Exchange Traded Funds 101

 

Low fees, diversification, and liquidity are just a few of the buzz words that come to mind when describing this relatively new investment vehicle, the Exchange Traded Fund. Being traded on major stock exchanges (where the name Exchange Traded comes from), this fund gives new investment opportunities for both first time investors and professionals who are looking for a more cost and tax efficient alternative to mutual funds.

 

Exchange Traded Funds, or ETFs, hold different securities (stocks and bonds) in one easy to sell, low cost package for the investor. The simplest type of ETFs will track an index, meaning it will hold shares in the different companies being tracked by an index like the S&P/TSX or S&P 500. Different types of ETFs might track a commodity, sector, or international market. Which ETF you choose all depends on your investment strategy and objectives.

 

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Getting Started With ETFs

 

First, you’ll need to decide where to make your purchase. If you’re wanting to select, buy, and sell an ETF yourself for a low fee or fee per trade, a self-directed brokerage account may be a good place for you. If you’re wanting a financial advisor to help walk you through the process of building your investment portfolio and you’re okay paying a higher management fee, that’s also an option. Alternatively, online investing platforms with brokerage services are available too as a sort of happy medium between the other two options where you can still get the help of a financial advisor but at a much lower cost.

 

Once you’ve determined the where, you’ll need to select which ETF is right for you. As mentioned above, there are different types of ETFs with each one holding its own portfolio of investments. The question is do you want a passive or active ETF? A passively managed ETF typically has lower fees and will track or match an index whereas an actively managed ETF will try to outperform it, likely for a higher fee. It’s important to know your management fees through a brokerage will be in addition to any fees associated with a passively or actively managed ETF.

 

Advantages of ETFs

 

Low Cost

Chances are when investing in an ETF, you’ll save yourself the headache of having to build your own portfolio of individual stocks and bonds as well as the individual cost of doing so. Comparable to mutual funds, ETFs can offer less turnover of the underlying securities themselves which means fewer realized capital gains and greater tax efficiency.

 

Diversification

You can diversify your portfolio by buying different types of ETFs. The underlying investments (investments inside your ETF) themselves may already be allocated to different asset classes and/or investment strategies allowing for further diversification.

 

Liquidity

Being traded throughout the day on major stock exchanges means you can buy and sell ETF shares at their current price. The amount of shares on the market can also increase or decrease according to their demand and typically trade close to their Net Asset Value.

 

Accessibility

With low to no investment minimums, this means they are more accessible to the beginner or DIY investor or average person.

 

A Note From The Author

 

While I’m not able to provide investment advice of any kind, I do believe it’s important for you as the reader to understand the basics about the different investments available in Canada today. Part of this reason is because as a financial educator I believe having this information in one easy to access place is key to building financial intelligence. The other reason is because as a promotor of Infinite Banking (the idea of using Dividend-Paying or Participating, Whole Life Insurance for cash flow purposes), it makes sense to educate my clients (and those interested in implementing this strategy into their financial plan), on the underlying investments of the Participating Account as well as the underlying investments of other financial vehicles not associated with Infinite Banking. Please note this information is intended for educational purposes only and not as financial advice. Thanks for understanding!

 

Key Features Desired By Most Canadians


Safety and Security

  • Predictable Results
  • No Capital Loss/Safe Harbor
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Growth

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Access To Money Without Penalty

  • Liquidity, Use and Control
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Tax-Favoured

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All the best in your financial journey,

 

Ashley Lalonde

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