ETF's/Index Funds | Money Club

ETF's / Index Funds

What is the best way for most people to invest?

Broad based ETF's / index funds.

What are they?

An ETF / index fund is a pooled investment vehicle (it holds a basket of securities) that passively seeks to replicate the returns of a market index.

It is the perfect option for people who do not have the time or interest/expertise to manage their own investments.

Why broad based ETFs / index funds?

Simple - after you buy the ETF/index fund you don’t have to do anything. You don’t need to monitor or tinker.
Professional management - the ETF/index is regularly and automatically adjusted to winning stocks and away from under-performing stocks.
Diversification - depending on the ETF/index fund you chose, you will own 300+ of the largest and best run companies.
Low fee - often as low as 0.1%
Outperformance - over a 15 year time period you will outperform 80% of professional money managers.

Difference between ETFs and index funds?

ETFs and index funds are similar animals. The big difference is how you buy them. ETFs trade on an exchange just like stocks - like stocks, you pay a commission to buy and sell them. Index funds are bought directly from the fund manager.

Broad Based ETF / Index Funds

XEQT.TO

iShares Core Equity ETF

Geographic weightings:

US = 45%
Canada = 25%
Emerging markets = 5%
Rest of world = 25%

To learn more click here

VOO

Vanguard S&P 500 ETF

Tracks the performance of

the 500 largest US stocks.

To learn more click here

XIC.TO

iShares S&P/TSX ETF

Tracks the performance of

the 226 largest Canadian stocks.

To learn more click here

VSC.TO

Vanguard Short Term

Bond ETF

Tracks the performance of Canadian corporate bonds.

To learn more click here

Should you invest in stocks or bonds?

If you are investing for the long term if you want to maximize your return, you want to be an owner (stocks) and not a loaner (bonds). Stocks will outperform bonds over the long term.

Why is that?

Bond returns are capped - generally at the interest rate they were issued at. Stock returns are not capped. Stock returns are tied to economic/GDP growth. Despite their problems, Canada and the US are economic miracles. As the economies of these countries continue to prosper, by owning stocks you are able to participate and benefit from this growth. And the runway is long - lasting decades into the future.

Can you invest in both stocks and bonds?

Yes. Your allocation will generally depend on your age and risk tolerance. As people age they tend to weight their portfolio more to bonds. This is also true for people who are very risk averse (those who can't handle the volatility of stocks).

Portfolio Weightings

Portfolio weighting is simply what ETF's do you want to own and how much of each. To decide this you need to answer a couple of questions.

What should the split be between stocks and bonds?
- This will depend on your risk tolerance.
- Someone who is very risk tolerant might go 100% stocks and 0% bonds.
- Someone who is very risk averse might go 50% stocks and 50% bonds. Or even 25% stocks and 75% bonds.
- The key is to find a split between stocks and bonds that allows you to sleep well at night (where you are not thinking about it).

Regarding stocks, XEQT.TO is a great choice. It gives you very good diversification. One purchase and you are done.
- For investors who want more exposure to the US there is VOO. For more exposure to Canada there is XIC.TO

How to decide what to invest in.

Tae Kim at the Financial Tortoise does a great job of reviewing many of the different ETF/index options available to investors.

Keeping it simple is important.

For a Canadian investor who can tolerate the volatility, a good one option is XEQT.TO This option is not discussed in the video.

What is the problem with stocks?

Stocks are very volatile. Individual stocks can fluctuate in price by 40% or more in a year. And during bear markets the entire stock market might decline 30% or more. (A bear market in stocks might happen once every 5 years or so.) However, over the past 100 years, after every sell-off, within a relatively short period of time (a couple of years) the stock market averages have usually regained their losses and then resumed their upward trajectory.

The key is to ignore fluctuations in the stock market. If you are able to do this then stocks might be for you.

If you cannot handle the volatility - leading you to sell when they decline - then a 100% stock portfolio is not the right fit for you. Investing a majority of your assets in a bond fund might make more sense.

Bottom line, you need to be able to sleep well at night. You need to get your weightings between stocks and bonds so they are the right fit for you.

Volatility can be a wonderful thing for young investors.

Young investors are contributing new funds every month. If stocks fall in value by 30% they will be able to buy more units for the same money. That is called opportunity.

It's like walking into the grocery store and finding your favourite food item 30% off. What do you do when you see that? You buy. And you feel great - because you got a deal. And you probably don't just buy your regular amount. When it is on sale you probably buy extra. Maybe you double your purchase that week.

Bear markets and stock sell offs should be approached the same way. Not only should you keep buying. You should find more money and double up on your purchases every month stocks are on sale. This is very counter-intuitive.

A year or two later, when stocks have rebounded (like they usually do) you will have made a killing on all the new money you continued to invest at bear market low prices.

What will make it hard is everyone around you will be panicking. Financial news. Social media. Your friends. When the bear market is raging they will all be telling you to sell. Historically speaking, this has ALWAYS been the wrong thing to do.