A Guide To Investing In Canadian Etfs Wisely

Exchange-traded funds (ETFs) are a popular investment vehicle in Canada, with Canadian ETF assets exceeding $367 billion as of January 2024. ETFs are similar to stocks in that they can be easily purchased and sold on an exchange, but they also offer the diversification benefits of mutual funds by holding hundreds to thousands of securities.

ETFs are a great way for investors to build a low-cost, diversified portfolio and save on the fees charged by Canadian mutual funds. They are also more cost-effective and easier to trade than mutual funds, making them a compelling option for those looking to invest in the Canadian market.

When considering how to invest in Canadian ETFs, it is important to define your investment goals and asset mix, select the ETFs you want to buy, open a trading platform account, fund your account, place an order, and monitor your investments regularly.

There are also different types of ETFs to consider, such as equity ETFs, fixed-income ETFs, commodity ETFs, currency ETFs, and real estate ETFs. Additionally, you can choose between using a trading platform or a robo-advisor to make your ETF investments.

Overall, ETFs offer a versatile and cost-effective way to invest in the Canadian market, providing investors with a range of options to suit their risk tolerance, investment objectives, and financial situation.

Choosing a trading platform

When choosing a trading platform, there are several factors to consider to ensure that the platform suits your needs. Here are some key considerations:

• Fees and commissions: Compare the costs of using different platforms, including trading commissions, account opening fees, and account maintenance fees. Look for platforms that offer low or no-commission trading, as these can help you save money in the long run.
• Customer support: Check the ratings and reviews of the platform's customer service. Ensure they offer highly-rated and responsive support to assist you with any issues or queries you may have.
• Account types: Ensure the platform offers the specific account types you are interested in, such as RRSP, TFSA, or RESP accounts. Different platforms may offer different account options, so choose one that aligns with your investment goals.
• ETF types: Make sure the platform offers the ETFs you are interested in purchasing. Not all platforms provide access to the same range of ETFs, so verify that your desired ETFs are available before signing up.
• Tools and resources: Look for platforms that provide access to a variety of tools and resources to help you make informed investment decisions. These can include market research tools, portfolio tracking, and educational resources.
• Reputation and reliability: Opt for well-known and reputable platforms with a track record of satisfied users. Check reviews and testimonials from other investors to gauge their level of satisfaction with the platform's performance and reliability.

Some popular trading platforms in Canada include Questrade and Wealthsimple Trade. Questrade offers free ETF purchases, a robust trading platform, and various account types. Wealthsimple Trade, on the other hand, is a commission-free platform offering RRSP, TFSA, and non-registered accounts. It is also the only platform in Canada to offer fractional share trading.

Understanding different types of ETFs

Exchange-traded funds (ETFs) are a great entry point into the stock market, as they allow investors to spread out their risk and offer low expenses. There are several types of ETFs available to Canadian investors, each meeting a specific investment need. Here are some of the main types of ETFs:

Traditional Index/Beta ETFs

Also known as passive ETFs, these are the most common type of ETF. They track an index of equities, such as the S&P 500 or the S&P/TSX Composite Index, and the rules that the index follows. Index ETFs are low-cost and offer daily transparency, allowing investors to know exactly what they own at any given time. Examples include the Mackenzie US Large Cap Equity Index ETF (QUU) and the Mackenzie Canadian Equity Index ETF (QCN).

Strategic Beta ETFs

Strategic or smart beta ETFs aim to deliver improved performance compared to the index (known as delivering alpha). They do this by tweaking the indices/benchmarks across several factors, such as value, volatility, growth, geography, and size. An example of a strategic beta ETF is the Mackenzie Maximum Diversification Emerging Markets Index ETF (MEE).

Actively Managed ETFs

These ETFs follow a manager's active strategies and can be found for fixed income, equity, and balanced ETFs. The managers aim to beat the benchmark's performance rather than track it. An example of an actively managed ETF is the Mackenzie Unconstrained Bond ETF (MUB).

Equity Exchange-Traded Funds

Equity ETFs are funds that track an index of equities. They invest in a variety of company stocks, allowing investors to own shares of hundreds or thousands of companies and entitling them to the profits of these companies. Equity ETFs can be further classified as market-based, sector-based, or factor-based.

Bond and Fixed Income ETFs

Bond ETFs are among the most popular types of ETFs. They primarily invest in bonds, which are loans issued by governments or corporations to raise funds without offering their shares for sale. Bond ETFs focus on government, municipal, international, or corporate debt. Popular bond ETFs include the Vanguard Total Bond Market ETF (BND) and the iShares Core US Aggregate Bond ETF (AGG).

Commodity ETFs

Commodity ETFs track the prices of specific commodities, such as silver, gold, platinum, and agricultural products. However, investing in these funds does not give investors ownership of these assets. Instead, they are buying a derivative contract that tracks the price of the commodity. Popular examples of commodity ETFs include the iShares Silver Trust (SLV) and the Horizons Gold Yield ETF (HGY).

Currency ETFs

Currency ETFs track the performance of a single currency, such as the Canadian dollar, in the foreign exchange market, cryptocurrency, or a basket of currencies. Investing in a currency ETF offers investors exposure to the forex market and the potential to invest in currencies that are likely to increase in value. However, it is important to note that investment in currencies involves high risks due to their volatility.

Real Estate Exchange-Traded Funds

Real estate ETFs invest in the real estate market, primarily through real estate investment trusts (REITs). By investing in a real estate ETF, investors can easily enter the sector without having to buy traditional real estate. Real estate ETFs are also attractive in terms of yield, as they are expected to pay out a significant portion of their taxable income to shareholders.

Factor ETFs

Factor ETFs are exchange-traded funds that invest following certain market indexes. They target companies that exhibit certain factors, including growth, value, volatility, and momentum. This type of ETF seeks to help investors increase returns, improve investment performance, and mitigate risk.

Specialty ETFs

Specialty ETFs include leveraged funds and inverse funds. Leveraged funds use borrowed money to amplify the returns of an underlying index, while inverse funds profit when the target index performs poorly. Specialty ETFs can lead to significant gains but also come with high risks, making them more suitable for short-term investing rather than long-term.

Sustainable ETFs

Sustainable ETFs combine traditional investing with social, environmental, and governance insights. They invest in companies that have shown a commitment to reducing their global carbon footprint and promoting diversity and inclusion. Sustainable ETFs go beyond profitable investing goals to support the quest for a sustainable, interconnected world.

Selecting the right ETFs for your portfolio

There are a few key considerations to keep in mind when selecting ETFs for your portfolio. Here are some factors to help you make informed decisions:

• Investment Goals and Risk Tolerance: Understand your financial goals, time horizon, and risk tolerance. Are you investing for retirement, a house, or a specific goal? Are you comfortable with market volatility, or do you prefer a more conservative approach? Defining these factors will help you determine the appropriate asset allocation and types of ETFs to consider.
• Diversification: Diversification is a crucial aspect of investing. Opt for ETFs that provide exposure to different asset classes, sectors, and geographies. This diversification can help mitigate risks and provide a more balanced portfolio.
• ETF Provider Reputation: Research the ETF providers you are considering. Reputable companies like Vanguard, BlackRock (iShares), and BMO often offer well-managed and reliable funds. Their long-standing presence in the market can provide an added layer of trust and stability.
• Expense Ratio: The expense ratio represents the annual fee charged by the fund. ETFs with lower expense ratios will preserve more of your returns over time. Compare the expense ratios of similar ETFs to find the most cost-effective options.
• Liquidity: Ensure that the ETF you're considering has sufficient trading volume and liquidity. This typically results in tighter bid-ask spreads and fewer price discrepancies, making it easier to buy or sell your shares.
• Performance History: While past performance doesn't guarantee future results, it can give you insights into how the ETF has navigated different market conditions. Consider ETFs with a solid track record of performance that aligns with your investment goals.
• Underlying Assets: Understand the specific assets held by the ETF. This information will help you gauge the ETF's potential volatility, growth prospects, and associated risks. Ensure that the underlying assets align with your investment strategy and risk tolerance.
• All-In-One vs. Building Your Own Portfolio: You can choose between buying an all-in-one ETF portfolio or creating your own custom portfolio. All-in-one portfolios are simpler and don't require much research, but they usually come with slightly higher fees. Building your own portfolio involves selecting a combination of equity and fixed-income ETFs, which demands more research and ongoing maintenance but offers lower costs.
• ETF Selection Criteria: Develop your own criteria for selecting ETFs. Consider factors such as investment objectives, risk tolerance, fees, performance, and the reputation of the ETF provider. This will help you make informed decisions and choose ETFs that align with your financial goals.

Opening a trading account

When choosing a trading platform, consider factors such as fees and commissions, customer support, and the types of accounts and ETFs available. For example, Questrade offers free ETF purchases, while Wealthsimple Trade provides commission-free trading for stocks and ETFs. It's important to compare costs, such as trading commissions, account opening fees, and account maintenance fees, to find the best option for your needs.

Once you've selected a platform, simply follow the steps to sign up and create your account. Some platforms may require a minimum balance, such as the $1,000 minimum for trading on Questrade. After setting up your account, you can then proceed to fund it using methods like Electronic Funds Transfer (EFT) or wire transfer. You can also set up automatic contributions to ensure regular investments.

With your trading account funded, you're now ready to start investing in ETFs. Remember to do your research, define your investment goals, and understand your risk tolerance before making any investment decisions.

Placing an order

Once you have decided on the ETF(s) you want to invest in, it is time to place your order.

There are two main types of orders: market orders and limit orders. A market order will execute at the best available price, while a limit order allows you to set a specific price at which you’re willing to buy the ETF.

For example, if you want to buy 100 shares of iShares S&P/TSX 60 Index ETF (XIU) using a limit order at a price of $25 per share, you would enter the following order details:

• Order type: Limit order
• Quantity: 100 shares
• Duration: Day or Good-Till-Cancelled (GTC)

Double-check the order details, including the ticker symbol, order type, quantity, and price, to ensure accuracy. Once you are confident in the order, submit it for execution. You should get a notification that the purchase has been successful, and now see the shares in your trading account.

Tips for Placing an Order

• Do your research on the ETF before placing an order. Understand your investment goals, the ETF's performance history, expense ratio, underlying assets, and the reputation of the ETF provider.
• Consider using a limit order if you want to set a specific price for your purchase. This can help you get a better deal, but there is a chance that your order may not be filled if the market price doesn't reach your limit.
• Monitor the market conditions and performance of your ETF investments regularly after placing your order. You may need to rebalance your portfolio if it deviates from your desired asset allocation.
• Be aware of the transaction fees and commissions charged by your trading platform. These fees can add up, especially if you are trading small amounts of ETFs frequently.

Frequently asked questions