What’s an ETF?
Let's talk about ETFs, or exchange-traded funds. This type of investment has been gaining popularity in recent years, but what sets them apart?
What is an ETF?
An ETF is a type of investment fund that trades on an exchange, similar to a stock. Imagine ETFs as the sleek, tech-forward relatives of mutual funds and index funds. While both ETFs and index funds aim to mirror the performance of specific indexes, ETFs stand out as they trade on exchanges, just like stocks. Picture an exchange like an Amazon but for stocks and ETFs. You can buy from these exchanges through investing platforms like Wealthsimple, where you can transfer money into your account, search for the ETF you want to buy, and once you click “buy” the ETF is now yours! This accessibility allows for seamless buying and selling, unlike mutual funds typically bought through financial advisors or index funds obtained directly from the company selling it.
Additionally, ETFs often boast much lower fees compared to mutual funds, appealing to a wide range of investors seeking cost-effective solutions. In Canada, ETFs hold more popularity than index funds, and the trend is mirrored in the US, where ETF adoption has surpassed that of index funds in recent years.
Pros and Cons of ETFs
Pros:
Low Costs: ETFs often have lower expense ratios compared to mutual funds, making them a cost-effective investment option.
Easy to Sell: Since ETFs trade on exchanges, you can buy and sell easily throughout the day via investment platforms like Wealthsimple.
Lower Risk: Like mutual funds, ETFs offer diversification by investing in a basket of stocks and bonds, spreading out risk.
No Investment Minimum: Unlike some mutual funds and index funds, there is no minimum spend when it comes to ETFs. You can buy a single share (e.g., if it’s priced at $28.56, you can buy just 1), and nowadays you can sometimes even buy fractional shares where you choose how much you want regardless of the price (e.g., if it’s prices at $28.56 you can buy half of 1 share for $14.28).
They’re Hands-Off: While they’re not managed as closely as mutual funds, they’re still managed by professionals so you don’t need to do any of the work yourself to pick stocks.
Cons:
Trading Fees: While ETFs have lower expense fees (MER), you may incur trading commissions when buying and selling shares depending on which platform you use, so keep an eye out for these. For example, as of when this blog was written TD Bank in Canada charges $9.99 each time you purchase or sell an ETF, while Wealthsimple has no transaction fees.
Limited Management: While some ETFs are actively managed, many track a specific index, offering limited opportunities for outperforming the market. (Note that despite the advertisement by mutual funds, they tend not to outperform the market and even if they do, the high-fees will more than likely eat away at any extra money from higher performance).
KEY TAKEAWAYS:
ETFs combine the benefits of mutual funds and individual stocks, offering diversification, low costs, and flexibility.
Make sure you keep an eye out for trade commission fees- if you’re planning to invest a large lump of money once a year, a $10 fee might not matter. But if you’re planning to invest money monthly or from each paycheck (which is what most people do), a $10 fee every month can certainly add up! Look around for platforms that offer low or no trading fees (this is why we like Wealthsimple).
About The Authors
Amanda and Siobhan found a shared passion for personal finance shortly after completing their MBAs in 2018. Amanda excelled as a Director of Product in the tech industry, while Siobhan established herself as a leader in e-commerce before transitioning to academia as a Professor.
In 2020, they joined forces to found Hiver Academy, a platform born from their own experiences and triumphs in conquering student loans and building wealth. Realizing that financial success is within reach once the complexities are simplified, their mission now revolves around empowering individuals to achieve financial freedom.
With a wealth of knowledge and a commitment to demystifying money and investing, Amanda and Siobhan are dedicated to helping others navigate the path to success.
