an investor can own hundreds of investments in their portfolio. ETFs can include stocks, bonds, commodities, real estate, and even hybrid funds that offer a mix of securities.

Liquidity

Thanks to the way ETFs are structured, ETF shares are considered more liquid than mutual fund shares.


💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

What Are the Disadvantages of ETFs

There are some potential downsides to trading ETFs, too, including:

Trading Might Be Too Easy

With pricing updated instantaneously, the ease of ETF trading can encourage investors to get out of an investment that may be designed to be long term.

Understanding ETF Costs

Even if ETFs average lower fees than mutual funds, a brokerage might still charge commissions on trades. Commission fees, plus fund management fees, can potentially make trading ETFs pricier than trading standalone stocks.

In addition, some ETFs can come with higher bid/ask spreads (depending on trading volume and liquidity), which can increase the cost of trading those funds.

Lower Yield

ETFs can be great for investors looking for exposure to a broad market, index, or sector. But for an investor with a strong conviction about a particular asset, investing in an ETF that includes that asset will only give them indirect exposure to it — and dilute the gains if it shoots up in price relative to its comparable assets or the markets as a whole.

What Are Common Types of ETFs?

The ETF market is quite varied today, but much of it reflects its roots in the equities market. The first U.S. ETF was the Standard & Poor’s Depository Receipt, known today as the SPDR. It was launched on the American Stock Exchange in 1993. Today, ETFs that cover the S&P 500 are one of the most common types of ETFs.

Since the SPDR first debuted, the universe of exchange-traded funds has greatly expanded, and ETF trading and investing has become more popular with individual investors and institutions. Although index ETFs — those that passively track an index — are still the most common type of fund, ETFs can be actively managed. In addition, these funds come in a range of different flavors, or styles.

Because of the way these funds are structured, ETFs come with a specific set of risk factors and costs — not all of which are obvious to investors. So, in addition to the risk of loss if a fund underperforms (i.e., general market risk), investors need to bear in mind that some ETFs might get different tax treatment; could be shut down (dozens of ETFs close each year); and the investor may pay a higher bid/ask spread to trade ETFs, as noted above.

With that in mind, ETFs can offer an inexpensive way to add diversification to your portfolio. Here are some common types of ETFs.

Index ETFs

These provide exposure to a representative sample of the stock market, often by tracking a major index. An index, like the S&P 500, is simply a measure of the average of the market it is attempting to track.

Sector ETFs

These ETFs track a sector or industry in the stock market, such as healthcare stocks or energy stocks.

Style ETFs

These track a particular investment style in the stock market, such as a company’s market capitalization (large cap, small cap, etc.) or whether it is considered a value or growth stock.

Bond ETFs

Bond ETFs provide exposure to bonds, such as treasury, corporate, municipal, international, and high-yield.

Caveats for Certain ETFs

A handful of ETFs may require special attention, as they may incur higher taxes, costs, or expose investors to other risks.

Foreign Market ETFs

These ETFs provide exposure to international markets, both by individual countries (for example, Japan) and by larger regions (such as Europe or all developed countries, except the United States). Note that ETFs invested in foreign markets are subject to risk factors in those markets, which may not be obvious to domestic investors, so be sure to do your homework.

Commodity ETFs

Commodity ETFs track the price of a commodity, such as a precious metal (like gold), oil, or another basic good. Commodity ETFs are governed by a special set of tax rules, so be sure to understand the implications.

Real Estate ETFs

Real estate ETFs provide exposure to real estate markets, often through what are called Real Estate Investment Trusts (REITS). Dividends from REITs also receive a different tax treatment, even when held within the wrapper of a fund.

Additional ETFs

In addition, there are inverse ETFs, currency ETFs, ETFs for alternative investments, and actively managed ETFs. (While most ETFs are passive and track an index, there are a growing number of managed ETFs.) These instruments are typically more complicated than your standard stock or bond ETF, so do your due diligence.

What Is ETF Trading?

ETF trading is the buying and selling of ETFs. To trade ETFs, it helps to understand how stocks are traded because ETF trades are similar to stock trades in some ways, but not in others.

Stocks trade in a marketplace called an “exchange,” open during weekday business hours, and so do ETFs. It is possible to buy and sell ETFs as rarely or as frequently as you could a stock. You’ll be able to buy ETFs through whomever you buy or sell stocks from, typically a brokerage.

That said, many investors will not want to trade ETFs frequently. The bid-ask spread — the difference between the highest price a buyer is willing to pay and the lowest price a seller will accept — can add to the cost of every trade.

A simple ETF trading strategy is to buy and hold ETFs for the purpose of long-term growth. Whether you choose a buy and hold strategy or decide to trade more often, the ease of trading ETFs makes it possible to build a broad, diversified portfolio that’s easy to update and change.

Risks of Trading ETFs

As noted in the discussion about common types of ETFs, it bears repeating that some ETFs can expose investors to more risk — but all exchange-traded funds come with some degree of risk. For example, investing in one of the most common types of ETFs, an S&P 500 ETF which tracks that index, still comes with the same risk of loss as that part of the market.

If large-cap U.S. stocks suddenly lose 30%, the ETF will also likely drop significantly.

This caveat applies to other asset classes and sectors as well.

3 Steps to Invest in ETFs

If you want to start investing in ETFs, there are a few simple steps to follow.

1. Do Your Research

Are you looking to get exposure to an entire index like the S&P 500? Or a sector like technology that may have a different set of prospects for growth and returns than the market as a whole? Those decisions will help narrow your search.

2. Choose an ETF

For any given market, sector, or theme you want exposure to, there is likely to be more than one ETF available. One consideration for investors is the fees involved with each ETF.

3. Find a Broker

If you’re already trading stocks, you’ll already have an investment broker that can execute your ETF trades. If you don’t have a broker, finding one should be relatively painless, as there are many options on the market. Once your account is funded, you can start trading stocks and ETFs.

How to Build an ETF Portfolio

Are you willing to take on more investment risk to see more growth? Would you prefer less risk, even if it means potentially lower returns? How will you handle market volatility? Understanding your personal risk tolerance can help you choose ETFs for your portfolio that round out your asset allocation.

For example, if you decide that you would like to invest in a traditional mix of stocks and bonds at a ratio of 70% to 30%, you could buy one or several stock ETFs to gain exposure to the stock market with 70% of your money and some ETFs to fulfill your 30% exposure to the bond market.

The risk factors of equity and bond ETFs are relatively easy to anticipate, but if you venture into foreign stock ETFs, emerging markets, or gold and other commodities, it’s wise to consider the additional risk factors and tax implications of those markets and asset classes.

Once you’ve determined your desired allocation strategy and purchased the appropriate ETFs, you may want to take a hands-on approach when managing your portfolio throughout the year. This could mean rebalancing your portfolio once a year, or utilizing a more active approach.

The Takeaway

ETFs bundle different investments together, offering exposure to a host of different underlying securities in one package. There’s likely an ETF out there for every type of investor, whether you’re looking at a particular market, sector, or theme. ETFs offer the bundling of a mutual fund, with the trading ease of stocks, although the total costs and tax treatment of ETFs require some vigilance on the part of investors.

Though a DIY approach to investing using ETFs is doable, many investors prefer to have the help of a professional who can provide guidance throughout the investment process.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Invest with as little as $5 with a SoFi Active Investing account.

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Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.


Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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