Robert Armstrong has seen first-hand how young people buy investment products. His 20-year-old daughter just started investing via an app, opting to purchase Exchange Traded Funds (ETFs) on her first foray into the investing world.
“When you’re younger you only know what your friends are talking about, and younger people go where it’s simple,” he says.
That said, Armstrong, an investment strategist and portfolio manager with BMO is a big fan of mutual funds, especially for young investors with longer-term goals.
“(These products) give you access to a diversified portfolio,” he says.
He says that the investing community is increasingly selling mutual funds and ETFs in bundles that make them very alike in many ways.
“I personally think that mutual funds are going to evolve, and every mutual fund is going to be available as an ETF – they are merging into one,” Armstrong says.
How they break down
Both ETFs and mutual funds offer investors diversified securities and the chance to invest in a wide assortment of stocks and bonds. Mutual funds are usually made up of sector-specific stocks and government-issued bonds and offer a mix of stocks and bonds that can deliver what an investor seeks, whether that’s high growth, security or income.
However, while mutual funds aren’t traded on a stock exchange and are a pooled investment from many investors, ETFs are bought and sold in shares, and traded on stock exchanges and belong to individual investors. And while ETFs can often be purchased via an app, mutual funds are usually bought in person.
Both mutual funds and ETFs can be passively managed – but mutual funds are more frequently actively managed, meaning a fund manager will monitor and manage those investments.
“You have to pay for active management,” says Armstrong, adding that elicits higher fees.
But it can be a good option for a younger person who wants an arms-length approach to investing. “This way the individual doesn’t have to make the active investment call.”
ETFs are lower cost than mutual funds with management fees as low as 0.01%. While mutual fund fees are dropping, “there is a 1.5%-point difference between mutual funds and ETFs,” says Darryl Brown, director of portfolio strategies for Spring Financial Planning in Toronto – and it’s a fee difference that can add up over time.
“Not everyone wants to manage and monitor their own portfolio”
According to Brown, many older Canadians have traditionally opted for mutual funds.
“They’re attractive in that you receive active, professional investment management” in addition to accessing a globally diversified portfolio, he says.
But now that people have increasing opportunities to access investments more directly, especially through online broker accounts, ETFs have become very popular, he adds.
“You’re buying a basket of investment securities with a predefined methodology – either based on region or the size of companies,” says Brown. ETFs also reduce individual company risk.
“This has proven to be a very good investment strategy for people who hold these types of investments – especially when they don’t trade them and understand that they are holding this basket of investments for the long-term,” says Brown.
“And an ETF is a lot easier to manage than people think it is, and now every investing platform out there has dozens of videos to show people step by step how to invest in a different channel.”
Yet not everyone is able and confident to set up, monitor and manage their own portfolio of ETFs.
“It is still very intimidating for a lot of people,” he says, suggesting that if someone doesn’t feel like they have the right tools to be a confident investor, they should not consider ETFs.
“It’s just not going to be successful,” he says.
Instead, he recommends uncertain would-be investors consider the traditional advisor channel to start. He says that knowing what fees will be charged is critical before going through a financial advisor or planner.
“What’s most important is that you understand the why about what you’re investing, and set parameters around that,” Brown says.
It’s important to be flexible and change gears if needed, as well as approaching investing with a good dose of realism, Brown says.
“Trying to day trade and time the market is something that no one can do.”