Let’s Talk About ETFs
I am not sure about you, but when it comes to investing it seems like ETFs are all the rage! Truth be told, ETFs have gained popularity in recent years as they offer a convenient and cost-effective way to diversify a portfolio.
But what, exactly, are ETFs? How do you buy them and how do these impact your portfolio? Let’s explore the top five things that every investor in ETFs needs to know to make informed decisions and embark on a successful investment journey.
The top 5 things you need to know about ETFs
1- What exactly is an ETF, anyway?
Exchange-Traded Funds (ETFs) are investment funds that are traded on stock exchanges, much like individual stocks.
Often called the superhero of investments, ETFs are a combination of different investments bundled together in a basket. ETFs are traded on the stock market, so you (yes, YOU) can buy or sell them just like you would any other stock.
Unlike mutual funds, ETFs are traded throughout the day on stock exchanges (The TMX, NASDAQ, NYSE, etc..), providing investors with flexibility in buying and selling at market prices. This liquidity is a key advantage for those looking to react quickly to market changes.
2- ETF’s deliver diversification
One of the primary advantages of investing in ETFs is the opportunity for diversification – the ability to spread your money across many different investments. Diversification can help mitigate risk, providing a more stable foundation for long-term growth.
3- Keep your eyes on fees
Like all financial products there are fees (costs) with ETFs. Costs can significantly impact the overall returns of an investment. While ETFs are generally known for their lower expense ratios compared to traditional mutual funds, you should still examine these costs. Look for ETFs with low fees so that you get to keep more of your money. Some platforms even let you trade ETFs for free.
Be sure to also review the MER (management expense ratio) on the ETF providers website, or speak with your financial planner. MER is a fee that is often between 0.50% – 3% and this fee is comprised of a few components, namely: Management fee (fees for advice, access and Service), Operating expenses and taxes.
Ensure you review the MER (management expense ratio) on the ETF providers website and with your financial planner as some sites will just show the management fee which is not the total cost (does not include taxes or trading).
Additionally, commission-free trading platforms have become increasingly common, making it more cost-effective for investors to buy and sell ETFs without incurring additional fees.
4- Choosing the right ETF for your goals
With so many ETFs available in the market, selecting the right one can be overwhelming. Novice investors should identify their investment objectives, whether it's capital appreciation, income generation, or a combination of both.
Different ETFs cater to various goals, here are some of the most popular ETF categories:
Dividend stocks: Stocks that pay a dividend or have a strong payout record
Industry: Securities from companies in a specific industry, such as consumer goods
Major indexes: Stocks or bonds, based on a major index such as the S&P 500 or the Nasdaq 100, FTSE Canada Universe Bond
Commodity: Investments in physical commodities such as gold, copper or the producers of these metals
5- Check-in with your ETF regularly
Just like with a garden, you need to keep an eye on your investments. This way you can see how they're doing and make changes if needed. This is called "rebalancing," and it keeps your garden (or portfolio) looking fresh, healthy and on track with your risk tolerance level.
This may involve selling assets that you have profited from and reallocating your portfolio to maintain the desired asset mix.
Speak with your financial planner or bank, so they can assist you in making informed decisions aligned with your financial objectives.
The bottom line
Investing in ETFs can be fun and rewarding. Just remember, it's like choosing your favorite flavors at an ice cream shop, find the ones you like, keep an eye on them, and enjoy watching your money grow.
By understanding the basics, embracing diversification, being mindful of costs, selecting the right ETFs, and staying informed, you can navigate the world of ETFs confidently.