Congratulations on having that lazy 10K sitting about looking for an investment home. You’ve worked hard for it, now you want to make it work hard for you. You want stability. You want returns. You want it all but you don’t want to lose it all in commissions and fees.
Your bank wants you to throw it in a mutual fund, but you’ve been hearing a lot about ETFs (exchange traded funds) recently and maybe you can be trusted to do your own due diligence and trading..
Where should you throw your dinero?
Let’s go through some pros and cons.
DIVERSITY: You’re really not getting a burnt match between either option here. Both ETFs and mutual have generally a vast portfolio of stocks and bonds in their lineup, and neither has an advantage over the other.
MANAGEMENT: Ditto here, both ETFs and mutual funds are professionally managed so that you can be invested in a sector but not have to be watching 24/7 for small changes that might hurt your investment.
But that’s kind of where the similarities end.
MINIMUM SPEND: A mutual fund will likely not be appealing unless you have over $1k to put in. Indeed, most funds won’t take less. An ETF, however, a listed stock, so you could buy in for anywhere from a couple of bucks per, to hundreds. Commissions obviously apply, but you don’t need much of a pot to pull from to play.
AUTO PAYMENTS: You can set things up to take a piece of your monthly wage and automatically invest in a mutual fund. That gets trickier when you’re working with ETFs. For some, this won’t matter, as it only takes a few clicks of a button to transfer money into a trading account and snap up more ETFs, but it’s worth noting.
PRICING: A mutual fund value is figured at the end of the trading day. One of the nice things about ETFs is they’re constantly re3-priced based on buys and sells, so you can daytrade them if you choose and take advantage of those fluctuations (Or get smoked by them, depending on your level of expertise).
MANAGEMENT FEES: These count, and they count a lot. In fact, over $20 billion annually is charged by mutual funds for management fees and other expenses. That’s a whopping $568 each year for every person in Canada. In fact, ETFs cost between 0.09% and 0.7% to own annually. Mutual funds, which track worse than most indexes when it comes to returns, cost as much as 3.5% on the upside and 1.5% on the low end. Then there’s your ‘front load fee’, which covers the commissions of those selling it to you.. This may explain why so many more investors leave their money in mutual than ETFs – the industry earns far more from such behaviour and encourages it.
FOCUS: ETF’s follow set rules in terms of their make-up. You know what you’re buying when you invest in them. But mutual can get all sorts of weird if the person managing them decides to break from the frame. Invested in a Canadian dividend fund? Great, and what’s it matter if some of your cash ends up in a US midcap? Others think it matters a lot, because you’re choosing what sector to invest in when you pick your fund, and presumably there’s a reason for doing so.
EASE OF USE: ETFS = no financial advisor required. Case closed.
RETURNS: From 2004 to 2011, only in one year did the RBC Canadian Equity Fund beat the TSX 60 index, and it in fact brought a 53.8% return compared to the index return. During the same time, the iShares S&P TSX 60 (
TSX:T.XIU,
Stock Forum) lagged the index by less than a single percentage point most years, averaging a 73.2% return compared to a 77.1% return on the index proper.
Some funds really eat dirt; if you plumped for the Investors Canadian Large Cap Fund from 2004 to 2011, you made just 19.1% on your money during that time, according to Bloomberg.
Unless you plan to invest in every company on the TSX 60 individually, a TSX ETF is simply your best way to follow the macro trends in a sector, country, exchange, commodity or even mindset.