A Monthly Guide To Etf Investing

Exchange-traded funds (ETFs) are a great way to invest in a wide range of stocks without choosing individual stocks. ETFs are similar to index mutual funds but tend to be lower-cost, more liquid, and tax-effective. They are a good option for investors who save each month or with every paycheck. ETFs can be purchased through online platforms or brokerages, and there are options with no minimum investment size. Consistent monthly investments in ETFs are a great way to save for the long term, bringing peace of mind and simplifying saving and budgeting.

ETF vs Mutual Funds: Lower fees, more liquidity, and tax-effectiveness

Exchange-Traded Funds (ETFs) and Mutual Funds are two popular investment options for those looking to diversify their portfolios. While both have their advantages, ETFs offer several benefits that mutual funds do not.

Firstly, ETFs are known for their lower fees. In 2022, the average expense ratio for an index ETF was 0.16%, while the average cost for an actively managed mutual fund was 0.66%. ETFs are often "no-load", meaning there is no purchase fee, and they also don't charge annual 12b-1 fees like mutual funds. The lower fees of ETFs are due to their passive management style and lower operational, marketing, and administrative costs.

Secondly, ETFs offer greater liquidity than mutual funds. ETFs can be bought and sold throughout the day, just like stocks, making them ideal for active traders. In contrast, mutual funds can only be bought and sold at the end of each trading day, based on the net asset value (NAV) calculated at the end of the business day.

Lastly, ETFs are considered more tax-efficient than mutual funds. This is because ETFs don't generate as many capital gains distributions, which are taxed at the long-term capital gains rate. The passive management style of most ETFs means there are fewer transactions and, therefore, fewer taxable events. Additionally, the creation and redemption process of ETFs can relieve the fund manager of the responsibility of buying or selling the ETF's underlying securities, further reducing the potential for taxable events.

When deciding between ETFs and mutual funds, it is essential to consider the fee structures and tax implications of each investment option. ETFs offer lower fees and greater liquidity, and they are often more tax-efficient than mutual funds.

In terms of how to invest in ETFs monthly, there are a few options. One way is to use a robo-advisor platform, such as Wealthsimple or Modern Advisor, which allows you to build an ETF portfolio with small, regular contributions and no trading commissions. Another option is to use a brokerage with commission-free ETFs, such as Questrade or WealthSimple. Finally, you can consider the iShares PACC plan, which allows you to contribute a fixed dollar amount each month to purchase ETF shares without paying a commission.

Robo-advisors: Cost-efficient for investors adding small amounts each month

Robo-advisors are a great option for investors looking to add small amounts to their portfolio each month. Robo-advisors are online investment platforms that use algorithms to build and manage an investment portfolio for you. They are a low-cost alternative to traditional financial advisors, and they can be an excellent option for those who want to invest in ETFs monthly.

Robo-advisors typically select a portfolio of ETFs based on your risk tolerance, desired level of returns, and investment goals. They offer a diversified portfolio of ETFs, reducing your risk and potentially increasing your returns. One of the benefits of robo-advisors is that they charge lower fees than traditional financial advisors. They usually charge a management fee, which can range from 0.25% to 0.5% of your assets annually, and there may also be fund fees, known as expense ratios, which are typically between 0.05% and 0.25%.

Some popular robo-advisors include:

• Wealthfront: Offers a blend of automated investment portfolios and DIY stock investing portfolios, with a low management fee and excellent tax strategy. However, it has a $500 account minimum and no access to human advisors.
• Betterment: Provides a competitive annual fee of 0.25% and has no minimum balance requirement. It also offers access to live financial advisors for an additional cost.
• Vanguard Digital Advisor: Charges a low annual net advisory fee of no more than 0.20% and offers excellent retirement planning tools. However, there is no access to financial advisors.
• SoFi Automated Investing: Charges no annual advisory fee and provides access to financial advisors at no additional cost. The account minimum is only $1.
• Fidelity Go: Offers free management on balances below $25,000 and integrates with other Fidelity accounts. However, it does not offer tax-loss harvesting.

Robo-advisors provide a cost-efficient way to invest in ETFs monthly. They are a good option for those who want a diversified portfolio and professional management at a lower cost. They are also convenient, as they are accessible online and can be set up quickly.

Commission-free ETFs: No commission, but you have to place trades manually

Several online brokerages, including Questrade, WealthSimple, and Virtual Brokers, allow you to purchase ETFs with no commission. Others, such as Scotia iTRADE and Qtrade, offer a limited menu of commission-free ETFs. While you still have to place each trade manually, you can contribute cash to your account automatically and then buy a few shares at a time without paying commissions.

For example, you can set up a standing order from your bank account to your investment account, and then use that money to invest in an ETF of your choice each month. This way, you can make regular investments at the same time each month, and timing won't matter as much. If the ETF is lower one month, you'll end up buying more shares for your money, and if it's higher the next month, you'll get slightly fewer. Over time, it tends to average out.

This approach is particularly good if you want to get exposure to a broad range of stocks with a small amount of capital. For example, you could start with a small amount like £25 or £50 every month. Some invest quarterly but with bigger sums.

Keep in mind that ETFs don't make it easy to invest small amounts. That's because almost all brokerages charge a commission to buy and sell ETFs, which can quickly erode any benefit you might get from the ETF's lower management fees. So, if you're looking to invest small amounts with ETFs, using a brokerage with commission-free ETFs can be a good option.

Pre-authorised purchase plans: Contribute a fixed amount each month with no commission

Pre-authorised purchase plans, or PACCs, are a great way to invest a fixed amount each month without paying any commission. This method is ideal for those looking to invest small amounts regularly.

PACCs are available for iShares ETFs at most brokerages. First, you arrange to contribute a fixed amount to your account each month. You then instruct the brokerage to buy a fixed amount of the ETF each month, without paying any commission. The only caveat is that only whole shares can be purchased. For example, if you set up a PACC for $200 per month and the ETF is trading at $22, you will buy nine shares, and the remaining $2 will remain uninvested.

This method of investing in ETFs is beneficial as it simplifies saving and budgeting, as you are likely paid on a monthly basis. It also helps you avoid missing out on returns by forcing you to invest as soon as you receive your salary. Additionally, it brings peace of mind, as you don't have to worry about timing the market, which is incredibly difficult and often risky.

With PACCs, you can easily increase your monthly contribution as your financial situation changes, making it a flexible and convenient way to invest in ETFs.

Index mutual funds: Good for investors making small, regular contributions

Index mutual funds are a good option for investors making small, regular contributions. Here's why:

Low Costs

Index funds typically have lower expense ratios because they are passively managed. They don't require research analysts and incur fewer transaction fees and commissions since they trade as little as possible to keep costs low. Actively managed funds, on the other hand, have larger staffs and conduct more complicated and frequent trades, driving up costs.

Broad Market Exposure and Diversification

Index funds aim to mirror the performance of a specific market index, offering broad market exposure. This means they provide diversification across various sectors and asset classes, reducing investment risk. While any individual stock may see its price drop steeply, if it's a relatively small part of a larger index, it won't be as damaging.

Historical Performance

Over the long term, many index funds have outperformed actively managed funds, especially after accounting for fees and expenses. According to the widely followed S&P Indices Versus Active (SPIVA) scorecards, about 9 out of 10 actively managed funds didn't match the returns of the S&P 500 benchmark in the past 15 years.

Tax Efficiency

Index funds have lower turnover rates, resulting in fewer capital gains distributions, making them more tax-efficient than actively managed funds. Investors in index funds only incur capital gains taxes when they sell shares in the fund, whereas index fund owners pay capital gains taxes on any gains reported annually.

Ease of Use

Index funds are straightforward to invest in and are a popular choice for investors seeking low-cost, diversified, and passive investments. They are often favoured for their consistent performance and are now a staple in many investment portfolios.

Systematic Investment Plans

Index mutual funds allow investors to set up systematic investment plans (SIPs) for as little as $25 per month. This makes them a good option for those looking to invest small amounts regularly.

Final Thoughts

When choosing between index mutual funds and ETFs, it's important to consider costs, time horizons, and risk appetite. Index mutual funds may be a better option for those making small, regular contributions due to their lower costs and ease of use. However, ETFs offer more flexibility and can be traded throughout the day, providing more liquidity.

Frequently asked questions