Should You Use ETFs?
Exchange Traded Funds (“ETFs”) are one of the best ways to easily diversify your investment portfolio. For new and seasoned investors alike, some ETFs can provide broad exposure to global stock markets and some can provide broad exposure to passive income through dividends.
ETFs can be one of the best and simplest ways to invest in the stock market, and are potentially an excellent choice for your retirement portfolio, your child’s college fund and more.
ETFs vs. Mutual Funds
ETFs and mutual funds are similar in many ways. Both represent a collection of securities that trade as a single unit, and both are managed by a fund manager to whom you pay a management fee. However, there are a few differences to be aware of before you choose one or the other.
ETFs Typically Have Lower Fees than Mutual Funds
It’s not uncommon for F Class mutual funds to charge an average management fee of 0.79%. Canadian ETFs, on the other hand, have an average management fee of 0.48%.1
Over time, fees can drastically eat into your portfolio returns, reducing your portfolio by tens or even hundreds of thousands of dollars. Keeping your fees low is one of the easiest ways to maximize your returns over the long term, which is what makes ETFs such a popular choice among a wide range of investors.
ETFs Trade On An Exchange Like A Stock
Because ETFs trade on a stock exchange, you can buy and sell them throughout the day while the market is open. You can place an indication to purchase or sell mutual funds at any time, though you would need to wait for the next official closing valuation of that fund for the order to be fulfilled. Furthermore, you can only purchase whole shares of ETFs, whereas you can purchase partial shares of mutual funds.
Because you trade ETFs on an exchange, you need to be aware of trading commissions charged by your brokerage. Another potential investment cost saving: several discount brokerages in Canada have even made it free to buy and sell ETFs!
Why Might I Buy ETFs Instead of Individual Stocks?
ETFs may reduce concentration risk in your portfolio by providing exposure to dozens, or even hundreds of individual securities.
You can create a balanced investment portfolio by purchasing only two or three ETFs, or in the case of a one ticket solution, just a single ETF. To do the same with individual stocks would likely require owning more than 50 and likely into the hundreds of individual securities. For new investors, those with small accounts, or those with limited time to manage an entire portfolio, ETFs are a shortcut to enjoying the diversification benefits of accessing a broad segment of the stock market or an asset class without having to manage a portfolio.
If you want to further diversify your portfolio in a specific niche industry or type of stock, you can use ETFs for that too. You can find ETFs focused on technology, pharmaceuticals, natural resources and more. There are also ETFs that contain only dividend-paying stocks, if you are looking to increase your passive income in your investment portfolio.
In other words, you can use ETFs to build a highly personalized investment portfolio that suits your individual risk tolerance and investment goals.
Passive Investing In A Self-Directed Portfolio
Furthermore, because there is a fund manager and investment analyst managing the ETF, you don’t need to make any trading decisions like you would for individual stocks. If the idea of poring over dozens of earnings reports before market open sounds like a chore to you, you’re probably better off investing in ETFs instead of stock picking.
Contributing to the ETFs in your portfolio on a regular basis will allow you to take advantage of dollar-cost averaging, a passive investing strategy that gives you peace of mind in the short-term and potentially manage risk over the long term. If you really want a hands-off approach, set your eligible ETFs up on a DRIP, so any dividends earned are used to buy new shares. You may have an automated investment portfolio in no time!
However, if you do like to make some active trades, investing in ETFs doesn’t mean you have to stop! I personally use broad market ETFs to make up the foundation of my portfolio, then select individual stocks for specific investment goals or just for fun. As a result, I still get all the fun and benefits of active stock trading, while the majority of my capital remains well-diversified through ETFs.
I’ve been investing in ETFs since I started investing! Over the past 10 years, they’ve allowed me to take advantage of stock market gains and earn passive income while providing risk-diversification in my investment portfolio. ETFs now make up the bulk of my TFSA and RRSP — as well as my daughter’s RESP — and are the cornerstone of my long-term investment strategy for my family’s financial security.
1 Morningstar Direct, as at Nov 18, 2020.
Commissions, management fees and expenses all may be associated with an investment in exchange traded products managed by Horizons ETFs Management (Canada) Inc. (the "Horizons Exchange Traded Products"). The Horizons Exchange Traded Products are not guaranteed, their values change frequently and past performance may not be repeated. The prospectus contains important detailed information about the Horizons Exchange Traded Products. Please read the relevant prospectus before investing.
The views/opinions expressed herein may not necessarily be the views of Horizons ETFs Management (Canada) Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.