ETFs: The Complete Guide

When deciding which investment tool makes the most sense for you, it’s best to understand all available options. But, there is a lot to know. Learning the difference between a mutual fund and an exchange-traded fund (ETF), for example, can help you choose the best option for you today, and into the future. To help you decide, here is a complete guide to ETFs.

What is an ETF Exchange-Traded Funds

 

There are many options available. But not all are built the same. For example, the best dividend exchange-traded funds are not necessarily the best in Canada, generally speaking. 

Where you choose to invest your money will change in any given year. And with the precarious markets, these can change on a dime. Therefore, there are some fairly reliable places to invest your money that provide returns and security. An ETF is one of the more reliable investment tools to invest in.

What Is An ETF?

These are traded similarly to a stock. However, instead of a particular company, this fund is a collection of securities traded together on the stock market. It contains different types of investments. These include bonds and commodities.

It is an algorithm that tracks certain economic sectors or an index. And unlike mutual funds, the trades happen several times throughout the day. Therefore, the value of the fund changes multiple times throughout the day.

ETFs reflect established companies spread out across market sectors. This makes them a diversified investment option that are somewhat protected from market fluctuations. Therefore, this makes them a good tool for investors who want to get into the market. And while similar to mutual funds, they are purchased at a fraction of the cost. This makes them appealing to newer or more humble investors.

There are over 700 ETFs available for Canadians to invest in. However, it can be challenging to decide which ones to put your hard-earned money into. This guide can help. 

What Is The Difference Between An ETF And a Mutual Fund?

In Canada, ETF investments are beginning to outpace mutual fund sales. There are many similarities between the two investment vehicles, as well as some key differences. Most notably, ETFs tend to track large indexes, like the S&P 500. In contrast, mutual funds are actively managed. While they may track an index, mutual funds are typically more hands-on. To clarify, an advisor actively manages a mutual fund with the aim of earning investors higher earnings.

However, because ETFs aren’t typically managed by an advisor, they are more affordable. Both investment vehicles have a Management Expense Ratio (MER). The MER of mutual funds are more expensive. They include management fees, operating expenses and taxes charged on the fund. However, because ETFs are passively managed, the MER is much lower in comparison.

In addition, there are tax advantages over mutual funds. For example, because advisors actively mutual funds, there are more trades. This means more tax implications. In contrast, ETFs tend to involve more stability and less trading. This means fewer tax implications for the investor.  

Finally, unlike ETFs that fluctuate with the market throughout the day, mutual funds are only traded once a day. This happens after the markets close. 

Which Is Better: An ETF Or A Mutual Fund?

Your risk tolerance determines which investment option makes the most sense for you. In addition, it depends on your investment amount and goals, For the laid-back investor looking for less management and lower expenses, an ETF may be the better option. However, if you want to invest in more niche market segments, a mutual fund is more likely to get you there. That makes mutual funds, theoretically, a more diversified option for your investments. Both, however, provide a good option for investing your money in multiple sectors, industries and stocks compared to buying individual stocks. This makes both a good investment for a well-rounded portfolio.

Types of ETFs

Even though ETFs are like baskets of stocks, there are a large number to choose from. 

Market tracking

These mirror the stock or bond market indices like the S&P 500 or the TXS. The ‘baskets’ contain stocks that are traded on those indexes. Therefore, market fluctuations affect your portfolio in the same way they hit the index.  

Sector Tracking

These ETFs follow a certain sector of the economy, like manufacturing, rather than a variety of stocks across sectors. And the types of sectors in which you can invest in include, but are not limited to, information technology, energy, the financial sector and utilities. 

International

If you want to invest outside of Canada, there are ETFs comprised of international stocks. And you have the option of looking at emerging markets or developed markets. However, this depends on your risk tolerance and investment preferences. 

Thematic

While less common, these are still an option for investors. For example, let’s say you are passionate about the environment. Well, you can choose ETFs comprised of environmentally conscious businesses. 

What Are The Best ETF For 2020?

Different types of funds will be of value to different types of investors. There are, however, some that are a solid addition to any investment portfolio.

Vanguard FTSE Canada All Cap Index ETF – (VCN)

This fund is diversified across small, medium and large-sized stocks. We like it because of its very low Market Expense Ratio (MER – the combined cost of fees, taxes and expenses charged to the account). It comes in at just .06% and yields 7.16%.  And this fund has 213 holdings. Therefore, by including small and medium-sized stocks, this fund is a good option for Canadians who don’t want all of their eggs in the energy and financial sectors.

Hares S&P/TSX 60 index ETF (XIU)

This fund encompasses all the top companies on the TSX, at a low fee. Its MER is just .18% and yields 2.9%. It includes high-quality, reliable companies. But it is less diversified because it doesn’t include sectors that aren’t as lucrative. However, it is a reliable investment due to its focus on the top performers on the S&P and TSX 60 index.

iShares Canadian select dividend index ETF (XDV)

iShares includes 30 of the highest-yielding stocks on the Canadian stock market. The MER is .55% and yields 4.5%, making it a solid investment. Unlike indexes that highlight significant market share and heavy trading, iShares instead looks at dividend yields and prospective growth and long-term stability.

Can You Lose All Your Money In ETF?

Investing in an exchange-traded fund is really investing in a bucket of stocks that live on the stock market. If the stock market tanks, so too will your ETF. Ideally, you diversify your holdings so that a significant market hit doesn’t empty your bank account. However, if you don’t invest with foresight, as well as diversity and risk assessment, you may lose all of your money.

What Is A Good Expense Ratio For An ETF?

For an actively managed portfolio, a good expense ratio is about .5% to .75%.  If your expense ratio exceeds 1.5%, you’re paying too much. On average, you can expect to pay an expense ratio of .44%.  

What ETF Offers The Highest Dividend?

ETFs offer a wide variety of investment options, from high dividends to high returns. Do you want to invest in an exchange-traded fund that yields high dividend returns? The SPYD tops the list of highest dividend-paying stocks on the S&P 500. SPYD boasts a one-year return of 12.88% and a dividend yield of 4.25%. Therefore, this makes it the highest dividend earner.

Best ETFs To Buy And Hold?

Do you have long-term savings goals? Then it is worth looking into ETFs that have slower, but more reliable long-term success. Buy and then hold for secure returns towards your long-term investment goal.

The Vanguard Total Stock Market ETF (VTI)

This Vanguard ETF fund is comprised of over 3,500 stocks, the largest proportion of which are large-cap stocks. It is a great option for people looking for long-term investments, but not the stress and the volatility of an individual stock. It offers a low .04% expense ratio with general annualized returns of as much as 10%.

The SPDR S&P 500 ETF (SPY)

This is the first-ever ETF. And because it tracks the S&P 500, it enjoys the greatest trading volume. Because of its significant trading volume, it’s a diversified option that can grow your money, steadily, over time. It comes with a low .09% expense ratio and a 15.91% annualized return.

Vanguard ETF

The Vanguard Group is the world’s largest provider of mutual funds and ETFs and a U.S. registered investment advisor. These funds pay dividends on either an annual or a quarterly basis.

The ETFs they offer include:

  •         Vanguard Total World Stock ETF (VT)
  •         Vanguard Total Stock Market Index Fund (VTI)
  •         Vanguard REIT Index (VNQ)
  •         Vanguard Total Bond Market ETF (BND)
  •         Vanguard Short-Term Treasury Index Fund ETF (VGSH)
  •         Vanguard Total World Bond ETF (BNDW)

The company offers a lower-cost option for investors, with fees running 83% lower than competitors. Therefore, it makes investing accessible to a wider audience.  

Buy

ETFs are a great and accessible investment option for all types of investors. Whether your goal is slow, reliable growth, or a riskier portfolio with the chance to earn more money, more quickly, there is a fund that will suit your investment style and needs. 

To purchase an ETF, you can go directly to the source and purchase the ETF directly from the issuer, like Vanguard. You also have the option of working with a broker who will look at multiple issuers for you to purchase from. Alternatively, you can use a robo-advisor, like Wealthsimple, to purchase and manage your ETFs.

 

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