Investopedia

Fact checked by Ryan Eichler
Reviewed by Charles Potters

Over the last generation, exchange-traded funds (ETFs) have changed the financial world by offering a low-cost and easy way to build an instantly diversified portfolio. These investment vehicles, which trade like stocks but hold baskets of securities like mutual funds, now manage $8.1 trillion in assets. as of the end of 2023. While ETFs are known for their comparatively low cost, understanding exactly how their fees work is crucial for any investor looking to maximize returns.

“ETF investors won’t see their ETF fees being paid directly,” said David Wilson, managing partner at Sincerus Advisory in New York City. He noted that since ETF fees typically are deducted from the fund in a seamless, behind-the-scenes process that happens daily, it’s easy to miss what impact they have on your returns.

As such, while ETF fees are supposed to be transparent, they’re still opaque to most investors. Below, we take you through how these fees are deducted and how they impact your bottom line.

Key Takeaways

• Exchange-traded fund (ETF) fees are automatically deducted from the fund’s assets daily, reducing the fund’s net asset value (NAV) rather than appearing as separate charges on investor statements.
• The cost of shares in an ETF includes both the expense ratio and trading costs like commissions and bid-ask spreads.
• Seemingly minor differences in ETF fees can significantly impact returns over time through the power of compounding.
• Buyer beware: While supposedly less costly expense ratios look like they might save you money, that’s not always the case.

What Are ETF Fees?

ETF fees cover expenses for managing the fund. These costs include everything from paying the portfolio managers who make investment decisions to covering basic administrative tasks like record keeping and marketing.

The most significant cost for you is given in the expense ratio. This figure, expressed as a percentage, tells you how much you’ll pay annually for every dollar invested. For example, if an ETF has an expense ratio of 0.10%, you’ll pay $1 annually for every $1,000 invested. While this might sound small, these fees add up over time through compounding.

Actively Managed vs. Passive ETF Fees

The funds above represent two categories that quickly differentiate the kind of fees you can expect. Passively managed index funds have lower costs because administrative costs are less: managing funds that mimic and index like the S&P 500 is far easier than needing staff to pick the best stocks to fill out a fund’s portfolio.

Actively managed funds select securities from within different sectors and types of assets, aiming to increase gains based on the trading acumen of its managers. Below is a summary of the differences between actively managed and index funds:

Fund Types and Fees

Of course, these broad categories are still too broad to tell you what kind of expense ratios you should expect, given your investment strategy.

“When evaluating funds, not all fees are created equal,” Wilson told us. He pointed out that some asset classes are naturally more expensive to manage than others. For instance, ETFs focused on U.S. large-cap stocks typically charge lower fees because these markets are larger and more liquid than specialized markets like emerging market stocks or micro-cap companies.

Thus, you need to consider ETF fees in light of their strategies. For example, passively managed ETFs that track well-known indices like the S&P 500 and the Dow Jones Industrial Average tend to have very low fees because the cost of maintaining such portfolios is minimal. However, investors pay higher fees for actively managed ETFs or niche ETFs that require more research and active management, such as those focused on emerging markets or alternative assets like commodities.

In these cases, the higher fees may be justified if the fund manager’s strategy delivers superior returns or provides diversification that lower-cost funds can’t. For example, an ETF investing in Vietnamese small-cap stocks might justify a higher fee because of the complexity and cost of operating in that market. Similarly, an ETF using options strategies to generate income might warrant higher fees because of the expertise required.

When comparing fees, you’re looking to see if the greater cost of the fund enables you to receive a greater amount of returns than the extra amount you’re paying.

Here are the different kinds of ETFs, with their general range of expense ratios (ranges taken from the ETF Database and the Investment Company Institute):

Broad Market Index ETFs (0.00% – 0.10%)

• Track major indexes like the S&P 500 or total stock market
• Lowest cost because of a simpler investment strategy and typically more extensive asset base
• Example: SPDR S&P 500 (SPY)

U.S. Large-Cap ETFs (0.00% – 0.12%)

• Focus on large American companies
• Highly liquid markets keep costs low
• Example: Proshares S&P 500 Dividend Aristocrats ETF (NOBL)

U.S. Bond ETFs (0.05% – 0.15%)

• Track U.S. government or corporate bonds
• Slightly higher costs because of more complex bond trading
• Example: iShares Core U.S. Aggregate Bond ETF (AGG)

International Developed Market ETFs (0.12% – 0.30%)

• Invest in foreign developed markets like Europe or Japan
• Higher costs because of international trading and currency management
• Example: Vanguard FTSE Developed Markets ETF (VEA)

Cryptocurrency ETFs (0.12% – 1.90%)

• Track cryptocurrency prices or crypto-related companies
• Higher costs because of complexity, security needs, and regulations
• Example: Grayscale Bitcoin Trust ETF (GBTC)

Real Estate ETFs (0.12% – 0.50%)

• Invest in real estate investment trusts (REITs)
• Higher costs because of real estate market research and analysis
• Example: iShares U.S. Real Estate ETF (IYR)

Commodity ETFs (0.25% – 0.75%)

• Track physical commodities like gold, silver, or oil
• Higher costs because of storage, insurance, and futures trading
• Example: SPDR Gold Shares (GLD)

Emerging Market ETFs (0.25% – 0.75%)

• Invest in developing markets like Brazil or India
• Higher costs because of complex trading and research requirements
• Example: iShares MSCI Emerging Markets ETF (EEM)

Sector or Industry-Specific ETFs (0.35% – 0.60%)

• Focus on specific sectors like technology or healthcare
• Higher costs because of specialized research and a smaller asset base
• Example: SPDR S&P Biotech ETF (XBI)

Leveraged/Inverse ETFs (0.90% – 1.50%)

• Attempt to multiply market returns or profit from market declines
• Highest costs because of complex derivatives trading and daily rebalancing
• Example: ProShares UltraPro Short QQQ (SQQQ)

Note

Index ETFs are trying to match the market (or at least that part of the market it focuses on), while actively managed funds are trying to outpace their benchmarks.

How are ETF Fees Deducted from the Fund?

Unlike your monthly subscription from Netflix Inc. (NFLX) or annual credit card fee, you’ll never see ETF fees appear as a line item on your statement. Instead, these fees are subtracted from the fund’s NAV daily in tiny increments that add up to the annual expense ratio. Here’s the process in action:

1. Each day, the ETF company calculates the fund’s total value.
2. It subtracts the day’s portion of the annual fee.
3. This adjusted value becomes the new NAV.
4. The process repeats daily.

Let’s say an ETF has an expense ratio of 0.20% (or $20 annually per $10,000 invested). Rather than charging this all at once, the fund provider divides this annual fee by 365 and deducts about $0.055 per day for every $10,000 you have invested.

This behind-the-scenes deduction means investors don’t need to keep cash on hand to pay fees. However, it also means your actual returns are always slightly lower than the fund’s reported performance. For example, if an ETF tracking S&P 500 returns 10% in a year and has a 0.20% expense ratio, your actual return would be 9.80%.

Fees significantly impact your ultimate returns, which is why they are important. A $1,000 investment that grows by 7% yearly would be worth $1,970 in 10 years without fees. Subtract a 1% annual fee, and the result is $1,790. Fund expenses have eaten up about 10% of your potential portfolio.

When accounting for ETF fees, don’t forget the bid-ask spread when you buy or sell shares. This difference is often minimal in highly liquid ETFs, but in less liquid funds, it’s often more costly.

Typical ETF Fees

When investing in ETFs, there are several types of fees. Here’s a comprehensive breakdown:

Trading Commissions

Brokers charge investors commissions for executing the buy and sell orders for the ETF shares for you. Historically, these fees could range from $5 to $25 per trade, but these have largely gone the way of paper charts and landlines—especially if shares are on U.S. exchanges.

When commissions are charged, they represent an immediate out-of-pocket expense that can affect short-term returns. Here’s where you’re most likely to find them:

1. Non-Core ETFs or Niche ETFs

• Specialized or /thematic ETFs: Funds focusing on niche markets, such as energy, cannabis, or blockchain, might not have partnerships with major brokerages, leading to higher commissions.
• Sector-specific ETFs: Funds focusing on particular industries (e.g., biotech or technology sub-sectors) may incur fees if they are from smaller or less mainstream issuers.

2. International ETFs

• ETFs that focus on international markets or are domiciled abroad may not be part of a brokerage’s commission-free list.
• Some of these ETFs trade less frequently and may be considered “foreign-listed,” incurring higher trading costs.

3. Non-Partner Funds

• Certain brokerages have specific lists of commission-free ETFs based on agreements with ETF providers. For example, if your brokerage doesn’t include an ETF issuer like Vanguard, you might pay a fee to trade Vanguard ETFs.

4. Leveraged and Inverse ETFs

• ETFs designed for short-term trading, including leveraged and inverse ETFs, might incur commissions if they’re not on the broker’s preferred list because of their high risk.

5. Low Liquidity ETFs

• ETFs with lower trading volume might incur extra fees because of their complexity and difficulty in execution.

To avoid these fees, check your brokerage’s list of commission-free ETFs and prioritize trading those that align with your investment goals.

Researchers have found repeatedly that a majority of actively managed funds underperform their benchmarks, making their higher fees often less justifiable.

Operating Expenses

These day-to-day costs include the following:

• Recordkeeping
• Accounting services
• Legal fees
• Custodial services
• Fund administration

These expenses are rolled into the ETF’s expense ratio and deducted daily from the fund’s assets.

Management Fees

Most of an ETF’s expense ratio goes toward compensating the fund manager. Passive ETFs that simply track an index usually charge minimal management fees since they require less effort to handle. However, actively managed ETFs that try to outperform their benchmark charge higher fees to cover the cost of research and more frequent trading decisions.

Marketing and Distribution Fees (12b-1 Fees)

While far less common in ETFs than mutual funds, some ETFs charge 12b-1 fees to cover the following:

• Marketing costs
• Advertising expenses
• Payments to financial advisors that are included in the expense ratio and typically range from 0.25% to 0.75% annually.

Securities Lending Revenue

Though not a fee paid by investors, it’s important to mention that many ETFs engage in securities lending—loaning out the underlying assets to other market participants, such as short-sellers, in exchange for a fee.

The revenue generated from securities lending helps offset some of the ETF’s operating expenses, reducing the fund’s net cost for investors. Some ETFs pass this revenue back to investors, which can slightly improve their returns.

Zero-Fee ETFs: Less Costly But Buyer Beware

Zero-fee ETFs have been around since the start of the decade, offering investors a cost-free way to access diverse markets. Prominent examples include BNY Mellon’s BNY Mellon US Large Cap Core Equity ETF (BKLC) and Core Bond ETF (BKAG) and SoFi’s Select 500 ETF (SFY) and Next 500 ETF (SFYX). These funds have 0% expense ratios, a stark departure from the industry norm; they’re achieved through fee waivers or subsidies to attract investors. That said, they have yet to do so in mass waves, with AUMs in the millions or low billions.

These ETFs might seem like a game-changer for those prioritizing low costs. With expense ratios at zero, you can avoid the ongoing drag fees inflict on your returns. BKAG, for example, provides exposure to thousands of high-quality bonds, making it an attractive choice for fixed-income investors, while SFY and SFYX cater to large- and mid-cap growth enthusiasts. Others cover more volatile assets, including cannabis and crypto.

However, caution is warranted. Here’s what you need to do, besides carefully reviewing any rebate structure, the assets managed, and the management’s track record:

• Understand revenue sources: Fee waivers might not last indefinitely. For instance, SoFi Technologies Inc.’s (SOFI) funds waive their 0.19% fees annually, meaning costs could rise in the future.
• Assess liquidity: With far fewer assets under management and far fewer shares trading hands than the major index ETFs—SFYX has a modest $70 million in AUM (see the table below)—which may result in wider bid-ask spreads, raising transaction costs.
• Compare alternatives: ETFs like SPDR’s S&P 500 ETF (SPY) or Vanguard’s Total Bond Market ETF (BND) charge just 0.02%, offering similar diversification and established liquidity without potential surprises.

While zero-fee ETFs are appealing, investors must weigh these benefits against risks, including liquidity challenges and the possibility of future fee increases. As such, the cheapest option could end up costing you more.

Why ETF Fees Matter

Fees Directly Impact Returns

ETF fees are deducted directly from the fund’s assets, meaning they reduce the net returns investors receive. For example, if an ETF generates a 7% annual return and has an expense ratio of 0.50%, the investor’s net return will be 6.50%. This deduction happens continuously, as fees are taken out daily, meaning investors don’t see these charges separately but experience them as slightly lower returns.

While a 0.50% expense ratio might not seem like much in the short term, over time it can significantly reduce your returns due to the compounding effect. For instance, an investor who invests $10,000 in an ETF with a 0.50% fee over 30 years at a 7% return will end up with about $66,000.

In contrast, investing the same amount in an ETF with a lower fee of 0.10% would have resulted in roughly $75,000 over the same period. That’s a $9,000 difference due solely to the fee structure, and this shows how small percentages can compound into large sums.

Long-Term Compounding of Fees

The longer the investment horizon, the more ETF fees compound and reduce overall gains. This is particularly important for investors with long-term goals such as retirement savings. For example, a 0.50% fee on a $100,000 portfolio can cost $500 per year in explicit fees. However, because those fees cut the amount of capital available to earn returns, the loss compounds over time.

If we project this over 30 years, with the same $100,000 earning a 7% annual return, we get the following:

• Without fees, the portfolio would grow to $761,225.
• With a 0.50% annual fee, the portfolio would grow to $660,753.

Low-Cost ETFs vs. High-Cost ETFs

One of the primary reasons investors are drawn to ETFs is their typically lower expense ratios compared to mutual funds. However, not all ETFs are created equal, and fees vary widely. For example, many passively managed ETFs that track major indexes like the S&P 500 have expense ratios as low as 0.03% to 0.10%. On the other hand, some actively managed ETFs, especially those using complex strategies or focused on niche markets, may charge 0.75% or even higher.

Let’s compare two ETFs:

• ETF A: Passively tracks the S&P 500 with an expense ratio of 0.05%.
• ETF B: Actively managed small-cap growth fund with an expense ratio of 0.85%.

Over 20 years, assuming both ETFs achieve the same gross return of 8% per year:

• ETF A (0.05% fee) would provide a net return of about 7.95% annually.
• ETF B (0.85% fee) would yield a net return of 7.15%.

This seemingly small difference in annual returns translates into a massive divergence in outcomes. On a $10,000 investment over 20 years:

• ETF A would grow to approximately $47,875.
• ETF B would grow to only $39,658.

How To Find Your ETFs Fees

Here are a few ways to easily find out the fees charged by an ETF:

Check the ETF’s Prospectus or Fact Sheet

The prospectus or fact sheet will clearly list the ETF’s expense ratio, which is the primary fee you’ll pay as an investor. You can find this document on the fund provider’s website or through your brokerage.

Look Them Up on Reputable Financial Data Platforms

Most financial news websites, broker platforms, or ETF screener tools will list the expense ratio of ETFs, making it easy to compare across different funds.

Use Online ETF Comparison Tools

Many online platforms and brokerage websites offer ETF comparison tools, which allow you to compare fees among multiple ETFs. These tools often provide detailed breakdowns of the different costs associated with owning ETFs, including operating expenses, management fees, and more.

Review Your Brokerage or Trading Platform

When you purchase an ETF through your broker, you might incur additional costs like trading commissions. Some brokers offer commission-free ETFs, while others may charge a fee per trade. You want to be sure to check with your broker to understand any transaction-related fees before investing.

ETF vs. Mutual Fund Fees

ETFs and mutual funds have long vied for investors’ dollars, but the landscape for fees has significantly evolved. Once known for their high costs, mutual funds now compete closely with ETFs in terms of affordability, reshaping a still-often told story about how mutual funds are pricier than ETFs.

Important

Given the significant cuts in mutual fund fees and loads, the biggest cost difference for mutual funds and ETFs are how they are taxed.

The Historical Fee Gap

Traditionally, ETFs were the cost-conscious investor’s choice. ETFs, which track indices or baskets of securities, have historically offered expense ratios as low as 0.03% to 0.25%, far below the 1% to 2% average for actively managed mutual funds. This made ETFs particularly attractive for passive investors.

How Things Have Changed

In recent years, mutual fund providers have responded to competitive pressure by slashing fees, especially for index mutual funds. Some index funds now offer expense ratios that rival or even undercut, ETFs. For example, major players like Vanguard and Fidelity have introduced mutual funds with expense ratios as low as 0.02% to match ETF prices​​.

Key Differences in Fee Structures

1. Additional fees: Both mutual funds and ETFs competitive ratios. However, some mutual funds (less than 10% and fewer each year) may still charge additional fees, like load fees (sales commissions), which ETFs typically avoid.
2. Trading costs: ETFs trade like stocks, which means investors incur brokerage fees unless using commission-free platforms. Mutual funds often don’t have trading costs but may require a minimum holding period to avoid redemption fees.
3. Tax efficiency: ETFs are often more tax-efficient because of their in-kind creation and redemption process, minimizing capital gains distributions. Mutual funds may trigger taxable events more frequently​​. That’s because when you redeem shares in a mutual fund, the fund may have to sell securities to generate cash, which can result in capital gains being passed on to all investors in the fund, even if they haven’t sold their shares. These capital gains distributions are taxable, often resulting in a higher tax burden compared with ETFs.

Are ETF Fees Deducted Daily or Annually?

ETF fees, represented by the expense ratio, are deducted daily but calculated annually. The daily fee is a small fraction of your investment to cover the fund’s operating costs, but it accumulates to the total annual expense ratio over a year. To be precise, if an ETF, for example, has an expense ratio of 0.25%, about 0.000685% is deducted from the fund’s assets each day (0.25% ÷ 365 days).

Do I Have To Pay Additional Fees To Buy and Sell ETFs?

It depends on your broker. While many now offer commission-free ETFs, some platforms may still charge trading commissions when you buy or sell ETF shares. In addition, the bid/ask spread—the difference between the buying price and the selling price—can also affect the total cost of your transaction.

Always check with your broker for details on commission charges and compare spreads for different ETFs before trading.

Which Funds Have the Lowest Fees?

Passively managed funds like index ETFs tend to have lower fees than actively managed mutual funds. Broad-based funds tend to have lower expenses than more niche or sector-specific funds because their management costs are distributed among a larger investor base. Vanguard claimed the lowest expense ratio among all fund managers with average asset-weighted expenses of 0.04%.

The Bottom Line

Despite getting lower in the past few decades, ETF fees are not to be overlooked. They are automatically deducted daily from the fund’s assets and, though seamless, can still have a long-term impact on your returns because of compounding. Ultra-low-cost ETFs, including zero-fee options, offer attractive products for cost-conscious investors. However, they come with caveats and trade-offs when compared with funds with slightly higher expense ratios.

Investors should weigh these considerations carefully and compare ETFs not just on expense ratios but also on liquidity, risk tolerance, and how the fund aligns with your financial goals. Focus on funds that offer value in both cost and performance.

Fact checked by Suzanne Kvilhaug
Reviewed by David Kindness

Business valuation isn’t a straightforward process. For startups with little or no revenue or profits and less-than-certain futures, the job of assigning a valuation is particularly tricky. For mature, publicly listed businesses with steady revenues and earnings, it’s typically a matter of valuing them as a multiple of their earnings before interest, taxes, depreciation, and amortization (EBITDA) or based on other industry-specific multiples. But it’s a lot harder to value a new venture that’s not publicly listed and may be years away from sales.

Key Takeaways

• If you are trying to raise capital for your startup, or you’re thinking of putting money into one, it’s important to determine the company’s worth.
• Startups are notoriously hard to value accurately since they do not yet have operating income or perhaps even a salable product, and will be spending money to get things going.
• While some approaches like discounted cash flows can be used to value both startups and established firms, other metrics like cost-to-duplicate and stage valuation are unique to new ventures.

Understanding Start-Up Business Valuations

Valuations give investors and stakeholders information they need to make decisions. It helps them evaluate their prospective return on investment.

New businesses frequently need outside funding to support their expansion. In order to determine the amount of money to be raised and the ownership stake to be offered to investors, valuations are crucial to fundraising operations. Business valuations of start-ups not only let investors decide whether to invest but to decide upon their ownership equity stake based on anticipated company outlook. In addition, based on the valuation, investors may opt for different types of securities allowed by the Securities and Exchange Commission.

The financial health and value drivers of a start-up are revealed by valuations, which is also helpful to internal members. Valuations support strategic planning, goal-setting, and internal decision-making for budgeting, resource allocation, and capital allocation. Start-up management can use valuations to evaluate the success of their company model, pinpoint areas for development, and allocate resources to promote growth.

Challenges in Valuing Start-Up Ventures

Though valuations are important, there are several hurdles to overcome when trying to assess how much a start-up company is worth. These challenges may include the following.

• Lack of Historical Financial Information: Start-ups frequently lack financial historical information, making it difficult to evaluate their performance, revenue creation, and potential profitability. Traditional valuation techniques may be less useful as a result of this data shortage.
• Uncertain Future Performance: Because startups operate in rapidly changing marketplaces, it is challenging to predict their future growth. Uncertainty in the valuation results from the difficulty of estimating the size of the addressable market and the capacity of the company to gain market share.
• Lack of Comparables: Startups frequently propose ground-breaking technologies or unique business strategies that may lack proven standards or comparables. It is difficult to locate comparable businesses for value reasons due to this uniqueness. Alternatively, the comparables may have only raised capital via exempt offerings by issuing securities not listed on public exchanges.
• Dependence on Funding Rounds: To support their expansion, start-ups often depend on several rounds of funding. Based on investor opinion, market conditions, and the company’s development, valuations may change between various funding rounds, complicating the valuation process.
• Subjectivity and Biases: Because it mainly relies on presumptions, market trends, and investor opinions, valuing start-ups entails some subjectivity. Divergent valuations may result from different investors’ varied levels of risk tolerance and growth forecasts.

Consulting or research companies often publish lists of start-up companies with their valuations.

Start-Up Valuation Methods

Cost-to-Duplicate

This approach involves calculating how much it would cost to build another company just like it from scratch. The idea is that a smart investor wouldn’t pay more than it would cost to duplicate. This approach will often look at the physical assets to determine their fair market value.

The cost to duplicate a software business, for instance, might be figured as the total cost of programming time that has gone into designing its software. For a high-technology startup, it could be the costs to date of research and development, patent protection, and prototype development. The cost-to-duplicate approach is often seen as a starting point for valuing startups since it is fairly objective. After all, it is based on verifiable, historic expense records.

The big problem with this approach is that it doesn’t reflect the company’s future potential for generating sales and profits. What’s more, the cost-to-duplicate approach doesn’t capture intangible assets, like brand value, that the venture might possess even at an early stage of development. Because it generally underestimates the venture’s worth, it’s often used as a conservative estimate of company value. The company’s physical infrastructure and equipment may only be a small component of the actual net worth when relationships and intellectual capital form the basis of the firm.

Market Multiple

Venture capital investors like this approach, as it gives them a pretty good indication of what the market is willing to pay for a company. Basically, the market multiple approach values the company against recent acquisitions of similar companies in the market.

Let’s say mobile application software firms are selling for five times sales. Knowing what real investors are willing to pay for mobile software, you could use a five-times multiple as the basis for valuing your mobile apps venture while adjusting the multiple up or down to factor for different characteristics. If your mobile software company, say, were at an earlier stage of development than other comparable businesses, it would probably fetch a lower multiple than five, given that investors are taking on more risk.

In order to value a firm at the infancy stages, extensive forecasts must be determined to assess what the sales or earnings of the business will be once it is in the mature stages of operation. Providers of capital will often provide funds to businesses when they believe in the product and business model of the firm, even before it is generating earnings. While many established corporations are valued based on earnings, the value of startups often has to be determined based on revenue multiples.

The market multiple approach arguably delivers value estimates that come closest to what investors are willing to pay. Unfortunately, there is a hitch: Comparable market transactions can be very hard to find. It’s not always easy to find companies that are close comparisons, especially in the startup market. Deal terms are often kept under wraps by early-stage, unlisted companies—the ones that probably represent the closest comparisons. 

Discounted Cash Flow (DCF)

For most startups—especially those that have yet to start generating earnings—the bulk of the value rests on future potential. Discounted cash flow analysis then represents an important valuation approach. DCF involves forecasting how much cash flow the company will produce in the future and then, using an expected rate of investment return, calculating how much that cash flow is worth. A higher discount rate is typically applied to startups, as there is a high risk that the company will fail to generate sustainable cash flows.

The trouble with DCF is the quality of the DCF depends on the analyst‘s ability to forecast future market conditions and make good assumptions about long-term growth rates. In many cases, projecting sales and earnings beyond a few years becomes a guessing game. Moreover, the value that DCF models generate is highly sensitive to the expected rate of return used for discounting cash flows. So, DCF needs to be used with much care.

Important

Consider how inflation causes higher discount rates which cause valuations to decrease.

Valuation by Stage

Finally, there is the development stage valuation approach, often used by angel investors and venture capital firms to quickly come up with a rough-and-ready range of company value. Such rule of thumb values are typically set by the investors, depending on the venture’s stage of commercial development. The further the company has progressed along the development pathway, the lower the company’s risk and the higher its value. A valuation-by-stage model might look something like this:

Estimated Company Value	Stage of Development
$250,000 – $500,000	Has an exciting business idea or business plan
$500,000 – $1 million	Has a strong management team in place to execute on the plan
$1 million – $2 million	Has a final product or technology prototype
$2 million – $5 million	Has strategic alliances or partners, or signs of a customer base
$5 million and up	Has clear signs of revenue growth and obvious pathway to profitability

Again, the particular value ranges will vary depending on the company and, of course, the investor. But in all likelihood, startups that have nothing more than a business plan will likely get the lowest valuations from all investors. As the company succeeds in meeting development milestones, investors will be willing to assign a higher value.

Many private equity firms will provide additional funding when the firm reaches a given milestone. For example, the initial round of financing may be targeted toward providing wages for employees to develop a product. Once the product is successful, a subsequent round of funding is provided to mass-produce and market it. 

How Do You Assess the Growth Potential of a Start-Up?

Assessing the growth potential of a start-up involves evaluating factors like the target market, competitive advantage, scalability of the business model, customer adoption rates, market trends, and the ability to execute the business plan.

What Role Does Intellectual Property Play in Valuing a Start-Up?

Intellectual property, such as patents, trademarks, and proprietary technology, can significantly impact a start-up’s value. It provides a competitive advantage, protects innovations, and may increase barriers to entry for competitors.

How Does the Management Team Influence the Valuation of a Start-Up?

The management team’s experience, expertise, track record, and ability to execute the business plan can significantly influence the valuation of a start-up. Investors often assess the strength of the management team when valuing the company.

Can Market Comparables Be Used to Value Start-Ups?

Market comparables can be used to value start-ups, although finding direct comparables can be challenging due to the unique characteristics of start-ups. Comparable company analysis may involve identifying similar start-ups in terms of industry, growth stage, business model, or technology.

The Bottom Line

It is extremely difficult to determine the value of a company while it is in its first stages, as its future remains uncertain. There’s a saying that startup valuation is more of an art than a science. There is a lot of truth to that—though the approaches we’ve seen in this article help make the art a little more scientific.

Reviewed by Gordon Scott
Fact checked by Vikki Velasquez

Coffee is one of the world’s most consumed beverages. People consume about two billion cups of java every day, according to the British Coffee Association. While some of the world’s top coffee-producing nations are well-known, others may come as a surprise. More than 50 countries produce coffee, but the majority of global output comes from the top five producers: Brazil, Vietnam, Colombia, Indonesia, and Ethiopia.

Key Takeaways

• Coffee is one of the world’s most popular beverages.
• Brazil is the world’s top coffee producer, followed by Vietnam and Colombia.
• Indonesia and Ethiopia round out the list of top five coffee producers.

1. Brazil

The production of coffee has played a pivotal role in the development of Brazil and continues to be a driving force in the country’s economy. The plant was first brought to Brazil from French Guyana in the early 18th century by a Portuguese military officer. With the rise in popularity of coffee among Europeans, Brazil became the world’s largest producer in the 1840s and has been ever since. 

According to the United States Department of Agriculture (USDA), Brazil is expected to produce 66.4 million 60-kilogram bags of coffee in the 2024-2025 marketing year, accounting for 38% of the world’s production.

2. Vietnam

Relatively new to the international coffee trade, Vietnam has quickly become one of the largest producers. In the 1980s, the Communist Party made a big bet on coffee, and production increased by 20% to 30% every year during the 1990s, completely transforming the nation’s economy. Vietnam is expected to produce 30.1 million 60-kilogram bags of coffee in 2024-2025, according to the USDA.

Vietnam found a niche in the international market by focusing primarily on the less-expensive robusta bean. Robusta beans can have up to twice the caffeine as Arabica beans, giving the coffee a more bitter taste. Vietnam is the top producer of Robusta coffee in the world. For 2024-2025 year, 29 million of the country’s 30.1 million bags produced were robusta.

3. Colombia

A popular advertising campaign featuring a fictional coffee farmer named Juan Valdez helped brand Colombia as one of the most famous coffee-producing nations. Colombia is renowned for its quality coffee and is expected to produce 12.2 million 60-kilogram bags of coffee in 2023-2024.

For several years beginning in 2008, Colombian coffee crops were hit by a leaf disease known as coffee rust. Output plummeted but has since rebounded as the country replaced trees with rust-resistant varieties. Colombia ranks second in Arabica production, and millions worldwide prefer their mild, well-balanced flavor.

Note

The Netherlands has the highest volume of coffee sales per capita. The country’s sales totaled 8.11 kilograms in 2023. Finland and Denmark followed with sales reaching 7.99 kilograms and 6.88 kilograms respectively.

4. Ethiopia

Ethiopia is the fourth largest producer of coffee. As of the 2023–2024 year, it and is expected to produce 8.35 million 60-kilogram bags. Ethiopia is the largest coffee producer in Africa and has experienced continual growth in the past three years, according to the USDA.

5. Indonesia

Indonesia’s location and climate have helped it become the third-largest producer of robusta beans in the world. Total production, including Robusta and Arabica, is 8.15 million 60-kilogram bags in the 2023–2024 marketing year. In Indonesia, there are 1.2 million hectares of coffee crops, while small, independent farms account for the vast majority of output, each owning one to two hectares.

Indonesia produces several types of highly sought-after specialty coffees, the most interesting of which is Kopi Luwak. Harvested from the feces of Asian palm civets, the beans have a distinctive and understandably unique flavor. The process of collecting and harvesting the beans is rather intensive, and the result is one of the most expensive coffee beans in the world.

Which Country Produces the Most Coffee?

Brazil produces most of the world’s coffee. In 2023-2024, it produced 39% of the world’s coffee of 66.3 million 60 kg bags. It was followed by Vietnam, which produced 17% or 29.1 million 60 kg bags, and Colombia, which produced 7% or 12.2 million 60 kg bags.

How Much Coffee Was Produced in 2023?

Global coffee production reached 164.41 million 60 kg bags during the 2022-2023 season. That figure is expected to reach 169.18 million 60 kg bags during the 2023-2024 season.

How Many Cups of Coffee Are Consumed Each Day?

Coffee is one of the most popular beverages in the world. According to the British Coffee Association, as many as two million cups of coffee are consumed by people each day. The volume of capital sales per capita in the Netherlands totaled 8.11 kilograms, followed by Finland and Denmark, which saw 7.99 kg and 6.88 kilograms.

The Bottom Line

Coffee is consumed all around the world and is one of the world’s most popular beverages. Brazil, Vietnam, Colombia, Ethiopia, and Indonesia are the world’s top producers of coffee. The European Union (EU) and the United States are the two largest importers of coffee, with estimates reaching 47.5 million and 24.5 million bags during the 2024-2025 season.

Investment advisory, administrative fees, and securities lending drive revenue

Reviewed by Margaret James

BlackRock Inc. (BLK) is a global investment management company, providing investment and technology services to institutional and retail clients. Clients look to BlackRock for access to mutual funds, investments focused on objectives related to retirement income and college savings, and exchange-traded funds (ETFs).

Key Takeaways

• BlackRock is one of the world’s largest investment management companies by AUM.
• The firm has five main revenue segments: “Investment advisory, administration fees, and securities lending revenue,” “Investment advisory performance fees,” “Technology services and subscription revenue,” “Distribution fees,” and “Advisory and other revenue.”
• The firm derives most of its revenue from investment advisory and administration fees.
• BlackRock’s competitors include The Vanguard Group, State Street Corp., and T. Rowe Price Group Inc.

BlackRock’s Financials

BlackRock filed its latest 10-Q in April 2025 for Q1 2025, which ended on March 31, 2025, reporting over $11.5 trillion in assets under management (AUM). The company reported a net income of $1.5 billion, down 4% compared to Q1 2024. Revenue grew by 11.6% from Q1 2024 to $5.3 billion.

BlackRock generated $84.2 billion of net flows in Q1 2025. The Americas region led all other regions with long-term net flows of $51 billion. The company’s ETF offerings generated $107 billion in long-term net flows, more than the long-term net inflows of retail and institutional investors combined.

Note: BlackRock only provides revenues by segment.

BlackRock’s Business Segments

BlackRock generates revenue from five segments: “Investment advisory, administration fees, and securities lending revenue,” “Investment advisory performance fees,” “Technology services and subscription revenue,” “Distribution fees,” and “Advisory and other revenue.”

Investment Advisory, Administrative Fees, and Securities Lending

This segment provides most of BlackRock’s revenue through the investment advisory business and administration fees. In Q1 2025, this category accounted for $4.4 billion, or about 83.4% of total revenue.

Investment Advisory Performance Fees

Performance fees are assessed when performance exceeds a predetermined threshold. Performance fees accounted for $60 million, or about 1.1% of total revenue in Q1 2025.

Technology Services

BlackRock offers investment management technology systems, risk management services, wealth management, and digital distribution tools to various insurance companies, banks, pension funds, and asset management clients. Technology services accounted for $436 million in revenue for Q1 2025, or about 8.3% of the total.

Distribution Fees

This segment includes revenue associated with the distribution and service of its products. In Q1 2025, this category accounted for $321 million, or about 6.1% of total revenue for the year.

Advisory and Other Revenue

This segment includes revenue derived from its advisory services for global financial institutions, regulators, and governments. In Q1 2025, this category accounted for $58 million, or about 1.1% of total revenue.

Important

BlackRock is the parent company for the iShares group of ETFs, a leader in the global ETF market.

Recent Developments

In March 2025, it was announced that BlackRock, Microsoft, Global Infrastructure Partners, and MGX would welcome NVIDIA and xAI into the Global Infrastructure Investment Partnership, now operating as AI Infrastructure Partnership (AI). This partnership will invest in AI infrastructure, seeking to expand and improve AI data centers, supply chain planning, and deliver innovative and efficient energy solutions.

In 2025, BlackRock finalized its acquisition of Preqin, a leading provider of private markets data. This will enhance BlackRock’s capabilities in offering integrated investment, technology, and data solutions across both public and private markets.

What Does BlackRock Do?

BlackRock is an asset management firm. The company manages investments for small retail investors all the way to large financial institutions and governments. They’re a financial advisor that helps investors grow their money by investing in stocks, bonds, ETFs, and various other investments. The company is one of the largest asset management firms in the world, handling trillions of dollars.

What Is the Difference Between BlackRock and Blackstone?

Though very similar in name and both some of the largest financial companies in the world, BlackRock and Blackstone are very different companies. BlackRock is an asset management firm, managing trillions of dollars for investors and helping them grow their money through investments in stocks, bonds, and other assets. BlackRock also has its iShares business, which is a popular ETF brand. Blackstone, on the other hand, is a private equity firm. As a private equity firm, it purchases various companies, real estate, and other assets, improves them, and then sells them for a profit. Both companies used to be part of the same entity but split in 1994 and now operate separately.

What Corporate Clients Has BlackRock Advised?

BlackRock’s corporate clients have included AIG, UBS, the Central Bank of Ireland, and the Federal Reserve Bank of New York.

The Bottom Line

BlackRock is a global investment management company with offices located around the world. The company boasts over $11.5 trillion in AUM, has a variety of business segments, and is one of the largest and most successful asset management companies in the world.

Reviewed by Eric Estevez
Fact checked by Ryan Eichler

The compound annual growth rate (CAGR) is the mean annual growth rate over a period longer than one year. It’s an accurate way to calculate and determine returns for individual assets or investment portfolios.

CAGR is used by investment advisors to tout their market savvy, and by investment funds to promote returns.

Key Takeaways

• The compound annual growth rate (CAGR) provides a pro forma number that tells investors what an investment yields on an annually compounded basis.
• CAGR is the best formula for evaluating performance over time.
• Investors can use a risk-adjusted CAGR to compare performance and risk characteristics between investment alternatives.

What Is CAGR?

The CAGR is a formula that provides a smoothed rate of return. It results in a pro forma number that tells what an investment yields on an annually compounded basis. It indicates to investors what they have at the end of the investment period. CAGR reveals a trend by smoothing out fluctuations. 

CAGR is the best formula for evaluating how different investments perform over time. It helps fix the limitations of the arithmetic average return. Investors can compare the CAGR to how well one stock performed against others in a peer group or against a market index. The CAGR can also be used to compare the historical returns of stocks to bonds or a savings account.

Investors may use an industry’s CAGR projections to guide their portfolios. According to BCC Research, the virtual reality technology market is expected to grow from $21.1 billion in 2023 to $66.9 billion by 2028, at a CAGR of 26.0% while the artificial intelligence (AI) in drug discovery market is projected to grow from $1.6 billion in 2023 to $5.7 billion by 2028, at a CAGR of 29.6%.

How To Calculate the CAGR 

Assume an individual invested $1,000 at the beginning of 2022 that grew to $3,000 by year’s end, a 200% return. The market corrected the next year, and they lost 50%, ending with $1,500 at the end of 2023. Using average annual return doesn’t provide the return on the investment for the period. The average annual return on this investment was 75% (the average of a 200% gain and a 50% loss), but the result was $1,500, not $3,065, in these two years: $1,000 for two years at an annual rate of 75%.

Calculate the CAGR to determine the period’s annual return. Take the nth root of the total return to calculate the CAGR, where n is the number of years an investment is held. This calculation is the geometric mean. Take the square root of 50% (the total return for the period) in this example because the investment was for two years. The CAGR equals 22.5%.

This table illustrates annual returns, CAGR, and the average annual return of this hypothetical portfolio. It shows the smoothing effect of the CAGR. The lines vary, but the ending value is the same.

CAGR and Risk

Investment returns are volatile. They can vary significantly from one year to the next, but CAGR doesn’t reflect volatility. It provides a “smoothed” annual yield, so it can give the illusion that there’s a steady growth rate even when the value of the underlying investment can vary significantly. This volatility or investment risk is important to consider when making investment decisions.

Investment results also vary depending on the periods. Company ABC’s stock had the following price trend over three years:

Year	0	1	2
Price	$5	$22	$5

This could be viewed as a great investment if an investor were smart enough to buy the stock at $5 and one year later sell it at $22. They would even if the price was $5 one year later and they still had it in their portfolio. They would have lost 77% of equity (from $22 to $5) if they bought ABC in Year 1 at $22 and still had it in Year 2.

Note

A negative CAGR means an investment’s value has decreased over time.

Multiple Investments Example

Look at three investment alternatives to demonstrate both CAGR and volatility risk: a solid blue-chip, a risky tech company, and a five-year Treasury bond. First, examine the CAGR and average growth rate for each investment, adjusted for dividends and splits, for five years. Then, compare the volatility of these investments by using a statistic known as the standard deviation.

Standard deviation measures how annual returns vary from the expected return. The standard deviation of a savings account is zero because the annual rate is the expected rate of return. A stock’s price can vary significantly from its average return, causing a higher standard deviation.

The annual returns, CAGR, average annual return, and standard deviation (StDev) of each of the three investments are summarized in this table. The five-year bond was held to maturity. The market priced the five-year bond to yield 6.21% at the end of the first year, and the annual accrued amounts are displayed, not the bond’s price. The stock prices reflect those at the end of the respective years. The five-year bond is treated like a savings account, so the average annual return is equal to the CAGR.

The following graphs compare the year-end prices to the CAGR, and they illustrate how the CAGR for each investment relates to the actual year-end values. There’s no difference for the bond because the actual returns don’t vary from the CAGR. The difference between the actual value and the CAGR illustrates investment risk.

Blue-chip shares were more volatile than the five-year bond but not as much as the high-tech group. The CAGR for blue chips was slightly less than 20%, but it was lower than the average annual return of 23.5%. The standard deviation was 0.32 due to this difference.

High tech outperformed blue chip by posting a CAGR of 65.7%, but this investment was also riskier because the stock’s price fluctuated more than the blue-chip prices. This volatility is shown by the high standard deviation of 3.07.

Investors can use a risk-adjusted CAGR to compare the performance and risk characteristics between investment alternatives. Calculate a risk-adjusted CAGR by multiplying the CAGR by one minus the standard deviation. The risk-adjusted CAGR is unaffected if the standard deviation (risk) is zero. The larger the standard deviation, the lower the risk-adjusted CAGR.

The risk-adjusted CAGR comparison for the bond, the blue chip, and the high-tech stock:

• Bond: 6.21%
• Blue Chip: 13.6% (instead of 19.96%)
• High Tech: -136% (instead of 65.7%)

This analysis shows the bond holds no investment risk, but the return is below that of stocks. Blue chips are preferable to a high-tech stock. The high-tech stock’s CAGR was much greater than the blue chip’s CAGR (65.7% vs. 19.9%), but its risk-adjusted CAGR is lower than the blue chip’s risk-adjusted CAGR because high-tech shares were more volatile.

What Is a Market Index?

A market index is a pool of securities, all of which fall under the umbrella of a section of the stock market. Each index uses a unique methodology.

How Is Average Annual Return Calculated?

Average annual return (AAR) is a simple mathematical calculation of returns segmented into periods. Add the returns in all the periods and divide them by the number of periods used.

Why Is Risk Important When Calculating CAGR?

The CAGR isn’t ideal if it’s used to promote investment results without incorporating risk. For example, mutual fund companies may emphasize their CAGRs from different periods to encourage investment in their funds, but may not adjust for risk. Investors should understand the period used to evaluate the performance results.

The Bottom Line

The CAGR is a valuable tool to evaluate investment options, but it doesn’t tell the whole story. Investors can analyze investment alternatives by comparing their CAGRs from identical time periods. They should also evaluate the relative investment risk. This requires the use of another measure, such as standard deviation.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes online. Read our warranty and liability disclaimer for more info.

Review our comparison and decide the best robo-advisor for your finances

Fact checked by Will Baker

Paid non-client of Betterment. Views may not be representative, see more reviews at the App Store and Google Play Store. Learn More about this relationship.

Betterment and Merrill Guided Investing are two robo-advisors that can help you with automated investing. Betterment is a legacy, standalone robo-advisor, while Merrill Guided Investing is a newer offer from a well-recognized financial brand. Both made our list of the best robo-advisors, with Betterment winning best for beginners, best for tax-loss harvesting, best for crypto portfolio selection, and best for cash management, while Merrill Guided Investing is the winner of best for education.

Betterment is a pure robo-advisor that has been adding features putting it in more direct competition with traditional financial firms. This includes more employer-focused plan offerings, as well as savings and checking features. Merrill Guided Investing is part of the Bank of America financial ecosystem, with the wider ecosystem including just about every financial account and service imaginable. A key difference between the two is Betterment’s all-digital robo-advisor versus Merrill Guided Investing and its more active management approach led by the Chief Investment Officer (CIO). We’ll dig deeper into these two digital investment management solutions to see which is a better fit for your portfolio needs.

Key Takeaways of Betterment

• Multiple portfolio strategies including core, ESG, innovative tech, and crypto
• Low $10 minimum to begin investing
• Tax-loss harvesting 
• Multiple goal-setting options

Key Takeaways of Merrill Guided Investing

• Actively managed portfolios attempt to outperform market returns
• 24/7 phone customer service and live chat available
• Accounts are integrated with Bank of America products and services
• Broad slate of educational resources, calculators, and tools for beginners through advanced investors

Account Setup 

Account setup is very straightforward at both Betterment and Merrill Guided Investing and can be completed online. Each robo-advisory platform enables users to view sample portfolios before funding an account. 

Betterment

To set up an account at Betterment, create a username and password and provide basic personal information, including your Social Security number. Complete a brief questionnaire spanning your goals, time horizon, and comfort level with investment risk. Betterment recommends an investment portfolio composed of a diversified mix of stock and bond ETF investments to align with your questionnaire responses. Users can view the suggested portfolio only after setting up an account. Fortunately, you don’t need to fund the account to view the portfolio recommendations. 

At Betterment, you can manually adjust the mix to make it more or less conservative or aggressive. Investors can also opt for fixed income, innovative tech, smart beta, or environmental, social, and governance (ESG) sustainable portfolios. Betterment also offers a Cryptocurrency ETF portfolio. You can start an account with $0 and can get started investing with Betterment with just $10.

Merrill Guided Investing

To create a Merrill Guided Investing account, input your name, phone number, and email address. Then, respond to a variety of questions to determine the account makeup. Topics covered include choosing an investment goal from among eight choices and assigning a cost and timeline to the goal. Create your funding assumptions and then choose your risk tolerance. Users can also answer several risk-related questions to inform their risk tolerance level. Finally, Merrill users select either a market-tracking portfolio or a sustainability ESG option.

Unlike at Betterment, Merrill Guided Investing allows users to create an account, view sample portfolios, and see potential financial outcomes without providing a Social Security number. To start investing at Merrill Guided Investing, however, you’ll need the $1000 account minimum.

Account Setup Verdict: Betterment

Both Merrill and Betterment allow potential users the opportunity to adjust portfolio allocations and read about investment choices and methodology before funding an account. Merrill Guided Investing gives you more of a view without creating a full account. That said, Betterment’s portfolio pages include sample holdings and full methodologies. Both these robo-advisors make it very easy to get started, but we give Betterment the nod here for having such a low account minimum.

Account Types

Betterment

• Individual taxable
• Joint taxable 
• Traditional IRA 
• Roth IRA
• 401(k) rollover IRA
• Simplified employee pension (SEP) IRA (for the self-employed and small businesses)
• Trust 
• 529 college savings plan (only available through an employer)
• Student loan management accounts (only available through an employer)
• Cash reserve and checking

Merrill Guided Investing

• Individual taxable
• Joint taxable
• Traditional IRA
• Roth IRA
• SEP IRA 
• SIMPLE IRA
• 401(k) to IRA rollover
• Uniform Transfers to Minors Act (UTMA) and Uniform Gift to Minors Act (UGMA)

Account Types Verdict: Tie

Both Betterment and Merrill Guided Investing offer the commonly used account types. An employer enabled 529 plan or custodial (UTMA/UGMA) account will only make a difference if you are looking for those specific account types.

Account Services

Betterment provides a variety of investment accounts, including high-yield cash and checking, through partner banks. Within the Merrill Guided Investing robo-advisor, the account services are limited to investment management and investment management with an advisor. As Merrill is a member of the Bank of America family, Merrill investors can access a range of additional financial services and cash management products.  

Cash Management

The cash management options at Betterment include a checking account and high-yield cash reserve, provided through partner banks. Since most robo-advisors lack two cash management products, this advances Betterment’s offers in contrast with other stand-alone robo-advisors. Features include a checking account and debit card with ATM fee reimbursement. The high-yield cash reserve account account offers among the highest interest rates available online at 4.00% (4.50% for new customers). Betterment doesn’t require you to hold any part of your portfolio in cash. As a goal target date approaches, funds will be moved more into bond equivalents but they can be sold and moved into a Cash Reserve account if you so choose.

Since Merrill Guided Investing belongs to the Bank of America family, users will find a variety of savings and checking products within the brand. The interrelationship between Merrill and Bank of America provides a powerhouse of financial and cash management solutions not available at the standalone Betterment platform. Merrill also keeps a portion of your portfolio in cash and that is put into a Merrill Lynch direct deposit program yielding a solid 4.13%.

Cash Reserve is only available to clients of Betterment LLC, which is not a bank, and cash transfers to program banks are conducted through the clients’ brokerage accounts at Betterment Securities. For Cash Reserve (“CR”), Betterment LLC only receives compensation from program banks; Betterment LLC and Betterment Securities do not charge fees on your CR balance.

Checking accounts and the Betterment Visa Debit Card provided and issued by nbkc bank, Member FDIC. Checking made available through Betterment Financial LLC. Neither Betterment Financial LLC, nor any of their affiliates, is a bank. Betterment Financial LLC reimburses ATM fees and the Visa® 1% foreign transaction fee worldwide, everywhere Visa is accepted.

Cash Management Verdict: Betterment

Betterment doesn’t keep your portfolio in cash at all and its fully invested approach will likely yield more returns over the long-term. Outside of this, Betterment provides you with tools to also manage your uninvested cash through the platform. This includes a high-yield cash account and a debit account with cash back options. Merrill Guided Investing has similar offerings in the larger Bank of America ecosystem, but Betterment’s are right in the platform.

Goal Planning

Both Betterment and Merrill Guided Investing enable goal setting for targeted financial planning. Each platform provides portfolios suited to specific time horizons and graphs with expected probabilities of reaching a goal. For a near-term goal, such as saving for a vacation in a few years, the asset mix will be conservative and tilt towards bonds. But a 35-year-old saving for retirement will expect a more aggressive asset allocation, with higher percentages allocated towards high-return, higher-risk stock ETFs and smaller amounts to bond ETFs and cash. 

Betterment

Betterment lists six goals from which to choose:

• Major Purchase
• Education
• Retirement
• Retirement Income
• General Investing
• Emergency Fund

Betterment forecasts your likelihood of reaching your goals based on your current savings and projected investment returns. You can inform this picture even more by linking external accounts for Betterment to integrate into those forecasts.

Merrill Guided Investing

Merrill Guided Investing presents eight goal choices, which can be labeled and customized:

• Retirement
• General Investing
• Home
• Education
• Family Support
• Special Occasion
• Travel
• Other 

The Merrill Guided Investing graphs show probabilities of reaching your goals based on investment amounts and varying market conditions. You can change the inputs to view the impact of distinct investment amounts, time horizons, and various asset allocations. The tools and calculators enable users to plan for various financial decisions, including retirement, college planning, and basic personal finance scenarios. 

Goal Planning Verdict: Tie

Both Betterment and Merrill Guided Investing are among the best robo-advisors for detailed goal planning. They take external accounts into consideration and use detailed approaches to give you a realistic picture of where you are and what you can do to get their faster.

Portfolio Construction

Both Betterment and Merrill Guided Investing construct investment portfolios that align with the user’s financial goals, age, and risk tolerance. Each provider depends upon the well-researched Markowitz modern portfolio theory which strives for the best returns for each given risk level. Each platform offers portfolios with varying risk levels from conservative through aggressive. Both Betterment and Merrill populate portfolios with diversified U.S. and international stock and bond ETFs. Neither platform includes real estate funds in their offers, while Merrill also includes mutual funds.

Where they deviate is that Merrill combines a human advisor element with a tactical asset allocation model. The Merrill strategy, in concert with the Chief Investment Officer, adjusts portfolios based upon market conditions in an attempt to outperform basic market-matching passive investment strategies, while Betterment offers more investment strategy portfolios than Merrill Guided Investing. Betterment added a value tilt portfolio in the last year that takes a programmatic approach to what Merrill Guided Investing is attempting to do by finding and investing more in undervalued firms.

Betterment

Betterment offers the following portfolio strategies:

• Core: Diversified global portfolio with stock and bond ETFs
• Innovative Technology: Includes high-growth tech companies like clean energy, semiconductors, and robots
• Broad Impact: Targets companies with strong environmental, social, and governance (ESG) criteria
• Climate Impact: ESG option, includes companies with lower carbon emissions
• Value Tilt: A portfolio that looks for companies that are undervalued and tilts towards investing more in them
• Social Impact: ESG option with a focus on companies working towards minority empowerment and gender diversity
• Goldman Sachs Smart Beta: Attempts to outperform the market with a focus on specific investment factors
• BlackRock Target Income: All-bond ETF portfolio for cash flow

Merrill Guided Investing

Merrill Guided Investing’s portfolio options are:

• Market Tracking: Core option with diversified stock and bond ETFs and mutual funds
• ESG: Diversified stock and bond ETFs and mutual funds that meet sustainable environmental, social, and governance criteria

Portfolio Construction Verdict: Betterment

Investors who prefer an opportunity to beat the market through professional human investment management combined with computer-driven models might lean towards the Merrill Guided Investing portfolios. Those who prefer crypto ETFs, income portfolios, access to a high-growth tech portfolio, or are willing to try a rules based approach to unearthing value will find more options at Betterment. 

Available Assets

	Betterment	Merrill Guided Investing
Individual Stocks	No	No
Mutual Funds	No	Yes
Fixed Income	Only through ETFs	Mutual funds and ETFs
REITs	Only in customized portfolios	No
Sustainable or ESG Options	Yes: Broad Impact, Climate Impact, Social Impact	Yes
ETFs	Yes	Yes
Non-Proprietary ETFs	Yes	Yes
Private Equity	No	No
Forex	No	No
Crypto	Yes, through a separate account offering	No

Portfolio Customization 

Both platforms allow users to adjust asset allocations and choose strategy portfolios. Neither choice allows individual stock trading. Betterment provides deeper customization options with the Flexible Portfolio option.

Betterment

More experienced investors might consider the Betterment Flexible portfolio. The Flexible portfolio starts with the Core option and offers access to additional asset classes such as commodities, high-yield bonds, and REITs. You select the ETFs and asset percentages. A portfolio analysis tool provides insights into the potential impact of your adjustments including risk and diversification scores. 

Merrill Guided Investing

Merrill clients can submit a request to delete an asset from the recommended portfolio. A
“reasonable investment restriction” will be considered by the Merrill Guided Investment committee, but acceptance of the request is not guaranteed.

Portfolio Customization Verdict: Betterment

Customization options at either platform typically have an impact on the portfolio’s diversification, risk level, and return profile. Betterment offers far more options than Merrill Guided Investing for tweaking your portfolio from the basic model.

Portfolio Management 

A key feature of all robo-advisors is portfolio rebalancing. Assets are periodically bought or sold to make sure the investments remain in line with the user’s desired asset allocation balance. Each platform offers 24/7 access to the website dashboard. Both Betterment and Merrill Guided Investing rebalance when new assets are added or withdrawn.

Betterment

At Betterment, when asset allocation percentages drift past 3%, the portfolio will automatically be rebalanced as long as your account meets the minimum balance threshold. This is the rules based approach that most people expect from a robo-advisor. Betterment also allows you to adjust automatic rebalancing so it only uses deposits and withdrawals rather than shifting automatically with the market.

Merrill Guided Investing

Merrill’s active management approach means accounts are not rebalanced on a predetermined schedule. Rebalancing may occur for various reasons. As is customary, portfolios will be rebalanced when asset allocation percentages deviate from the preferred percentages. Rebalancing may also occur in accord with the managers’ strategic tactical asset allocation decisions which are influenced by market conditions and other factors. Merrill will also consider external accounts that are synced when making portfolio recommendations.

Portfolio Management Verdict: Tie

Merrill Guided Investing has a very unique approach to rebalancing that does consider your external accounts. Some investors may prefer this to a rules based approach used by most robo-advisors. Betterment does this in the usual way for robo-advisors and gives you some additional tweaks to the process.

Tax-Advantaged Investing

Betterment

Tax-loss harvesting is performed on Betterment’s taxable portfolios. This automated process offsets realized taxable gains with the sale of securities with losses. This process can reduce total tax payments. Betterment has gone further into developing a robust tax-loss harvesting methodology than most robo-advisors, expanding it across Betterment accounts and maintaining full investment.

Merrill Guided Investing

The Merrill Guided Investing portfolios are managed with a nod to tax efficiency. The all-digital plan does not offer tax-loss harvesting. The company has signaled that it may be added in 2024, but it is still absent at this time.

Betterment is not a licensed tax advisor. Tax Loss Harvesting+ (TLH+) is not suitable for all investors and is subject to certain conditions. Read more at https://www.betterment.com/legal/tax-loss-harvesting and consider your personal circumstances before deciding whether to utilize Betterment’s TLH+ feature. Investing involves risk. Performance not guaranteed.

Tax-Advantaged Investing Verdict: Betterment

Betterment is our pick for best for tax-loss harvesting, so it is no surprise that it takes this category when Merrill Guided Investing lacks this key feature for taxable accounts.

Key Portfolio Management Features

	Betterment	Merrill Guided Investing
Rebalancing	market monitoring; rebalance triggered when assets drift 3% from target as long as your account meets the minimum balance threshold	At management discretion, when funds are added or removed and according to market conditions
Reporting Features	Dashboard with an overview of net worth, goal progress, and investment performance; Betterment provides regular nudges and reminders to keep users invested	Dashboard presents performance and offers opportunity to make updates and adjust goals; includes dynamic view of goals progress
Tax-Loss Harvesting	Yes	Tax-minimization strategies only; Merrill advisory-managed accounts may enroll in dynamic tax loss harvesting
External Account View/Sync	Yes; clients can link retirement, banking, and brokerage accounts, but only Betterment assets are rebalanced	External account linking available for fund transfers and analysis on goal planning and asset allocation

Security

Both platforms provide the highest level of data security, encryption, fraud protection, and privacy. Betterment, through partner banks, and Merrill Guided Investing both protect your assets against firm bankruptcy or malfeasance with SIPC insurance. The basic SIPC insurance covers cash and securities worth $500,000, with a $250,000 limit for cash. 

Betterment

Betterment includes FDIC insurance for cash accounts through partner banks: 

• Cash Reserve accounts are eligible for up to $2 million ($4 million for joint accounts) of FDIC insurance ($250,000 insurance per program bank†). Subject to certain conditions.
• Checking accounts are FDIC-insured up to $250,000 for individual accounts and $250,000 per depositor for joint accounts (at nbkc bank, Member FDIC, and deposit network, subject to certain conditions).

Betterment is not a bank.

Merrill Guided Investing

All Merrill clients are eligible to receive excess SIPC coverage provided by Lloyd’s of London up to $1.9 million cash per customer. Merrill Guided Investing does not provide FIDC insurance, but you would get that through a Bank of America deposit account.

Security Verdict: Tie

Betterment and Merrill Guided Investing are both at industry standards. Your money is protected with either firm.

User Experience 

Desktop

Both Betterment and Merrill Guided Investing’s desktop platforms are easy to navigate, with access to most corners of the website with one click. The dashboards of each show assets, performance, and progress towards goals. Goals are easy to adjust from the desktop for each platform. Both platforms offer digital advice and feedback to help you reach your financial goals.

Mobile App

Users of both platforms will appreciate the mobile apps. Each firm has an iOS and Android mobile app and each has solid reviews. Betterment’s mobile app provides the same account overview as the desktop. Betterment mobile users can track progress, schedule deposits, amend goals, manage cash, and more.

Merrill Guided Investing portfolios can be accessed through the Merrill or Bank of America app. Users can access the dashboard, track activity, progress, and view market news, and deposit checks. Users of both platforms will find what they need on each mobile app. 

Customer Service

With 24/7 live customer service by phone and chat, Merrill is easier to contact. During weekdays, both platforms are accessible by phone. Both of these services provide access to financial advisors at a premium level.

Customer Service Verdict: Merrill Guided Investing

Merrill Guided Investing wins the customer support category by having 24/7 phone access.

	Betterment	Merrill Guided Investing
Phone & email available	Yes, 718-400-6898, weekdays, 9 a.m. to 6 p.m. ET	Yes, 888-637-3343, 24/7
Pre-funding phone consultation with a certified advisor	Yes, but subject to minimum investments	Yes, but depends on minimum investment
Online chat available	Chatbot only	Yes (for customers in platform)
Website FAQ section	Yes	Yes

Fees

Neither Betterment nor Merrill Guided Investing charges commissions. However, each of the underlying funds within the portfolios will levy its own low-expense ratios, which go directly to the fund management. 

Betterment

Betterment Digital requires $10 to begin investing but no investment minimum to open an account. Betterment Premium, with unlimited financial advisor access, requires $100,000 to begin investing. 

• Digital: 0.25% AUM for accounts worth $20,000 or more (or with a $250 per month auto deposit); $4 per month for accounts worth less than $20,000
• Premium accounts with unlimited financial advisor access: 0.65% AUM
• Cash accounts: No fee

Betterment Premium accounts require a $100,000 minimum investment. For accounts with at least $2 million, there is a fee discount of 0.10%.

Merrill Guided Investing

As part of the Bank of America family, there are ways to reduce the Merrill Guided Investing fees through the Preferred Rewards program. The investment minimum for the Online offer is $1,000. For Online With an Advisor, the minimum is $20,000. This is an easier entry point for financial advice than the $100,000 minimum for Betterment Premium.

• Online: 0.45% based upon the prior month’s balance and assessed monthly 
• Online with an advisor: 0.85% based upon the prior month’s balance and assessed monthly; includes unlimited calls with a financial advisor

Fees Verdict: Betterment

On the surface, it is a simple decision of the 0.25% at Betterment versus 0.45% at Merrill Guided Investing. However, a quirk of Betterment’s fee structure results in $4 per month on accounts less than $25,000 that don’t set up a $250 auto deposit. These accounts will actually pay more in fees than with Merrill Guided Investing, but that vanishes as balances grow. Overall, however, Betterment is the lower fee option.

Category	Betterment	Merrill Guided Investing
Management Fees for $5,000 Account	$48 (Investing)	$22.50 (Online)
Management Fees for $25,000 Account	$62.50 (Investing)	$112.50 (Online), $212.50 (With Advisor)
Management Fees for $100,000 Account	$250 (Investing), $650 (Premium)	$450 (Online), $850 (With Advisor)
Termination Fees	$0	$0
Expense Ratios	Range from 0.05% to 0.16%	Between 0.05% to 0.13%, depending on your allocation
Mutual Funds	N/A	Lowest available expense ratios for particular share class

The Bottom Line

Investors in Betterment or Merrill Guided Investing can be confident in either portfolio for solid investment management. Both made our list of the best robo-advisors for 2024, but there are several key distinctions that might lead you to one platform or the other.

Betterment overall offers lower pricing and a greater variety of investment options. The Digital product is great for beginners, with a $10 entry point. Those seeking a variety of investment management strategies along with high-yield cash options for a reasonable fee might lean towards Betterment. The availability of low-cost financial planning packages for the digital user is a unique draw. On the negative side, you will need $100,000 to invest in Betterment Premium, which provides unlimited financial advisor access. Finally, if you’re seeking exposure to crypto, tech, smart beta, or income portfolios, then you’ll gravitate towards Betterment.

Merrill Guided Investing might be a good option for those who are members of the Bank of America Preferred Rewards Program, as that will lower the management fees. Also, if you’re seeking a robo-advisor with human advisors and a relatively low minimum, Merrill offers the option to work with an online advisor and that might work for you. Most investors will be comfortable with Merrill’s core and ESG sustainable investment portfolios. Whether the actively managed approach merits the higher fees is a personal decision. Finally, whether Merrill Guided Investing or Betterment is right for you depends upon your personal financial situation and preferences. 

What Is the Minimum Balance for Merrill Guided Investing?

A minimum of $1,000 is required for the Online option, while $20,000 is required for the Online With an Advisor option. The Online With an Advisor account includes unlimited calls with a financial advisor.

What Are the Fees for Merrill Edge Guided?

The investment management fees are 0.45% of assets managed for the Online option and 0.85% for Online With an Advisor. The fee reduction is available through the Bank of America Preferred Rewards Program.

Can I Lose Money at Betterment or Merrill Guided Investing?

Yes. When investing in financial markets, your account value goes up and down with the market value of the investments. If you sell with a drawdown in your account, you will lose money. Historically, over decades, the returns on a well-diversified portfolio have been positive. The portfolios constructed by both Merrill Guided Investing and Betterment are meant to show positive growth over time, but they can experience periods of negative returns depending on when they were funded and how the market has performed since.

Which Portfolio Is Best on Betterment?

The best portfolio on Betterment depends upon what you’re seeking. The Core is fine for most investors. If you’re in retirement, then you might prefer the Income portfolio. The Innovative Tech and Crypto ETF Portfolio aren’t replacements for a Core portfolio, only add-ons for additional diversification. The ESG choices are designed for users who want to align their investments with their values.

How We Picked the Best Robo-Advisors

Providing readers with unbiased, comprehensive reviews of digital wealth management companies, more commonly known as robo-advisors, is a top priority of Investopedia. To collect data for our 2024 best robo-advisor awards and rankings, we sent a digital survey with 64 questions directly to each of the 21 companies we included in our rubric. Our team of researchers verified the survey responses and collected any missing data points through online research and conversations with each company directly. The data collection process took place from Jan. 8 to Feb. 9, 2024.

We then developed a quantitative model that scored each company to rate its performance across nine major categories and 59 criteria to find the best robo-advisors. The score for each company’s overall star rating is a weighted average of the criteria:

• Goal Planning – 21.00%
• Portfolio Contents – 17.00%
• Portfolio Management – 17.00%
• Fees – 15.00%
• Account Services – 10.00%
• Account Setup – 5.00%
• Customer Service – 5.00%
• Security & Education – 5.00%
• User Experience – 5.00%

Many of the companies we review for our projects grant our team of expert writers and editors access to live accounts so they can perform hands-on testing. Robo-advisor companies allowed us to do this, as well.

Through this all-encompassing data collection and review process, Investopedia has provided you with an unbiased and thorough review of the top robo-advisors. Read more about how we research and review robo-advisors.

The above material and content should not be considered to be a recommendation. Investing in digital assets is highly speculative and volatile, and only suitable for investors who are able to bear the risk of potential loss and experience sharp drawdowns. Digital assets are not legal tender and are not backed by the U.S. government. Digital assets are not subject to FDIC insurance or SIPC protections.

We independently evaluate all recommended products and services. If you click on links we provide, we may receive compensation.

Reviewed by Ebony Howard
Fact checked by Vikki Velasquez

Floods are among the top natural disaster threats to homes because of their increasing frequency, potential for devastating consequences, and the growing costs to repair their damage. So if you finance the purchase of a home in a high-risk flood zone with a mortgage backed by a federal agency, your lender will require you to purchase flood insurance.

It’s time to get smart about the basics of flood insurance, when it’s required, coverage details and cost, and ways to reduce the need for it.

Key Takeaways

• Flood insurance is required by lenders of federally-backed mortgages for properties in high-risk flood zones.
• Most homeowners’ insurance policies do not provide you with flood insurance.
• The cost of coverage depends on various factors, such as the type of zone your house is in, the elevation of the property, and the amount of coverage.
• Flood insurance covers damage to property and its personal contents.
• You can reduce the cost of flood insurance, or your need for it, by buying a property in low- to moderate-risk flood zones or completely outside of any flood zone.

What Is Lender-Required Flood Insurance?

Certain mortgage lenders mandate flood insurance to limit your financial exposure (and their risk) to flood-related damage to your property. Your mortgage lender may require you to purchase flood insurance if your property is in a specially designated flood zone.

Standard home insurance usually doesn’t cover damage from flooding but lenders want to protect their investments. This is why they generally don’t approve mortgages until this insurance requirement is met for properties in flood zones.

The government identifies these zones as special flood hazard areas deemed high-risk. They can be located on Flood Insurance Rate Maps, which are available free of charge through the Federal Emergency Management Agency (FEMA).

When Is Flood Insurance Required by Lenders?

Mortgage lenders require you to purchase a flood insurance policy if your property is in a high-risk flood area identified by FEMA and you have a government-backed mortgage. These include mortgages that are:

• Insured by the Federal Housing Administration (FHA)
• Backed by Fannie Mae and Freddie Mac
• Guaranteed by the Department of Veterans Affairs (VA)

Some lenders may require flood insurance even if the property isn’t in a high-risk area. Even certain private mortgage lenders may require that you buy flood insurance.

Important

You can take out a flood insurance policy if you own or rent a home or condo. You can also purchase coverage if you own or rent commercial property.

How Flood Insurance Works

Flood insurance is different from typical homeowners insurance. Homeowners insurance is designed to cover damage to your home from natural causes like fire and wind, as well as theft.

Accidental water damage may be covered but only under certain circumstances, such as sudden pipe bursts.

Flood insurance, on the other hand, is special coverage that homeowners obtain if they live in areas that are deemed at high risk of flooding. It covers damage from flooding, rising waters from heavy rain and rivers, and storm surges.

Homeowners who are required to take out flood insurance can purchase policies from insurance companies or through the National Flood Insurance Program (NFIP), which offers government-backed policies.

Filing a Claim

Should a flood occur, you can file a claim for damage by following these steps:

1. Contact your insurance company, describe the damage, and then separate damaged from undamaged property in advance of the adjuster’s visit.
2. Take photos of your damaged property. These should include shots of discarded objects, structural damage, and standing floodwater levels.
3. In addition, list your damaged (or lost) items. Alongside that information, note down their purchase dates and values. Attach the receipts for them, if you still have those.
4. Finally, you will need to complete and sign a Proof of Loss document, which the adjuster can provide. This is your sworn statement concerning your claim. The insurance company (or the NFIP) needs this document to process your claim payment.

Make sure you keep the insurer’s phone number and your policy number in a safe and readily accessible location so you can access it quickly and easily after a flood.

23,000

The approximate number of communities that participate in the National Flood Insurance Program.

Determining Flood Risk

People commonly believe that floods occur near coastlines or bodies of water (such as a river or lake). While that’s true, floods can happen anywhere and at any time, such as after very heavy rainfalls, when drains back up, or when there is construction in the area of a property.

One of the best ways to determine the flood risk for a potential property is to look at the appropriate flood map at FEMA’s online Flood Map Service Center before you buy, according to insurance expert witness Lezlee Liljenberg.

“Oftentimes, the realtor or mortgage person does not look at this and many times not until way too late in the transaction to be able to change course,” Liljenberg said. Doing your research ahead of time can save you money in the long run.

You can determine your risk by pulling up the map for the property address at the Service Center. Zone designations include a color, a letter, and a risk level.

The chart below provides information about zones and risk levels.

Zone	Risk Level	Notes	Flood Insurance Reequired?
A (Special Flood Hazard Area)	High	1 in 4 chance of flooding for 30-year mortgage	Yes
V (Special Flood Hazard Area)	High	1 in 4 chance of flooding for 30-year mortgage	Yes
B (Non-Special Flood Hazard Area)	Moderate to Low	Risk is reduced but not removed	Recommended but not required
C (Non-Special Flood Hazard Area)	Moderate to Low	Risk is reduced but not removed	Recommended but not required
X (Non-Special Flood Hazard Area)	Moderate to Low	Risk is reduced but not removed	Recommended but not required
D	Uncertain	Possible, but undetermined hazards or unstudied areas	Recommended but not required

Cost of Flood Insurance

Flood insurance can range from a few hundred to thousands of dollars, according to Liljenberg. How much you pay depends on several factors:

• The flood zone
• The elevation of your structure
• The type of structure on your property, including how it’s constructed, its age, and whether it’s occupied
• The limits of your coverage (greater coverage means higher premiums)
• The amount of your deductible (higher deductibles typically mean lower premiums)

“Flood policies are due at one time so this can be a huge shock when discovering you are in a flood zone,” Liljenberg added.

To address this, FEMA is making changes to allow policyholders to pay for their flood insurance in monthly installments.

Note

According to FEMA, the median current cost of flood insurance for a home as of 2023 was $786.

Coverage Details

Flood insurance coverage under the NFIP protects your property and its contents against losses related to flooding.

Homeowners are covered for up to $250,000 for the property and up to $100,000 for personal property while business and multi-family content and building repair coverage covers up to $500,000 in damages.

The table below highlights what’s covered in each category:

Building Coverage	Personal Property Coverage
Structure and foundation	Clothing
Electrical systems	Curtains
Plumbing systems	Furniture
Heating and cooling systems (A/C, furnaces, water heaters)	Electronic equipment
Appliances (fridges, stoves, dishwashers)	Portable items
Carpeting (installed on unfinished flooring)	Carpeting (not included in building coverage)

Keep in mind that the land on which your property stands isn’t covered by a flood insurance policy.

Private insurers also offer flood insurance with higher limits and a wider range of coverage options. Check with your lender to see if your preferred carrier qualifies.

Options to Reduce or Avoid Lender-Required Flood Insurance

Flood insurance can add to your home-related costs. But, you have options if you want to reduce or avoid taking out a special policy to cover floods. Consider the following:

• Look for a property that isn’t in a flood zone.
• Look at zones with low to moderate risk (where flood insurance may be optional).
• Review the flood map and challenge your lender if your findings don’t match up with theirs.
• Get a letter of map amendment, which waives lender requirements if the property is outside the Special Flood Hazard Area. 

You can also buy your house with cash instead of financing the purchase—no lender means no requirement.

Again, though, your home insurance policy may not cover any damage from flooding, which means you’ll be on the hook to cover the cost of repairs or replacement due to flood damage.

The Bottom Line

The requirement to purchase flood insurance can catch property buyers off guard. But you’ll need it if you’re financing the purchase of a home with a government-backed mortgage. Some private lenders may even require it.

Check with your lender and review the applicable flood map if you’re unsure about your property’s flood zone status and the need to buy flood insurance.

Reviewed by Eric Estevez
Fact checked by Vikki Velasquez

Unpaid medical bills can be financially and emotionally overwhelming. With rising healthcare costs and insurance plans that don’t always cover everything, millions of Americans are currently in medical debt.

Whether it’s a surprise emergency room visit or a long-term treatment plan, knowing how to handle medical bills proactively can help protect your finances and your peace of mind. These steps can help reduce the burden and avoid long-term damage to your credit.

Key Takeaways

• Always request an itemized bill and verify insurance coverage before paying medical charges.
• Some patients may qualify for financial aid, hospital assistance programs, or retroactive Medicaid to reduce or eliminate medical debt.
• New rules limit how medical debt appears on credit reports, but larger unpaid balances can still hurt your score if left unresolved.

Understanding Your Medical Bill

Before paying anything, it’s necessary to understand what you’re being charged for. Medical bills can contain errors, duplicate charges, or misapplied insurance payments.

You should always request an itemized bill to spot errors or duplicate charges, says Aaron Leak, founder of ECL Private Wealth Management, adding that you should compare it with your insurance explanation of benefits (EOB) to confirm what was covered and what you may still owe.

Also, check that the bill actually belongs to you and corresponds to the services you received. Leak suggests contacting the billing department to confirm it’s accurate and yours. If something seems off, request clarification in writing before making any payments.

Important

You can always negotiate with hospitals and healthcare providers. Some may offer a steep discount for immediate or cash payment.

Determining Your Responsibility

Once you’ve reviewed your bill and compared it against your insurance coverage, take time to understand your financial responsibility. This includes verifying deductible status, co-insurance, and whether any out-of-network charges were incorrectly applied. If your insurance was supposed to cover something that hasn’t been paid, follow up directly with your provider to resolve discrepancies.

You may also want to review the insurer’s denial codes or appeal options. Medical billing departments can make mistakes, and insurers sometimes reverse denials upon request.

Exploring Financial Assistance Options

Hospitals and nonprofit healthcare providers often have programs to help patients who can’t afford their bills. Apply for hospital financial assistance or charity care, Leak advises. These programs are typically based on income and family size, and some offer retroactive aid if you qualify after the bill is issued.

You can also research community and nonprofit resources. For example, organizations like Undue Medical Debt buy and forgive outstanding balances for qualifying individuals. Additionally, depending on your state and situation, you might be eligible for retroactive Medicaid coverage—especially if the treatment occurred during a time of financial hardship.

Legal Protections and Rights

If you get a bill from an out-of-network emergency room or a provider who you thought was covered, you may be protected by the No Surprises Act. This federal law was designed to limit unexpected charges for certain medical services. It prohibits surprise billing for emergency care and some non-emergency care at in-network hospitals, regardless of your insurance plan.

You also have rights under the Fair Debt Collection Practices Act (FDCPA) if your medical bills go to collections, including protections against harassment and the ability to dispute inaccurate charges.

Negotiating With Healthcare Providers

If you’re not yet in collections, contact the billing office to discuss your options. “Call early to negotiate discounts or set up a payment plan,” Leak recommends.

Some providers offer prompt-pay or cash-pay discounts that can significantly reduce your bill. And no matter what agreement you reach, “always get agreements in writing,” Leak says. This protects you in case of billing errors or disputes later on.

$1,000

The amount of medical debt held by about 14 million people in the United States, according to Peterson-KFF.

Dealing With Debt Collectors

If your medical bill has already been sent to collections, you still have rights—and negotiating power. Leak recommends you request written verification of the debt to ensure the charges are legitimate. If there are errors, dispute any errors with the collector and credit bureaus.

It may also be possible to settle the debt for less than the full amount. But again, make sure any agreement is documented before making a payment. This will help protect your credit and avoid misunderstandings.

Impact on Credit Scores

Medical debt doesn’t affect your credit the way it used to. Thanks to recent policy changes impacting the major credit bureaus:

• Paid medical collections no longer appear on credit reports.
• There’s a one-year grace period before unpaid medical bills are reported.
• Debts under $500 are no longer shown at all.

Still, larger unpaid debts can lower your credit score, so acting quickly is key. “Larger unpaid debts can still hurt your score, so act fast,” Leak warns. The longer the debt lingers, the more difficult it may be to negotiate or resolve.

The Bottom Line

Medical debt can be stressful, but you’re not powerless. If you’re struggling with medical debt, always review your bills for errors, explore financial aid, understand your rights, and communicate early with providers and collectors. This way, you can avoid the worst financial outcomes and regain control of your situation.

Reviewed by Gordon Scott
Fact checked by Suzanne Kvilhaug

One of the ways that investors make money from exchange traded funds (ETFs) is through dividends that are paid to the ETF issuer and then paid on to their investors in proportion to the number of shares each holds.

If you’re looking for an ETF that pays a steady stream of income, you might consider one of the many ETFs that focus on investments that historically have paid high dividends.

ETF issuers decide whether to pay these dividends directly, or reinvest them in the fund, and pay them out at a later payout date. The fund prospectus makes it clear which it is. Investors can also choose to automatically reinvest their dividends in additional shares of the ETF.

The Timing of ETF Dividend Payments

Like any company that issues a stock dividend, an ETF’s sponsor sets an ex-dividend date, a record date, and a payment date. These dates determine who will receive the dividend and when it will be paid. The timing of these dividend payments is on a different schedule than those of the underlying stocks and is set by the ETF sponsor.

For example, the ex-dividend date for the popular SPDR S&P 500 ETF (SPY) is the third Friday of the final month of a fiscal quarter (March, June, September, and December). If that date is not a business day, the ex-dividend date falls on the prior business day. At the end of each quarter, the SPDR S&P 500 ETF distributes the dividends.

These dates are listed in the fund’s prospectus, which is publicly available to all investors.

Just as like any stock shares, the price of an ETF often rises before the ex-dividend date—reflecting a flurry of buying activity—and falls afterward, as investors who own the fund before the ex-dividend date receive the dividend, and those buying afterward do not.

Dividends Paid in Cash

The SPDR S&P 500 ETF pays out dividends in cash. According to the fund’s prospectus, the SPDR S&P 500 ETF puts all dividends it receives from its underlying stock holdings into a non-interest-bearing account until it comes time to make a payout. At the end of the fiscal quarter, when dividends are due to be paid, the SPDR S&P 500 ETF pulls the dividends from the non-interest-bearing account and distributes them proportionally to the investors.

Some ETFs may temporarily reinvest the dividends from the underlying stocks into the holdings of the fund until it comes time to make a cash dividend payment. Naturally, this creates a small amount of leverage in the fund, which can slightly improve its performance during bull markets and slightly harm its performance during bear markets.

Dividends Reinvested

ETF managers also have the option of reinvesting investors’ dividends into the ETF rather than distributing them as cash. The payout to shareholders is accomplished through reinvestment in the ETF’s underlying index on their behalf.

Essentially, it comes out to the same amount: An ETF shareholder who receives a 2% dividend reinvestment from an ETF can sell those shares and take the cash.

Dividends Are Taxable

These reinvestments can be seen as a benefit, as it does not cost the investor a trade fee to purchase the additional shares through the dividend reinvestment.

However, each shareholder’s annual dividends are taxable in the year they are received, even if they are received via dividend reinvestment.

Taxes on Dividends in ETFs

ETFs are often viewed as a favorable alternative to mutual funds in terms of their ability to control the amount and timing of income tax to the investor. However, this is primarily due to how and when the taxable capital gains are captured in ETFs.

Owning dividend-producing ETFs does not defer the tax on the dividends paid by an ETF during a tax year. The dividends that an ETF pays are taxable to the investor in essentially the same way as the dividends paid by a mutual fund are taxable.

Examples of Dividend-Paying ETFs

Here are five popular dividend-orientated ETFs.

1. The SPDR S&P Dividend ETF (SDY)

The SPDR S&P Dividend ETF (SDY) is the most extreme and exclusive of the dividend ETFs. It tracks the S&P High-Yield Dividend Aristocrats Index, which includes companies in the S&P Composite 1500 that have increased their dividends for at least 20 consecutive years.

Due to their long history of reliably paying these dividends, these companies are often considered less risky for investors seeking total return.

2. The Vanguard Dividend Appreciation ETF (VIG)

The Vanguard Dividend Appreciation ETF (VIG) tracks the S&P U.S. Dividend Growers Index, a market capitalization-weighted grouping of companies that have increased dividends for a minimum of ten consecutive years.

Its assets are invested domestically, and the portfolio includes many companies known for paying rich dividends, such as Microsoft Corp. (MSFT) and Johnson & Johnson (JNJ).

3. The iShares Select Dividend ETF (DVY)

The iShares Select Dividend ETF (DVY) is the largest ETF to track a dividend-weighted index. Similar to VIG, this ETF invests in U.S. companies but the focus is on smaller companies.

Roughly one-quarter of the 100 stocks in DVY’s portfolio are utility companies. Other major sectors represented include financials, consumer staples, energy, and communication stocks.

4. The iShares Core High Dividend ETF (HDV)

BlackRock’s iShares Core High Dividend ETF (HDV) is younger and uses a smaller portfolio than the company’s other notable high-yield option, DVY. This ETF tracks a Morningstar-constructed index of 75 U.S. stocks screened by dividend sustainability and earnings potential, which are two hallmarks of the Benjamin Graham and Warren Buffett school of fundamental analysis.

In fact, Morningstar’s sustainability ratings are driven by Buffett’s concept of an “economic moat” that some businesses create to insulate themselves from their rivals.

5. The Vanguard High Dividend Yield ETF (VYM)

The Vanguard High Dividend Yield ETF (VYM) is characteristically low-cost and straightforward, like most Vanguard offerings. It tracks the FTSE High Dividend Yield Index effectively and demonstrates outstanding tradability for all investor demographics.

A particular quirk of the investment strategy for VYM is its focus on companies that pay very high dividends. As a result, this ETF’s majority holdings are heavy in the financial and consumer staples sectors.

Other Income-Oriented ETFs

In addition to these five funds, there are dividend-focused ETFs that employ various strategies to increase dividend yield.

ETFs such as the iShares Preferred and Income Securities ETF (PFF) track a basket of preferred stocks from U.S. companies. The dividend yields on preferred stock ETFs should be substantially more than those of traditional common stock ETFs because preferred stocks behave more like bonds than equities and do not benefit from the appreciation of the company’s stock price in the same manner.

Real estate investment trust ETFs such as the Vanguard Real Estate ETF (VNQ) track publicly traded equity real estate investment trusts (REITS). Due to the nature of REITs, the dividend yields tend to be higher than those of common stock ETFs.

There are also international equity ETFs, such as the WisdomTree Emerging Markets High Dividend Fund (DEM) or the First Trust Dow Jones Global Select Dividend Index Fund (FGD), which track higher-than-normal dividend-paying companies domiciled outside of the United States.

How Do Dividends Work in an ETF?

ETF issuers collect any dividends paid by the companies whose stocks are held in the fund, and they then pay those dividends to their shareholders. They may pay the money directly to the shareholders, or reinvest it in the fund.

Not all ETFs earn dividends for their shareholders, and some ETFs are invested primarily in stocks that historically pay high dividends to their shareholders.

If you’re interested in investing in an ETF that produces regular income that is paid directly to you, check the prospectus to find out whether dividends are paid out to investors or reinvested in the fund.

Do I Owe Taxes on My ETF Dividends?

Yes. Dividends paid through an ETF or through a traditional mutual fund are taxed exactly as stock dividends are. The taxes are due in the year that the dividend payment is received, whether the dividend is paid to the shareholder or reinvested in the fund.

What Is a Dividend?

A dividend is a share in a company’s profit for a quarter or a year that is paid to each of its investors. Some companies pay no dividends at all, relying on fast growth in their share prices to attract investors. At the other end of the spectrum, many well-established and profitable companies pay good dividends year after year. Their investors aren’t buying and selling their shares to make a fast profit. They’re holding onto their shares in order to create a steady stream of income.

The Bottom Line

Although ETFs are best known for tracking broad indexes such as the S&P 500 or the Russell 2000, many ETFs focus on dividend-paying stocks.

Historically, dividends have accounted for about 41% of the total returns of the stock market, and a strong dividend payout history is one of the oldest and surest signs of corporate profitability. If your goal is steady income, you might look at one of the many ETFs that focus on dividend-paying companies.

Reviewed by Thomas J. Catalano

LIBID vs. LIBOR: An Overview

LIBID and LIBOR were once key reference rates in the London interbank market, where banks exchanged funds directly or through electronic trading platforms. LIBOR (London Interbank Offered Rate) represented the rate at which banks lent funds to one another. LIBID (London Interbank Bid Rate) was the rate at which banks were willing to borrow funds.

Both rates were important in global finance, especially LIBOR. They served as benchmarks for many financial instruments, such as short-term interest futures contracts, forward rate agreements, interest rate swaps, and currency options.

LIBOR had a particularly pivotal role in the eurodollar market and served as the basis for pricing retail products, such as mortgages, student loans, and credit cards, playing a critical role in the financial markets for decades.

However, it was officially phased out on June 30, 2023. The move away from LIBOR was a result of concerns over its reliability, transparency, and vulnerability to manipulation. Similarly, LIBID was also phased out as it was also seen as unreliable. Its usage had been declining long before its official cessation.

Since LIBOR’s closure, financial institutions have transitioned to various other rates, such as the Secured Overnight Financing Rate (SOFR) in the U.S. and the Sterling Overnight Index Average (SONIA) in the U.K.

Key Takeaways

• LIBID and LIBOR were both interest rate benchmarks for short-term interest rates in the London interbank market, but have been discontinued.
• LIBID represented the rate at which banks were willing to borrow eurocurrency deposits, while LIBOR reflected the rate at which they lent.
• Both LIBID and LIBOR have been replaced with more transparent, transaction-based benchmarks, such as SOFR and SONIA.

LIBID

The London Interbank Bid Rate (LIBID) was the rate that banks were willing to pay for eurocurrency deposits and other bank funds in the London interbank market. Eurocurrency deposits are funds held in banks outside the country of the currency’s origin. For example, U.S. dollars held in a bank outside the U.S. would be considered eurodollars.

LIBID was generally set lower than LIBOR and represented the “bid” side of the interbank market. While some financial institutions used LIBID, it was not nearly as widely followed or governed as LIBOR.

Once LIBOR was being phased out, LIBID began to lose ground as well, primarily due to two reasons: (1) a decrease in the volume of interbank lending and borrowing, and (2) no formal methodology for its calculation.

LIBOR

The London Interbank Offered Rate (LIBOR) was the interest rate at which international banks were willing to lend unsecured funds to one another for different maturities and in multiple currencies. It was calculated daily for five currencies: the Swiss franc, the euro, the pound sterling, the U.S. dollar, and the Japanese yen, across seven maturities, from overnight to one year.

While LIBOR was widely used and important in financial markets, years of declining transaction volumes and manipulation scandals eventually led to its discontinuation.

Cessation of LIBOR and Transition to Alternative Rates

LIBOR was phased out due to concerns over its reliability and vulnerability. It was based on daily estimates submitted by banks rather than actual lending transactions, making it vulnerable to manipulation.

This became a global problem in 2012 during the LIBOR scandal, when it was revealed that several banks submitted false rates to benefit their trading positions, greatly reducing trust in the rate.

Furthermore, the underlying market that LIBOR was meant to reflect, unsecured interbank lending, had been shrinking since the 2008 financial crisis. With fewer actual transactions taking place, it became difficult for LIBOR to rely on actual rates and became more judgment-based.

Note

The U.S. dollar LIBOR stopped publication on June 30, 2023.

Once it became evident that LIBOR was no longer accurate or trustworthy, regulators decided to replace it with benchmarks that were based on observable data, reducing the chances of manipulation.

The U.S. adopted the Secured Overnight Financing Rate (SOFR), which is calculated from overnight Treasury-backed repurchase agreements. In the U.K., the Sterling Overnight Index Average (SONIA) replaced LIBOR.

These rates are considered to be more transparent, less prone to manipulation, and better reflections of the financial markets.

What Is SOFR?

SOFR, the Secured Overnight Financing Rate, is a benchmark interest rate used in the U.S. that reflects the cost of borrowing money overnight collateralized using U.S. Treasuries in the repo market. SOFR influences various short-term interest rates, such as loans and financial contracts. SOFR replaced LIBOR as the benchmark interest rate after the latter was revealed to have flaws, primarily vulnerability to manipulation, as it was based on estimated rates submitted by banks. SOFR, on the other hand, utilizes actual transactions, which makes it more transparent.

Why Was LIBOR Discontinued?

LIBOR, the London Interbank Offered Rate, was discontinued for several reasons. The rate was based upon estimates submitted by banks rather than actual transactions, leaving it open to manipulation. In 2012, it was revealed that some banks had submitted false rates to benefit themselves, rather than provide accurate information on borrowing costs. After the 2008 financial crisis, the volume of transactions in the London interbank market significantly decreased, making it harder to base the rate on real data, increasing the reliance on estimates, further contributing to the manipulation.

Who Decides Interest Rates?

In most nations, interest rates are determined by the country’s central bank. In the U.S., this is the Federal Reserve. The Federal Open Market Committee (FOMC) in the Fed meets regularly to determine if rates should increase, decrease, or remain the same. They do this to control inflation while at the same time maintaining employment and economic growth. Through this, the central bank sets the benchmark rate, which other institutions, such as banks, use to set the interest rates on their products, like loans.

The Bottom Line

LIBID and LIBOR were important benchmark interest rates in the global financial markets, each serving its own purpose. LIBOR was widely used and impacted many short-term rates, such as mortgages and credit cards.

After years of credibility issues, LIBOR was fully phased out in 2023, with LIBID also being discontinued before LIBOR. Both rates have since been replaced with more trustworthy alternatives, such as SOFR and SONIA.