Described by some as the Swiss Army Knife of investment tools, Exchange Traded Funds or ETFs can be powerful building blocks in constructing a cost-effective, balanced core portfolio that can help you reach your financial goals.
ETFs come in many varieties. Some track a specific index such as the S&P/TSX 60 or the S&P 500; others might track a specific asset class such as government bonds. Still other ETFs are designed to track sectors such as technology stocks, REITS, gold, commodities, small or large cap equities or foreign stock exchange indexes. Just about any major exchange index in Canada and abroad has a corresponding ETF associated with it.
With a range of carefully chosen ETFs you can balance the asset allocation of your portfolio to meet your investment needs.
By owning a basket of securities within a specific sector, investors can capture the average return of the sector instead of taking on the increased risk of overweighting a single poor performer. That’s reason enough to be looking at this kind of investment, but there are others.
Liquidity and
Flexibility
ETFs are actively traded on all major stock exchanges throughout the day and can be bought and sold like any equity through your financial advisor.
Unlike mutual funds, there is no waiting till the end of day for a valuation, no delay in selling and no front or back end load fees to be paid – simply the standard investment commission you’d pay on any equity purchase.
Low Management
Cost
Unlike mutual funds, ETFs have a substantially lower management expense ratio (MER) — usually less than half a per cent because they duplicate an index and are not actively managed.
The Safety Factor
You’ll never outperform the market that the ETF represents, but you’ll never do worse than the market.
And as a long-term investment, ETFs have time on their side.
For example, the S&P/TSX composite index has posted an average annual gain of more than nine per cent over the last 20 years.
ETFs favour patient investors with a long-term investment horizon.
Global Market
Access
With the choice of ETFs worldwide, they are a convenient way to invest in foreign markets without going through the regulatory bureaucracy that sometimes comes with investing in offshore securities. All Canadian ETFs are RRSP eligible as are many of the U.S. and global ones.
ETFs may not be appropriate for all investors and are not without some risk.
For example, they are subject to market volatility and may lose value.
In addition, because of the specific sectors they track, some ETFs may have above average volatility. Finally, while most ETFs result in lower capital gains than traditional mutual funds, this is not always the case.
As such, it is important to request a prospectus, which details all fees and charges about the specific ETF and read it carefully before you invest.
To discuss the advantages and disadvantages of incorporating ETFs into your portfolio, please feel free to call or email.
For PDF versions of this or previous articles please email jim.grant@raymondjames.ca.
Jim Grant, CFP (Certified Financial Planner) is a Financial Advisor with Raymond James Ltd (RJL). This article is for information only. Securities are offered through Raymond James Ltd., member CIPF.Insurance and estate planning offered through Raymond James Financial Planning Ltd., not member CIPF. For more information feel free to call Jim at (250) 594-1100, or e-mail at jim.grant@raymondjames.ca. and/or visit www.jimgrant.ca.
