Most people are familiar with the traditional investments such as GICs or mutual funds (MF), but many are still not fully aware of the benefits that exchange traded funds or ETFs have to offer. The demand for ETFs is certainly growing worldwide but alas they are still not readily used by Canadian investors — and that is unfortunate.
Why is that, and what exactly are they?
An ETF is an open-ended fund that is listed and traded on a stock exchange, which can be bought or sold directly during trading hours, much like a stock. It is set up to have a basket of securities, which may consist of stocks, bonds, or other assets such as commodities.
The asset mix of a typical ETF generally aims to track the performance of an underlining index or provide exposure to a sector or asset class. Do they sound like mutual funds? They really are almost the same.
ETFs are very similar to MFs but have a few more advantages. ETFs are much more tax efficient and have much lower fees than the average mutual fund. ETFs can be traded multiple times during any given day; when the time is right to buy or sell, unlike a mutual fund that is restricted to close once per day at the closing NAV price.
Another thing I like about ETFs is their transparency. You can always see what you own in the fund. For example, if you wanted to invest in the same investments held in the NASDAQ or the S & P, you would simply purchase an ETF that tracks that particular index, easy, right?
Today, ETFs represent every asset class and can provide exposure to every sector of the market at a much lower cost than a typical mutual fund. In fact, given the broad choice offered with ETFs in the market, a well-diversified portfolio can be constructed with just four to six ETFs in an average retirement portfolio.
People are living longer these days, which is a good thing. However, now more than any other time in history, retirement seems to be demanding more from our savings than ever before. It can be very challenging for an aging investor to try to limit their risks and overall costs to ensure their savings last.
It should always be your goal to create a well thought out financial plan, but it should also be your objective to look for ways to reduce investment costs. You see, lowering your overall investment costs will ultimately increase your net returns and is one of the key contributors to you attaining your goal faster or perhaps having your money last longer.
Talk to your adviser about utilizing the benefits of ETFs in your portfolio. You may find that they are just the “low-cost investment option” you were looking for.
— Christine Ibbotson has written four finance books, including the bestseller How to Retire Debt Free & Wealthy. She also writes the Moneylady column. askthemoneylady.ca