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According to the IRS, approximately 90% of tax refunds are issued in under 21 days. However, some tax returns require more attention, which can lengthen the process and push back your tax refund date.

The deadline for filing 2023 taxes is Monday April 15, 2024. If you request an extension, the deadline is Tuesday October 15, 2024. Keep reading to learn more about deadlines for 2023 tax returns, and how to track the progress of your tax refund.

Tax Refund Process, Explained

The process begins when you submit your return to the IRS. The IRS then breaks down the process into three steps: return received, refund approved, and refund sent.

If you file electronically, you should receive an email confirming that your return was received within 24 hours. Paper return filers will have to wait longer.

After the IRS processes your return and confirms the information, your refund will be approved and a tax refund date will be issued. This takes about 3 weeks for electronic filers. Taxpayers who file a paper return by mail will wait at least four weeks.

The last step is when your tax refund is sent out. For filers who provide direct deposit information, your refund should appear in your account almost immediately. Taxpayers who do not include their bank information will have to wait for a paper check to arrive by mail.

💡 Quick Tip: We love a good spreadsheet, but not everyone feels the same. An online budget planner can give you the same insight into your budgeting and spending at a glance, without the extra effort.

Factors Impacting How Long a Tax Refund Takes

Several factors can affect the timing of your tax refund — including your financial organization skills and the accuracy of the information you provide. If you don’t receive your tax refund within 21 days, your return is likely being manually reviewed due to a mistake or complication.

The following factors can also affect your 2023 tax refund date.

How Early You File

Filing early is essential if you want to get your tax refund early. Ideally, you should be able to compile all your tax documents by the end of January. Forms such as W-2s, 1099-Rs, 1098-Es, and 1098s will provide the income information you need to file.

Filing early means submitting your tax return before the official deadline of Monday April 15, 2024, for your 2023 tax return. Since many taxpayers file their returns on the official deadline, filing early allows you to beat the rush.

Similarly, if you requested an extension, filing “early” means before the October deadline. The deadline for 2023 returns is Tuesday October 15, 2024. However, taxpayers can file anytime before October. This way, you’ll avoid the bottleneck that inevitably occurs on the deadline itself.

If You Are Claiming Certain Credits

Claiming certain credits on your tax return can push back your 2023 tax refund date. These include:

•   Earned Income Tax Credit

•   Additional Child Tax Credit

•   Injured Spouse Allocation

•   Child Tax Credit, if you claim the wrong amount

E-filed or Sent By Mail

Whether you do your own taxes by hand, use software to assist you, or hire an accountant or tax preparer, it’s best to opt for electronic filing. E-filed taxes are accepted by the IRS within a day or two, while mailed paper returns can take weeks to arrive.

Existing Government Debt

Some taxpayers owe the federal or state government due to unpaid child support, taxes from years past, or student loan payments. Taxpayers facing these issues will receive a reduced refund or none at all, and any refund can take longer than the standard 21-day timeframe after e-filing.

How to Track the Progress of Your Refund

If you’re like most taxpayers, it won’t take long until you start wondering where their tax refund is. Getting hold of a live IRS representative by phone is possible but challenging during tax season.

Fortunately, the IRS’s Refund Status tool provides updates on your 2024 tax refund date just 24 hours after you submit your 2023 taxes electronically.

The tool shows taxpayers one of three statuses: return received, refund approved, or refund sent. After the refund is approved, the IRS will give you a tax refund date. If you mailed your return, you’ll have to wait about four weeks for the tool to provide information on your refund.

What to Do Once Your Refund Arrives

How should I spend my tax refund? It’s a perennial question for taxpayers. Top choices include paying down debt, saving for a vacation, and investing. The important thing is to plan ahead so you don’t spend it all on frivolous or impulsive purchases.

One popular option is to treat your refund like regular income. You can budget the majority of the money for “needs,” by setting up an emergency fund or paying down your mortgage. The rest can be set aside for “wants,” such as a year’s worth of dining out.

An online budget planner can help you decide the appropriate percentages for needs and wants. Likewise, a debt pay off planner can show you how much sooner you’ll be debt-free after depositing some or all of your refund.


💡 Quick Tip: Income, expenses, and life circumstances can change. Consider reviewing your budget a few times a year and making any adjustments if needed.

What Happens If You Can’t File Income Taxes by the Deadline

Each year, taxpayers unable to file their return on time (usually mid April) can ask the IRS for an extension. The IRS’s Free File tool allows you to electronically submit a request to change your filing deadline to October.

Be aware that taxpayers who want an extension must make an educated guess about the taxes they owe and pay the IRS that amount.

How to File Form 4868 for a Tax Return Extension

Another way to file for an extension is to complete form 4868. You can submit the form electronically or by mail.

The Takeaway

While you cannot predict your exact tax refund date, filing electronically early in the tax season can help you get your refund faster. The IRS sends out most refunds within 21 days of receiving the return. The deadline for filing 2023 taxes is Monday April 15, 2024. If you request an extension, the deadline for filing a 2023 tax return is Tuesday October 15, 2024.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

FAQ

When should I expect my 2024 tax refund?

Typically, you can expect to receive your refund within 21 days of filing your return. However, mistakes and special tax credits can slow down the process.

What days does the IRS deposit refunds in 2024?

The IRS deposits refunds Monday through Friday, except for holidays.

How long does it take the IRS to approve a refund in 2024?

Most refunds are issued in 21 days or less from when the IRS accepts your return. However, if there are issues with the return, it may take longer.

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

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.

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

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.

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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Waiting for the IRS to process your federal tax return? You might be wondering how long it takes for your tax return to come back. If you file electronically, your tax return will usually be processed within 21 days. A paper return can take six weeks or longer. If you include direct deposit information, your refund will come back much faster.

If you’re concerned because your federal tax return is delayed, you can check its status online or speak to an IRS representative. Keep reading to learn what’s going on behind the scenes at the IRS with your tax return and what factors may affect when you’ll see your refund.

How Long the IRS Takes to Process Your Taxes

The main factor affecting when you get your tax return back is how long the IRS takes to process your information. Processing time will vary depending on whether you file an electronic or paper return. On average, processing for e-file returns takes less than 21 days, whereas paper returns can take more than six weeks.

If you want to get your tax refund early, it’s best to file electronically, include direct deposit information, and file early in the tax season.

💡 Quick Tip: Online tools make tracking your spending a breeze: You can easily set up budgets, then get instant updates on your progress, spot upcoming bills, analyze your spending habits, and more.

How Long a Tax Refund Typically Takes

Once your return is submitted to the IRS, processing can be broken down into three stages: return accepted, refund approved, and refund sent.

For electronic returns, you will typically see an email from the IRS within 24 hours confirming that your return has been accepted. For paper returns, you can expect notification in about four weeks. The acceptance stage just means the IRS has verified your personal information and checked that your dependents haven’t been claimed by someone else.

Next, the IRS will take a closer look at the information you’ve provided and either approve it or send a letter by mail asking for a correction or more information. This is the part that takes less than 21 days if you’ve e-filed.

Paper returns take longer because they must be manually uploaded by a human. Once uploaded, the information you provide can then be compared to data in the IRS system. However, submitting a paper return isn’t the only factor that can slow down a refund.

Factors That Could Slow Down Your Refund

If your return was filed electronically more than 21 days ago and you haven’t seen your refund yet, there could be a number of reasons for the delay, including:

•   The return has incorrect or incomplete information

•   Your personal info has potentially been used in identity theft or fraud

•   The child tax credit or recovery rebate credit may need to be corrected

•   The return qualifies for an additional child tax credit, earned income tax credit, or injured spouse allocation (form 8379)

•   Your bank or credit union needs additional time to post the refund to your account

If the IRS needs more information or wants a corrected return, they will contact you via mail. Many issues can be quickly resolved, especially if your finances are organized, as in a budget planner app. In the event that you owe money, the IRS will work with you to develop a payment plan. A debt payoff planner can also help you determine how you can pay your outstanding taxes comfortably and quickly.

Recommended: What Is The Difference Between Transunion and Equifax?

How to Track the Progress of Your Refund

The IRS offers two ways you can check the status of your refund: online or with a representative. An online tool called “Where’s my refund? ” allows you to check the status of your federal return. You’ll need the following information on hand:

•   Social security number

•   Filing status (Single, married–filing joint, married–filing separate, head of household, qualifying widower)

•   Refund amount

After inputting this information, you should be able to see whether your return has been accepted, processed, or sent back to you.

The IRS also has representatives who can research the status of your refund, either by phone (1-800-829-4477) or in person at a taxpayer assistance center . Note that the IRS probably won’t be able to give you much information if you e-filed less than 21 days earlier or by paper less than six weeks earlier.

As with the online checker, you’ll need to provide the representative with your social security number, filing status, and the refund amount you expect.

What to Do if Your Refund Arrives and Has a Mistake

If you receive your refund and realize there’s a mistake, you can file an amended return to correct it. Keep in mind, you can’t electronically file an amended return; you must send it by mail.

Some mistakes are identified by the IRS. In that event, you’ll receive a letter in the mail explaining the issue and how to respond.

If you’re still unsure of what to do, the IRS offers a hotline where you can ask for guidance.

•   Individual taxpayers: 800-829-1040 (TTY/TDD 800-829-4059)

•   Business taxpayers: 800-829-4933

How Long the IRS Has to Audit Your Taxes

If the IRS needs to review your tax return in more depth, you may be audited. Generally, the IRS tries to initiate audits as soon as they identify an issue with your tax return, but they may go back as far as three years. In cases where the error is substantial, they can audit up to six years of prior tax returns.


💡 Quick Tip: Income, expenses, and life circumstances can change. Consider reviewing your budget a few times a year and making any adjustments if needed.

The Takeaway

If you file electronically, your tax return will usually be processed within 21 days. A paper return can take six weeks or longer. If you include direct deposit information, your refund will come back much faster.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

FAQ

When can I expect my 2023 tax refund?

According to the IRS, nine out of 10 tax returns are processed within 21 days. To expedite the process, you can file your return electronically and include direct-deposit information. Paper returns are generally processed within 6 weeks.

How long does it take to get your tax refund direct deposit?

Most taxpayers who e-file and include direct-deposit info receive their refund in 21 days. If you submitted a paper return with direct-deposit info, you can expect your refund within 6 weeks.

How long does it take taxes to be returned?

Most taxpayers who e-file can expect refunds within 21 days. If you file via paper return, expect processing to take six weeks or more.

Photo credit: iStock/Baris-Ozer

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

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.

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.

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.

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.

SORL0124003

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.

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.

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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^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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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).

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