Friday, June 11, 2021 / by Mario Daniel Sconza
If you tuned into last week’s webinar with Canadian DIY investment guru Larry Bates, you would have learned that investment fees could easily take a $100,000+ bite out of your retirement fund.
So, now that you know investment fees should be top of your hit list, how are you going to invest all that money you put (or will put) into your TFSA and/or RRSP?
How about a low-risk, low-maintenance, easy-to-buy (or sell) fund with stable returns and minimal fees? It sounds like a lot to ask for, but an index ETF fits the bill and despite the confusing name, the concept is pretty simple.
What’s in a name?
“Index” refers to a stock index. Index ETFs are designed to mimic the movements of a stock index like the Toronto Stock Exchange 300 Composite Index (TSX), the Dow Jones Industrial Average Index (DJI) or the S&P 500 Index. If the TSX is up 10% for the year, so too would your TSX index ETF. An exchange-traded fund (ETF) simply means the fund can quickly and easily be bought or sold.
Are they risky?
Index ETFs offer “relatively” low risk compared to more targeted funds. For example, the S&P 500 Index contains 500 of the largest companies in the U.S. and includes many household names like Apple, Coca-Cola and Ford. The risk of an S&P index ETF is reduced by the number and diversity of these companies; poor profits at Apple can be offset by good performance at Coca-Cola, Ford, or 497 other companies. Yes, stock indexes can fall from year to year, so invest for the long term. The average annual return of the S&P 500 Index from 2010 to 2020 was a remarkable 13.6%!
Don’t mutual funds offer higher returns?
No, especially not over the long term. Mutual funds are actively managed, which means they have a lot of “experts” constantly tweaking the composition of the fund (at great expense) attempting to maximize the return. Unfortunately, less than 10% beat the market in any given year and few, if any have shown they can do it consistently over a 15-year period.
Do I need a financial advisor or stockbroker to buy an ETF?
It’s up to you, they could easily help you purchase an index ETF, but it will cost you! Many Canadians do it on their own by opening an online brokerage account. It isn’t difficult, you don’t need much money to get started, and you will save thousands as we learned in last week’s webinar.
What if I need the money I invested for an emergency?
ETFs are highly liquid. Need cash... get out your phone, log into your brokerage account and sell – it’s that easy. There is usually a flat fee for a buy or sell transaction, but it’s reasonable with most online brokerage accounts.
Do I have to manage or maintain my index ETF?
No, it’s a passive investment that is virtually maintenance free. In fact, you can set up a brokerage account to purchase a regular amount each month for super simple investing that also takes advantage of something called “dollar-cost averaging”.
If you want to learn more on how index ETFs compare to other investment options, how to buy an index ETF, or the above-mentioned dollar cost averaging strategy, make sure to join this upcoming webinar.
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