2017 was a good year for the Canadian ETF market, with total assets reaching nearly $146 billion at year-end. While a far cry from the $1.48 trillion that Canadian investors held in mutual funds, it still represents 28 percent growth for ETFs in Canada.
BlackRock’s iShares dominates the Canadian ETF market, boasting a 40 percent market share led by its flagship Canadian equity fund – iShares S&P/TSX 60 Index ETF (XIU).
With some 650 ETFs on the market, and seemingly more added every day, the landscape has become cluttered with so many niche products that border on speculation.
This record growth in ETFs is catching the attention of industry experts. For example, the Toronto Star’s Gordon Pape writes, “What was once a cheap, simple way to invest in the broad stock market has become increasingly complex.”
My switch to indexing was all about keeping things simple. Whether you call it the two-ETF solution, or the four-minute portfolio, the fact is I prefer my ETFs to be as low cost and broadly diversified as possible.
With that in mind, if you’re thinking of joining the ETF movement this year I’d like to share four tips to help get you started:
1) Stick to core funds
ETFs allow you to invest in broad indexes at accessible prices. There’s no reason to get cute here; stick to core funds like Canadian equities, Canadian bonds, U.S. and International equities.
Just a few of these funds can give access to broad exposures of stocks and bonds that can meet your investment goals.
For example, a balanced portfolio of iShares Core Funds could look something like this:
- 20 percent in XIC – iShares Core S&P/TSX Capped Composite Index ETF
- 40 percent in XAW – iShares Core MSCI All Country World ex Canada Index ETF
- 40 percent in XBB – iShares Core Canadian Universe Bond Index ETF
The total MER on this portfolio would be an insanely cheap 0.14 percent.
For more ideas on how to build a portfolio to suit your level of risk, check out BlackRock’s iShares Core sample portfolio tool.
Note – sample portfolio for illustrative purposes only.
2) Less is more
This tip applies to all aspects of investing.
Less is more when it comes to the number of ETFs you own. I’ve seen portfolios built with as many as 10 or 12 ETFs. Rebalancing must be a nightmare. Stick with two to four funds, max, and simplify your portfolio.
Less is more when it comes to trading. Most brokerages still charge $10 per trade, so if you’re adding money to your account on a regular basis try to limit your trades to once per month, or even once per quarter, to save on trading fees.
Less is more when it comes to tinkering with your asset allocation. Two of the top questions I get from investors who want to get into ETFs are, ‘how often do I adjust my asset allocation based on market conditions?’ and, ‘is now a good time to start investing in ETFs?’
While investments should be set up with the long-term in mind, asset allocations may vary depending on your life stage. BlackRock offers recommended asset allocations for investors in their 20’s all the way into their 80’s to give you an idea of how often you should be adjusting your portfolio.
Is now a good time to invest? Again, if your investing time horizon is measured in decades, then yes, now is a good time to invest in ETFs.
3) Rebalance at least once per year
Different stock markets and asset classes are going to have wildly different returns from year-to-year. That’s why it’s important to rebalance your portfolio on a regular basis.
Depending on how often you add new money to your portfolio, I’d suggest rebalancing no more than once per quarter, and no less than once per year.
If you’re making regular contributions like I do, then rebalancing can be as simple as adding new money to the ETF that’s lagging behind its target allocation.
But if your portfolio is in the “set it and forget it” phase, you’ll still need to monitor it once or twice a year to make sure your asset allocation is in alignment. If things have drifted out of line, simply sell some of the higher performing fund(s) and put more into the laggards. It’s the easiest way to buy low and sell high.
4) Don’t Be Greedy
As with investing in individual stocks or mutual funds it can be tempting to chase past performance and change your strategy. Indeed, when I posted my 3-year indexing returns many readers were excited to make the switch themselves.
I cautioned them as I’ll caution you now: Make the switch to ETFs and indexing for the right reasons. Making the switch shouldn’t be to chase past performance but to simplify your portfolio, save on investment fees, and to accept what the stock market delivers without fear of missing out on something better.
Mr. Pape is right to be concerned about niche products such as leveraged ETFs that bet on the price movements of commodities, for instance. The crypto-currency craze also has investors clamouring for access to a Bitcoin ETF. These are speculative investments that have no place inside a sensible core portfolio.
Final thoughts
No doubt the growth of ETFs has been fuelled in part by investors wanting to reduce how much they spend on management fees.
And when you consider how many mutual funds in Canada are simply closet index funds in disguise, it’s no wonder investors would rather pay index-like fees for index-like returns. On the other hand, there are mutual funds out there being actively managed by smart people – it might make sense to pay the management fees on those products. Make sure you know what you’re paying for and that you’re seeing real value.
If you’re ready to make the switch to ETFs then please consider these four tips to get the most out of your ETF portfolio and to keep you on track. Your much richer, future self will thank you.
