There are times when you want a lot of choice, but if you’re having trouble telling your options apart, choice can be overwhelming.
That holds true whether you’re in line at Starbucks, choosing between Baskin Robbins’ 31 flavours or looking at a stock portfolio.
Sure, there are financial experts who’ve made millions picking just the right combination of stocks, but they were able to do that thanks to years of experience and a massive amount of research.
If you’re just dipping your toe in the investment world – or simply don’t have the time to carefully curate the ideal mix of bonds and stocks – an ETF portfolio may be right for you.
What’s all the ETF buzz about?
One of the main reasons why investors like ETFs is the low cost, especially compared to mutual funds.
They’re also easy to track because they’re publicly traded, they can be easy to trade and they’re diverse because they cover nearly all asset classes.
Since ETFs are a collection of securities instead of just one company’s stock, they’re considered less risky.
Passive vs. actively managed ETFs
The only major difference between passive and actively managed ETF portfolios is that passive ETFs track an index like the TSX or the S&P 500.
Actively managed ETFs have a portfolio manager with a goal to outperform an index.
Since most ETFs aren’t actively managed, they tend to have lower costs compared to actively managed funds – but the cost of either is still lower than mutual funds.
Robo advisors vs. the human factor
An even cheaper option is to use a robo advisor ETF. Robo advisors automate the job of advisors: They assess your risk tolerance, put your money into the appropriate investments and adjust them based on your changing needs as well as the market.
Some will automatically rebalance your portfolio without charging additional fees and you get 24/7 access.
The difference between a robo advisor versus a portfolio manager is that portfolio managers can create and manage a portfolio, said Pat Dunwoody, the executive director of the Canadian ETF Association (CEFTA).
“The index tracking ones are easy to explain to a client. You can say, ‘so here’s the index that we’re following, do you agree that this is what you want to do and this is why I’ve chosen this index or these indexes?’ As opposed to ‘trust me, that fund manager is really good.’”
“They perpetually look around the world and see where they should be in and out whereas a robo advisor creates that portfolio and usually sticks to it unless they see something horrendous coming down the pipe,” she said.
What to consider when choosing ETFs
ETFs, or exchange-traded funds, have been around since the early 2000s but they’ve become increasingly popular with investors – but if your focus is on costs, you need to pick carefully. Some ETFs have higher expense ratios.
As with all investments, you also need to know your risk profile: certain ETFs are more high-risk than others and diversification can limit your exposure.
New ETFs are being created on a regular basis so investors are spoilt for choice and can find a fund in nearly every asset class and for every risk tolerance.