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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Break into the exciting Canadian market for exchange-traded funds Exchange-traded funds (ETFs) are an increasingly popular part of the investing landscape, being less volatile than individual stocks, cheaper than most mutual funds, and subject to minimal taxation. ETFs For Canadians For Dummies will guide you through the process of investing in ETFs in Canada, a smaller and sometimes riskier market. You'll get the most up-to-date information on the ETF investing landscape, and we'll help you figure out how to navigate the fast-changing marketplace. This book makes it all easy to understand, and offers updated info on the available ETFs, investment and tax laws, and market projections. * Invest your money wisely in the Canadian ETF market * Maximize your profits when you trade on the stock market * Discover how investing in Canada is different from investing elsewhere * Learn how to invest online with the latest apps and other tools This is the book for Canadian investors who want to diversify their investment portfolio and break into exchange traded funds. With the help of Dummies, anyone can learn to invest in ETFs.
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Veröffentlichungsjahr: 2022
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ETFs For Canadians For Dummies®, 2nd Edition
Published by: John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, www.wiley.com
Copyright © 2022 by John Wiley & Sons, Inc., Hoboken, New Jersey
Published simultaneously in Canada
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Library of Congress Control Number: 2022943767
ISBN: 978-1-119-89490-2 (pbk); ISBN 978-1-119-89492-6 (ebk); ISBN 978-1-119-89491-9 (ebk)
ETFs For Canadians For Dummies®
To view this book's Cheat Sheet, simply go to www.dummies.com and search for “ETFs For Canadians For Dummies Cheat Sheet” in the Search box.
Table of Contents
Cover
Title Page
Copyright
Introduction
Since the First Edition…
About This Book
Foolish Assumptions
Icons Used in This Book
Beyond the Book
Where to Go from Here
Part 1: The ABCs of ETFs
Chapter 1: No Longer the New Kid on the Block
In the Beginning
Fulfilling a Dream
Not Quite as Popular as the Latest Teen Idol, but Getting There
Ready for Prime Time
Chapter 2: What the Heck Is an ETF, Anyway?
Understanding the Nature of the Beast
Choosing between the Classic and the New Indexes
Preferring ETFs over Individual Stocks
Distinguishing ETFs from Mutual Funds
Why the Big Boys Prefer ETFs
Why Individual Investors Are Learning to Love ETFs
Getting the Professional Edge
Choosing Passive versus Active Investing
Deciding whether ETFs Belong in Your Life
Chapter 3: Getting to Know the Players
Creating an Account for Your ETFs
Introducing the Shops
Presenting the Suppliers
Familiarizing Yourself with the Indexers
Meeting the Intermediaries
Part 2: Building the Stock (Equity) Side of Your Portfolio
Chapter 4: Costs, Diversification, Risk, and Some Other Things You Need to Know
Risk Is Not Just a Board Game
Smart Risk, Foolish Risk
How Risk Is Measured
Modern Portfolio Theory
Mixing and Matching Your Stock ETFs
Chapter 5: Large Growth: Muscular Money Makers
Style Review
Big and Brawny
ETF Options Galore
Chapter 6: Large Value: Counterintuitive Cash Cows
Recognizing Value
Looking for the Best Value Buys
Chapter 7: Small Growth: Sweet-Sounding Start-Ups
Getting Real about Small-Cap Investments
Your Choices for Small Growth
Chapter 8: Small Value: Diminutive Dazzlers
It’s Been Quite a Ride
What about the Mid Caps?
Chapter 9: Beyond Canada: ETFs without Borders
The Ups and Downs of Different Markets around the World
Your Best Mix of Domestic, American, and International
Not All Foreign Nations — or Stocks — Are Created Equal
The Best Foreign ETFs for Your Portfolio
Chapter 10: Sector Investing: ETFs According to Industry
Selecting Stocks by Sector, Not Style
Speculating on the Next Hot Industry
Doing Sector Investing Right
Perusing Sector Choices
Chapter 11: Real Estate Investment Trusts: Becoming a Virtual Landlord
Considering Four Distinguishing Characteristics of REITs
Calculating a Proper REIT Allocation
Picking REIT ETFs for Your Portfolio
Chapter 12: Dividend Funds: The Search for Steady Money
Your High-Dividend ETF Options
Investing in non-Canadian dividend funds
Promise of Riches or Smoke and Mirrors?
Part 3: Adding Bonds (Fixed Income) to Your Portfolio
Chapter 13: For Your Interest: The World of Bond ETFs
Tracing the Track Record of Bonds
Tapping into Bonds in Various Ways
Determining the Optimal Fixed Income Allocation
Chapter 14: Your Basic Bonds: Government Bonds and Corporates
Buying Broad-Based Funds
Keeping It Short
Banking on Business: Corporate Bond ETFs
Investing in the U.S.
Chapter 15: Moving Beyond Basics into International and Target-Date Bond ETFs
Diversifying with Foreign Bonds
Investing in Emerging-Market Bonds: High Risk, High Return
Part 4: Specialized ETFs
Chapter 16: All That Glitters: Gold, Silver, and Other Commodities
Canada and Commodities
Gold, Gold, Gold!
Silver: The Second Metal
Oil and Gas: Truly Volatile Commodities
(Somewhat) Safer Commodity Plays
Indirect Participation in the Commodity Market
Chapter 17: Investing for a Better World
What Are “Sustainable Investing” and “ESG”?
Which Sustainable ETFs Are Best for Your Portfolio?
Chapter 18: Going Active with ETFs
Understanding the (Moderate) Rise of Active Management in Canada
Deciding Whether to Get Active
Getting Practical
Looking at Some of the Most Popular Actively Managed ETFs
Chapter 19: All-In-One ETFs: For the Ultimate Lazy Portfolio
Buying into the World’s Stock Markets in a Flash
Putting the World’s Bond Markets at Your Fingertips
Buying Stocks and Bonds in One Shot
Chapter 20: Proceed-with-Caution ETFs
Funds That (Supposedly) Thrive When the Market Takes a Dive
Funds That Double the Thrill of Investing (for Better or Worse)
“Buffer” or “Defined-Outcome” ETFs
Alphabet Soup: MLPs, SPACs, and IPOs
One-Horse Towns: Investing in Narrow ETFs
Funds for Crypto- or Other Currencies
Cannabis ETFs: The Highs (and Not So Highs) of a Budding Industry
Copycat ETFs
Part 5: Putting It All Together
Chapter 21: Sample ETF Portfolio Menus
Deciding How Much Risk Can You Handle While Still Sleeping at Night
Making Plans for Optimal Investing
Finding the Perfect Portfolio Fit
Chapter 22: Exercising Patience: The Key to Any Investment Success
The Tale of the Average Investor (A Tragicomedy in One Act)
“Investment Pornography” in Your Mailbox
Patience Pays, Literally
Chapter 23: Exceptions to the Rule (Ain’t There Always)
Rebalancing to Keep Your Portfolio Fit
Contemplating Tactical Asset Allocation
Harvesting Tax Losses, and the CRA’s Oh-So-Tricky “Superficial Loss Rule”
Revamping Your Portfolio with Life Changes: Marriage, Divorce, and Babies
Are Options an Option for You?
Chapter 24: Using ETFs to Fund Your Golden Years
Aiming for Economic Self-Sufficiency
TFSAs versus RRSPs
Ushering Your Portfolio into Retirement Readiness
Withdrawing Funds to Replace Your Paycheque
Chapter 25: Marrying ETFs and Non-ETFs to Make an Optimal Portfolio
Tinkering with an Existing Stock or Mutual Fund Portfolio
Looking Beyond the Well-Rounded ETF Portfolio
Part 6: The Part of Tens
Chapter 26: Ten FAQs about ETFs
Are ETFs Appropriate for Individual Investors?
Are ETFs Risky?
Do I Need a Financial Professional to Set Up and Monitor an ETF Portfolio?
How Much Money Do I Need to Invest in ETFs?
Thousands of ETFs Exist to Choose from, So Where Do I Start?
Where Is the Best Place for Me to Buy ETFs?
Is There an Especially Good or Bad Time to Buy ETFs?
Do ETFs Have Any Disadvantages?
Does It Matter Which Exchange My ETF Is Traded On?
Which ETFs Are Best in My RRSP, and Which Are Best in a Non-registered Account?
Chapter 27: Ten Mistakes Most Investors (Even Smart Ones) Make
Paying Too Much for an Investment
Failing to Properly Diversify
Taking On Inappropriate Risks
Selling Out When the Going Gets Tough
Paying Too Much Attention to Recent Performance
Not Saving Enough for Retirement
Having Unrealistic Expectations of Market Returns
Discounting the Damaging Effect of Inflation
Not Following the RRSP Rules
Failing to Incorporate Investments into a Broader Financial Plan
Chapter 28: Ten Forecasts about the Future of ETFs and Personal Investing
ETF Assets Will Continue to Grow … for Better or for Worse
More Players May Enter the Field, but Only a Few
ETF Investors Will Have No Need for Anything but ETFs
ETF Investors Will Have More, and Better, Options
The Markets Will (Unfortunately) See Greater Correlation than in the Past
Asset Class Returns Will Revert towards Their Historic Means
The Pandemic Will Change a Lot, but Not Everything
Inflation Will Remain Tame
Private Pensions (of Sorts) May Emerge from the Rubble
Hype Will Prevail
Part 7: Appendixes
Appendix A: Great Web Resources to Help You Invest in ETFs
Independent, ETF-Specific Websites
Websites of ETF Providers
Retirement Calculators
Financial Supermarkets
Stock Exchanges
Specialty Websites
Where to Find a Financial Planner
Regulatory Agencies
The People Who Create the Indexes
Good Places to Go for General Financial News, Advice, and Education
Yours Truly
Appendix B: Glossary
Index
About the Author
Connect with Dummies
End User License Agreement
List of Tables
Chapter 1
TABLE 1-1 The Six Largest Canadian ETFs by Assets
TABLE 1-2 The Six Largest American ETFs by Assets
Chapter 2
TABLE 2-1 ETFs versus Mutual Funds versus Individual Stocks
TABLE 2-2 The Rock-Bottom Canadian ETFs
TABLE 2-3 Holdings of the iShares S&P/TSX Capped Financials Index as of March 7,...
Chapter 3
TABLE 3-1 Canadian ETF Providers
Chapter 4
TABLE 4-1 Standard Deviation of Two Hypothetical ETFs
TABLE 4-2 Recent Performance of Various Investment Styles
TABLE 4-3 Recent Performance of Various Market Sectors
Chapter 16
TABLE 16-1 Gold Price Comparison
Chapter 19
TABLE 19-1 Four Leading Canadian Options
TABLE 19-2 U.S.-Listed Funds
Chapter 23
TABLE 23-1 A Shifting Portfolio Balance
List of Illustrations
Chapter 2
FIGURE 2-1: The secret to ETFs’ tax friendliness lies in their very structure.
Chapter 4
FIGURE 4-1: The risk levels of a sampling of ETFs.
FIGURE 4-2: ETFs A and B both have high return and high volatility.
FIGURE 4-3: The ideal ETF portfolio, with high return and no volatility.
FIGURE 4-4: The style box or grid.
Chapter 5
FIGURE 5-1: The place of large-growth stocks in the grid.
FIGURE 5-2: Large-growth stocks have given investors ample returns over the dec...
Chapter 6
FIGURE 6-1: Large-value stocks occupy the northwest corner of the grid.
FIGURE 6-2: This chart shows the growth of $1 invested in a basket of large-val...
Chapter 7
FIGURE 7-1: The shaded area is the portion of the investment grid represented b...
FIGURE 7-2: Historically, the growth of a basket of small-growth stocks hasn’t ...
Chapter 8
FIGURE 8-1: Small-value stocks occupy the southwest corner of the investment st...
FIGURE 8-2: As you can see, small value has truly shined in the past nine decad...
Chapter 10
FIGURE 10-1: The industry sector map for the United States and Canada (as of Ap...
FIGURE 10-2: The industry sector map for the entire world (as of April 30, 2022...
FIGURE 10-3: Industry sectors, from most to least volatile
Chapter 13
FIGURE 13-1: An illustration of how bonds protected investors during the very t...
FIGURE 13-2: When stocks slide, bonds have often done very well.
Chapter 21
FIGURE 21-1: A portfolio that assumes some risk.
FIGURE 21-2: A middle-of-the-road portfolio.
FIGURE 21-3: A portfolio aimed at safety.
Chapter 22
FIGURE 22-1: The daily pricing pattern for UGH.
FIGURE 22-2: The daily pricing pattern for DUM.
Guide
Cover
Title Page
Copyright
Table of Contents
Begin Reading
Index
About the Author
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Introduction
Every month, it seems, Bay Street comes up with some newfangled investment idea. The array of financial products (replete with 164-page prospectuses) is now so dizzying that the old lumpy mattress is starting to look like a more comfortable place to stash the cash. But there’s one product that continues to be worth looking at: the exchange-traded fund. Over the last decade (and certainly since we wrote the first edition of this book), the ETF, which is something of a cross between an index mutual fund and a stock, has taken the investment world by storm.
Just as computers and fax machines were used by big institutions before they caught on with individual consumers, so it was with ETFs. This made-in-Canada product (it’s true!) was first embraced by institutional traders — investment banks, hedge funds, and insurance firms — because, among other things, ETFs allow for the quick juggling of massive holdings. Big traders like that sort of thing. During the past several years, millions of North American investors have poured their savings into ETFs.
We like and use ETFs, too. They have grown exponentially in the past few years, and they will surely continue to grow and gain influence. Although we can’t claim that our purchases and recommendations of ETFs account for much of the multi-trillion-dollar ETF market, we’re happy to be a (very) small part of it. After you’ve read Exchange-Traded Funds For Canadians For Dummies, you may decide to become part of it as well, if you haven’t already.
Since the First Edition…
Many changes have taken place in the investment world, on both Bay Street and Main Street, since the first publication of this book in 2010. For one thing, a much larger pot of money (dollars, euros, yen) is now invested in ETFs: more than $10 trillion as of this writing (up from a mere $1 trillion in 2010).
The world has changed dramatically, too, as we have noted. Within the financial industry, innovations such as robo-advisors make investing as easy as ordering an Uber. (Imagine reading that sentence a decade ago, before ride-hailing apps and robos were a thing.) People are also paying more attention than ever to investment fees, and ETFs are almost always cheaper to hold than mutual funds. At the same time, advisors are being asked to spend more time on financial planning than on investing (as you’ll learn, the ETF makes focusing on planning easier for them to do).
There have been times when people haven’t been so sure about ETFs, which were blamed for the the infamous “flash crash” of May 6, 2010, and a lot of experts thought that they wouldn’t withstand a major downturn, but that’s turned out to be mostly nonsense. Not only did ETFs continue to perform in line with markets during the pandemic crash and subsequent rebound, but the ups and downs also helped investors see the benefits of passive investing, which I discuss here.
One very positive change in the past several years is that investors now have access to ETFs that cover most areas of the market. A decade-and-a-half ago, you couldn’t buy an ETF that would give you exposure to high-yield bonds. Or international bonds. Or international real estate investment trusts (REITs). All that has changed. There are ETFs that represent all those asset classes, and many more, including Bitcoin, robotics, and space-related funds. Building an entire well-diversified portfolio out of ETFs was not humanly possible several years ago; now, it’s being done every day.
Another very positive development: ETFs are being used more and more in Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs), where many of Canada’s hard-working people store the bulk of their savings. And they’re used in Registered Education Savings Plans (RESPs), too. Insurance companies have also jumped into the fray, offering ETFs in some of their annuity plans (which, unfortunately, are still often overpriced).
Although having more products to choose from is great on the surface, some ETFs are bad investments, pure and simple. More recent products were introduced to take advantage of the popularity of ETFs. They are overly expensive, and they represent foolish indexes (extremely small segments of the market, or indexes constructed using highly questionable methodologies). In this book, we help you separate the good from the bad.
Many of the newer ETFs are also specifically designed for short-term trading, and short-term trading usually gets small investors into big trouble.
A scary number of the newer ETFs are based on back-tested models: They track whatever indexes, or invest in whatever kinds of assets, have done the best in recent months or years. These ETFs (or the indexes they track) have shining short-term performance records, which induce people to buy. But past short-term performance is a very, very poor indicator of future performance.
Several new ETFs are focused on “meme stocks” — those stocks most highlighted on social media, often ballyhooed in memes as surefire ways to get rich. (Remember GameStop, the company Reddit investors sent soaring in January 2021?) Buying what’s most fashionable — by investing directly in the meme stocks or in an ETF filled with meme stocks — is not a wise investment move.
Actively managed ETFs have been slower to take off than Bay Street had hoped, but they are starting to make significant inroads. These ETFs differ radically from the original index ETFs. They don’t track any indexes at all, but instead have portfolios built and regularly traded by managers attempting to beat the indexes. As study after study has shown, active management usually doesn’t work all that well for investors, while fees accruing to the managers can add up to a princely amount. (Read more on active management in Chapter 18.)
About This Book
As with any other investment, you’re looking for a certain payoff in reading this book. In an abstract sense, the payoff will come in your achieving a thorough understanding and appreciation of a powerful financial tool called an exchange-traded fund. The more concrete payoff will come when you apply this understanding to improve your investment results.
What makes us think ETFs can help you make money?
ETFs are intelligent.
Most financial experts agree that playing with individual stocks can be hazardous to one’s wealth. Anything from an accounting scandal to the CEO’s sudden angina attack can send a single stock spiraling downward. That’s why it makes sense for the average investor to own lots of stocks — or bonds — through ETFs or mutual funds.
ETFs are cheap.
At least 250 ETFs, both in Canada and the U.S., charge annual management expenses of 0.10 percent or lower, and a few charge as little as 0.00 percent a year! In contrast, the average actively managed Canadian mutual fund charges around 2 percent a year. Index mutual funds generally cost a tad more than their ETF cousins. Such cost differences, while appearing small on paper, can make a huge impact on your returns over time. We crunch some numbers in
Chapter 2
.
ETFs are tax-smart.
Because of the very clever way ETFs are structured, the taxes you pay on any growth are minimal. We crunch some of those numbers as well in
Chapter 2
.
ETFs are open books. Quite unlike mutual funds, an ETF’s holdings are readily visible. If this afternoon, for example, we were to buy 100 shares of the iShares S&P/TSX 60 Index Fund, we would know that exactly 7.99 percent of our money was invested in Royal Bank, 6.77 percent was invested in TD Bank, and 3.86 percent was invested in Shopify. You don’t get that kind of detail when you buy most mutual funds. Mutual fund managers, like stage magicians, are often reluctant to reveal their secrets. In the investment game, the more you know, the lower the odds you will get sawed in half.
(News flash: North American regulators are still debating just how open the portfolios of the newer actively managed ETFs will have to be. For the time being, however, most ETFs track indexes and the components of any index are readily visible.)
And speaking of open books, the one you are holding has similarities to an ETF:
Exchange-Traded Funds For Canadians For Dummies
is intelligent.
We don’t try to convince you that ETFs are your best investment choice, and we certainly don’t tell you that ETFs will make you rich. Instead, we lay out facts and figures and summarize some hard academic findings, and we let you draw your own conclusions.
Exchange-Traded Funds For Canadians For Dummies
is cheap.
Hey, top-notch investment advice for only $29.99 (plus or minus any discounts, shipping, and tax) … . Where else are you going to get that kind of deal?
And
if you come to the conclusion after reading this book that ETFs belong in your portfolio, you’ll likely get your $29.99 (plus any shipping costs and tax) back — in the form of lower fees and tax efficiency — in no time at all.
Exchange-Traded Funds For Canadians For Dummies
is an open book.
We’ve already established that!
If you’ve ever read a For Dummies book before, you have an idea of what you’re about to embark on. This is not a book you need to read from front to back. Feel free to jump about and glean whatever information you think will be of most use. There is no quiz at the end. You don’t have to commit it all to memory.
Foolish Assumptions
We assume that most of the people reading this book know a fair amount about the financial world. Why else would you have bought a book that is entirely focused on exchange-traded funds?
If you think that convertible bonds are bonds with removable tops and that the futures market is a place where fortune tellers purchase crystal balls, we help you along the best we can by letting you know how to find out more about certain topics. However, you may be better off picking up and reading a copy of the basic nuts-and-bolts Investing For Canadians All-In-One For Dummies by Tony Martin and Eric Tyson (published by John Wiley & Sons, Inc.). After you spend some time with that title, c’mon back to this book. You’ll be more than welcome!
Icons Used in This Book
Throughout the book, you find little pieces of art in the margins called icons. These admittedly cutesy but handy tools give you a heads-up that certain types of information are in the neighbourhood.
Although this is a how-to book, you also find plenty of whys and wherefores. Any paragraph accompanied by this icon, however, is guaranteed pure, 100 percent, unadulterated how-to.
The world of investments offers pitfalls galore. Wherever you see the exclamation mark, be aware that this point highlights risk and where you might lose money — maybe even Big Money. Don’t skip the passage.
Read twice! This icon indicates that something important is being said and is really worth putting to memory.
If you don’t really care about the difference between standard deviation and beta, or the historical correlation between value stocks and REITs, feel free to skip or skim the paragraphs with this icon.
The world of Bay Street (and Wall Street) is full of people who make money at other people’s expense. Where you see the starburst, know that we’re about to point out an instance where someone will likely be sticking a hand deep in your pocket.
Beyond the Book
Aside from the information in this book, you have access to even more help and information online at Dummies.com. There, you can find information on all manner of topics.
Dummies.com is also where you’ll find the Exchange-Traded Funds For Dummies Cheat Sheet, which suggests topics to discuss with your financial professional, tells you how to choose the best ETFs, and succinctly explains how ETFs differ from mutual funds.
Where to Go from Here
Where would you like to go from here? If you want, start at the beginning. If you’re interested only in stock ETFs, hey, no one says that you can’t jump right to Part 2. Bond ETFs? Go ahead and jump to Part 3. It’s entirely your call.
Part 1
The ABCs of ETFs
IN THIS PART …
Delve into the early history of ETFs and their development ever since.
Find out what makes ETFs so special, and what makes them such darned good investments.
Discover where and how ETFs are created and traded.
Chapter 1
No Longer the New Kid on the Block
IN THIS CHAPTER
Discovering the origins of ETFs
Understanding the role ETFs play in today’s world of investing
Tallying ETFs’ phenomenal growth
Looking at the biggest names in ETFs
You can tell how much the conversation around ETFs has shifted in the way traditional mutual fund firms now talk about these securities. In 2006, when Bryan got his first job writing about investing and finance, even just a mention of an ETF sent conservative money managers and their public relations teams into denial. Now, almost all of the stalwart investment firms are selling and marketing ETFs, while their communication teams are more than happy to arrange interviews with experts willing to espouse the benefits of these funds.
The sheer number of ETFs has skyrocketed, too. At the end of 2021, there were 965 ETFs in Canada — up from 250 when we last wrote this book — and about 9,700 ETFs available for purchase around the world. In 2019, net sales for ETFs outpaced net sales for mutual funds for the first time, and while mutual funds still hold most retail assets in Canada, ETF assets are rapidly rising with each passing year. (Mutual funds aren’t losing their dominance anytime soon, though — mutual fund sales outpaced ETF sales on a year-over-year growth basis in 2021.)
These are all good things. ETFs enable the average investor to avoid shelling out fat commissions or paying layers of ongoing, unnecessary fees. And they’ve saved investors oodles and oodles in taxes.
Hallelujah.
In the Beginning
What do basketball, snowmobiles, insulin, and ETFs have in common? They were all invented in Canada. Yes, you read that correctly. Though our southern neighbours created the stock market, the mutual fund, and many other investment products, the Toronto Stock Exchange developed the first exchange-traded fund. The Toronto 35 Index Participation fund — the first ETF — was listed in March 1990. It tracked the TSE 35 Composite Index, an index made up of the 35 largest and most liquid stocks on the TSX.
As important as the ETF has become, the story behind its development isn’t quite as exciting as, say, the story behind the gas mask or hockey, two other Canadian inventions. As one Toronto Stock Exchange insider explained, “We saw it as a way of making money by generating more trading.” Thus was born the original ETF, best known as TIP (short for Toronto Index Participation). The TSE 35 Composite Index was then the closest thing that we had to America’s Dow Jones Industrial Average index. Some of the companies on the index included Bell Canada, the Royal Bank, and the now-defunct Nortel.
Enter the traders
TIP was an instant success with large institutional stock traders who could now trade an entire index in a flash. The Toronto Stock Exchange got what it wanted — more trading. And the ETF got its start.
TIP has since morphed to track a larger index, the so-called S&P/TSX 60 Index, which — you probably guessed — tracks 60 of Canada’s largest and most liquid companies. The fund also has a different name — the iShares S&P/TSX 60 Index Fund — and it trades under the ticker XIU. It is now managed by BlackRock, Inc., which, upon taking over the iShares lineup of ETFs from Barclays in 2009 (part of a juicy $13.5-billion deal), has come to be the biggest player in ETFs in the world. You get an introduction to BlackRock and other ETF suppliers in Chapter 3. (A completely different BlackRock-managed U.S. ETF now uses the ticker TIP, but that fund has nothing to do with the original TIP; the present-day TIP invests in U.S. Treasury Inflation-Protected Securities.)
Moving south of the border
As much as we may not want to admit it, Canadians have invented a lot of things that Americans have then perfected. Think about the BlackBerry and the iPhone. Although the ETF was born in Canada, and was popular, this index-tracking product is as widespread as it is thanks to the U.S. market. The ETF took three years to get to the States, but like most things American, when it launched, it launched big.
The mother of all U.S. ETFs was born on January 22, 1993, and listed on the American Stock Exchange (which, in January 2009, became part of NYSE Euronext). The first U.S.-based ETF was called the S&P Depositary Receipts Trust Series 1, commonly known as the SPDR (or Spider) S&P 500, and it traded (and still does) under the ticker symbol SPY.
The SPDR S&P 500, which tracks the S&P 500 index, an index of the 500 largest U.S. companies, was an instant darling of institutional traders. It has since branched out to become a major holding in the portfolios of many individual and institutional investors — and a favourite of favourites among day traders.
Fulfilling a Dream
ETFs were first embraced by institutions, and they continue to be used, big time, by banks, insurance companies, and such. Institutions sometimes buy and hold ETFs, but they’re also constantly buying and selling ETFs and options on ETFs for various purposes, some of which are touched on in Chapter 23. For noninstitutional types, the creation and expansion of ETFs has allowed for similar juggling (usually a mistake for individuals); but more important, ETFs allow for the construction of portfolios possessing institutional sleekness and economy.
Goodbye, ridiculously high mutual fund fees
The average mutual fund investor with a $150,000 portfolio filled with actively managed funds likely spends around $3,000 (2 percent) or so in annual expenses. By switching to an ETF portfolio, that investor might incur — if they incur any trading costs at all — perhaps $50 or so to set up the portfolio, and maybe $20 or so a year thereafter. But now their ongoing annual expenses will be about $308 (0.2 percent). That’s a difference, ladies and gentlemen of the jury, of big bucks. You’re looking at an overall yearly savings of almost $2,700, which is compounded every year the money is invested.
Hello, building blocks for a better portfolio
In terms of diversification, portfolios should include large stocks; small stocks; micro cap stocks; Canadian, U.S., European, and Chinese stocks; intermediate-term bonds; short-term bonds; and real estate investment trusts (REITs) — all held in low-cost ETFs. You can find out about diversification and how to use ETFs as building blocks for a core portfolio in Parts 2 and 3.
Yes, you can use other investment vehicles, such as mutual funds, to create a well-diversified portfolio. But ETFs make diversifying much easier because they tend to track very specific indexes. They are, by and large, much more “pure” investments than mutual funds. An ETF that bills itself as an investment in, say, small growth stocks is going to give you an investment in small growth stocks, plain and simple. A mutual fund that bills itself as an investment vehicle for small growth stocks may include everything from cash to bonds to shares of General Electric (no kidding, and you find other examples in the next chapter).
Will you miss the court papers?
While scandals of various sorts — hidden fees, “soft-money” arrangements, after-hours sweetheart deals, and executive kickbacks — have plagued the world of mutual funds and hedge funds, the ETF industry has far fewer court dates to make. That’s because the vast majority of ETFs’ managers, forced to follow existing indexes, have very little leeway in their investment choices. Unlike many investment vehicles, ETFs are closely regulated and they trade during the day, in plain view of millions of traders — not after hours, as mutual funds do, which can allow for sweetheart deals when no one is looking. Of course, anything can happen and there has been legal action around leveraged ETFs, but, for the most part, these funds haven’t been “judged” nearly as much as other securities.
Chapter 2 covers the transparency and cleanliness of ETFs in greater detail.
Not Quite as Popular as the Latest Teen Idol, but Getting There
ETFs have a lot going for them, so it’s not surprising that they have spread like a Justin Bieber Timbiebs ad. (Fun fact: Bieber was also created in Canada.) From the beginning of 2000, when there were only 80 ETFs on the U.S. market, to the end of 2021, when there were about 2,300 ETFs, the total assets invested in ETFs rose from $52 billion to just about $5.4 trillion. In Canada, the ETF industry had just $3 billion in assets under management in 2000; that’s climbed to $323 billion in 2021. Globally, assets in ETFs broke the $10-trillion mark in December 2021.
Certainly, $323 billion pales in comparison to the $2 trillion or so invested in Canadian mutual funds. But if current trends continue, and there’s no reason they won’t, then ETFs will become as popular as the Biebs.
ETFs’ popularity among investors stems from the aftermath of the Great Recession, when people lost a bundle of money in actively managed portfolios. The financial crisis did two things: it made people realize that fund managers can’t protect their clients against catastrophic events, which then made them realize they were paying too much for no protection. At the same time, more research was coming out indicating that most active managers don’t beat their benchmarks after fees are accounted for. So, if you can’t beat the index, then why not join it? Much more on that topic in Chapter 2.
THE LITTLE KID IS GROWING FAST: ETFs’ PHENOMENAL GROWTH
Following are a few facts and figures that indicate how the ETF market compares with the mutual fund market and how rapidly ETFs are gaining in popularity.
The amount of money invested in Canada-based ETFs and mutual funds as of December 2021:
ETFs: $348 billionMutual funds: $2 trillionThe total number of Canadian-based ETFs and mutual funds as of September 2012:
ETFs: 965Mutual funds: About 5,000Increase in Canada-based ETFs since 2012:
2012: 2502021: 965Percentage change increase: 286%Increase in Canada ETF providers since 2012:
ETF providers in 2012: 7ETF providers in 2021: 40Percentage change increase: 471%Total net assets growth in ETFs between 2012 and 2021:
2012: $54 billion2021: $348 billionPercentage change increase: 544%Moving from Bay Street to Main Street
In the world of fashion, trendsetters — movie stars or British royals — wander out in public wearing something that most people consider ridiculous, and the next thing you know, everyone is wearing that same item. Investment trends work sort of like fashion trends do, but at a slower pace. It took from 1990 until 2001 or so for this newfangled investment vehicle to really start moving. By about 2003, insiders say, the majority of ETFs were being purchased by individual investors, not institutions or investment professionals.
BlackRock, Inc., which controls more than a third of the U.S. market and more than a quarter of the Canadian market for ETFs (by assets), estimates that approximately 60 percent of all the trading in ETFs is done by individual investors. The other 40 percent of all trading in ETFs is carried out by institutions and fee-only financial advisors.
Fee-only, by the way, signifies that a financial advisor takes no commissions of any sort. It’s a very confusing term because fee-based is often used to mean the opposite. You can check out Chapter 26 to find out whether you need a financial professional (and what kind you need) to build and manage an ETF portfolio.
Actually, individual investors — especially the buy-and-hold kind of investors — benefit much more from ETFs than do institutional traders. That’s because institutional traders have always enjoyed the benefits of the very best deals on investment vehicles. That hasn’t changed. For example, institutions often pay much less in management fees than do individual investors for shares in the same mutual fund. (Fund companies often refer to institutional class versus investor class shares. All that really means is “wholesale/low price” versus “retail/higher price.”)
Mutual funds versus ETFs
You may think we sound like we’re pushing ETFs as not only the best thing since sliced bread, but also a replacement for sliced bread. Well, not quite. As much as we like ETFs, good old mutual funds still enjoy their place in the sun. That’s especially true of inexpensive index mutual funds, such as the ones offered by TD Canada Trust or CIBC. Mutual funds, for example, are clearly the better option when you’re investing in dribs and drabs and don’t want to have to pay for each trade you make … although some Canadian brokerage houses, such as Wealthsimple, National Bank, and Questrade, allow customers to trade many ETFs for free.
THE RIPPLE EFFECT: FORCING DOWN PRICES ON OTHER INVESTMENT VEHICLES
You don’t need to invest in ETFs to profit from them. Why? Because ETFs are driving prices down. Thanks to the competition that ETFs are giving to mutual funds, fund providers have been lowering their charges. Many companies have cut their management expense ratios (MERs) over the years to help keep mutual funds attractive. However, Canada’s mutual fund firms haven’t moved as quickly to cut their costs, with a 2019 Morningstar report finding that the country had the third-highest MER — 1.98 percent — for equity funds out of the 26 countries it studied. At some point, that number will fall — the average MER in the U.S. is 0.49 percent — or the ETF will eat the mutual fund industry’s entire lunch, not just its sides.
One of the largest purveyors of ETFs is The Vanguard Group, the very same people who pioneered index mutual funds. In the case of Vanguard, shares in the company’s ETFs are the equivalent of shares in one of the company’s index mutual funds. In other words, they are different share classes of the same fund — the same representation of companies but with a different structure and generally slightly lower management fees for the ETFs.
Because Vanguard funds allow for an apples-to-apples comparison of ETFs and index mutual funds, and because the company presumably has no great stake in which you choose, Vanguard may be a good place to turn for objective advice on which investment is better for you. But rest assured, this ain’t rocket science (a point that is repeated elsewhere in this book). For most buy-and-hold investors, ETFs will almost always be the better choice, at least in the long run. You look more closely at the ETFs-versus-mutual-funds question when you see actual portfolio examples in Chapter 16.
Ready for Prime Time
Although most investors are now familiar with ETFs, mutual funds remain the investment vehicle of choice by a wide margin. Mutual funds are still dominant for several reasons. First, they’ve been around a lot longer and so they got a good head start. (The first mutual fund, called the Massachusetts Investors Trust, was founded in 1929.) Second, largely as a corollary to the first reason, most company retirement plans and pension funds still prefer mutual funds to ETFs; as a participant, you have no choice but to go with mutual funds. And finally, the vast majority of ETFs, unlike mutual funds, are index funds, and index funds have only fairly recently — after a long, uphill battle — caught the eye of millions of investors.
Index mutual funds, which most closely resemble ETFs, have been in existence since 1976 when Vanguard, under visionary John Bogle, first rolled out the Index Investment Trust fund. Since that time, Vanguard and other mutual fund companies have created hundreds of index funds tracking every conceivable index. But it has taken a long time for them to catch fire.
Why would anyone want to invest in index funds or index ETFs? After all, the financial professionals who run actively managed mutual funds spend many years and tens of thousands of dollars educating themselves at places with real ivy on the walls, like Harvard and the University of Toronto. They know all about the economy, the stock market, business trends, and so on. Shouldn’t you cash in on their knowledge by letting them pick the best basket of investments for you?
Good question! Here’s the problem with hiring these financial whizzes, and the reason that index funds or ETFs generally kick their ivy-league butts: When these whizzes from Harvard and the University of Toronto go to market to buy and sell stocks, they are usually buying and selling stocks (not directly, but through the markets) from other whizzes who graduated from Harvard and the U of T. One whiz bets that ABC stock is going down, so they sell. Their former classmate bets that ABC stock is going up, so they buy. Which whiz is right? Half the time, it’s the buyer; half the time, it’s the seller. Meanwhile, you pay for all the trading, not to mention the whiz’s handsome salary while all this buying and selling is going on.
Economists have a name for such a market; they call it efficient. It means, in general, that so many smart people are analyzing and dissecting and studying the market that the chances are slim that any one whiz — no matter how whizzical — is going to be able to beat the pack.
CAN YOU PICK NEXT YEAR’S WINNERS?
Okay, study after study shows that most actively managed mutual funds don’t perform as well in the long run as the indexes. But certainly some do much better, at least for a few years. And any number of magazine articles and websites will tell you exactly how to pick next year’s winners.
Alas, if only it was that easy. Sorry, but studies show rather conclusively that it is anything but easy. Morningstar, on a great number of occasions, has earmarked the top-performing mutual funds and mutual fund managers over a given period of time and tracked their performance moving forward. In one representative study, the top 30 mutual funds for sequential five-year periods were evaluated for their performance. In each and every five-year period, the “30 top funds,” as a group, did worse than the S&P 500 in subsequent years.
That, in a nutshell, is why actively managed mutual funds tend to lag behind the indexes, usually by a considerable margin. If you want to read more about why stock pickers and market timers almost never beat the indexes, pick up a copy of the seminal A Random Walk Down Wall Street by Princeton economist Burton G. Malkiel (W. W. Norton). Or check out the website, https://ifa.com, which is run by something of an indexing fanatic (hey, there are worse things to be) and is packed with articles and studies on the subject. You could spend days reading!
The proof of the pudding
Every year, S&P Dow Jones Indices releases a report looking at how active managers faired against their benchmarks. In 2019, a whopping 64.5 percent of large-cap funds underperformed the S&P 500. If that number sounds bad, then look at the 10-year and 15-year figures: after a decade, 85.1 percent of large-cap funds failed to beat the S&P 500, while 91.6 percent underperformed it after 15 years.
A lot of people still say that active management works best in volatile markets, where managers can mitigate risks. Well, guess what? In 2020, with the pandemic causing all kinds of volatility, Morningstar found that out of the 3,000 actively managed funds it analyzed, just 47 percent outperformed their average passive index between June 2020 and 2021. That’s no better than a coin flip. S&P found that over that same time period, 58 percent of large-cap, 76 percent of mid-cap, and 78 percent of small-cap mutual funds trailed their respective benchmarks (the S&P 500, S&P MidCap 400, and S&P SmallCap 600, respectively).
Let’s plug in a few numbers to show you what underperformance can mean. These calculations are based off a 2010 study by Wharton finance professor Robert F. Stambaugh and University of Chicago finance professor Lubos Pastor, who looked over 23 years of data and found that actively managed funds have trailed, and will likely continue to trail, their indexed counterparts (whether mutual funds or ETFs) by nearly 1 percent a year. That may not seem like a big deal, but compounded over time, 1 percent a year can be huge.
An initial investment of $100,000 earning, say, 7 percent a year, would be worth $386,968 after 20 years. An initial investment of $100,000 earning 8 percent for 20 years would be worth $466,096. That’s $79,128 extra in your pocket, all things being equal, if you invest in index funds.
Moving to a real-ETF-world example, let’s look at that very first ETF introduced in the United States, the SPDR S&P 500 (SPY). Since its inception in January 1993, that fund has enjoyed an average annual return (as of mid-2021) of 10.4 percent — not bad, considering that it survived several very serious bear markets (2000–2002, 2008–2009, and 2020). Very few actively managed funds can match that record. (You’ll find some performance specifics in the next chapter.)
SPY remains by far the largest ETF on the market, with total assets of $396 billion. In terms of average number of shares traded daily, nothing even comes close to SPY: 83 million shares.
The major players
Parts 2 and 3 of this book provide details about many of the ETFs on the market. Here, you are introduced to just a handful of the biggies. You will likely recognize a few of these names.
Table 1-1 lists the six largest Canadian-listed ETFs on the market as of January 2022, as calculated by assets under management.
TABLE 1-1 The Six Largest Canadian ETFs by Assets
Name
Ticker
Assets (in billions of dollars)
BMO S&P 500 Index ETF
ZSP
$13.79
iShares S&P/TSX 60 Index ETF
XIU
$11.51
iShares Core S&P/TSX Capped Composite Index ETF
XIC
$9.98
iShares S&P 500 Index ETF (CAD-Hedged)
XSP
$8.21
BMO S&P/TSX Capped Composite Index ETF
ZCN
$7.37
Vanguard S&P 500 Index ETF
VFV
$6.54
Table 1-2 lists the six largest U.S. ETFs based on their assets.
TABLE 1-2 The Six Largest American ETFs by Assets
Name
Ticker
Assets (in billions of dollars)
SPDR S&P 500 ETF
SPY
$363
iShares Core S&P 500 ETF
IVV
$278
Vanguard Total Stock Market ETF
VTI
$239
Vanguard S&P 500 ETF
VOO
$220
Invesco QQQ ETF
QQQ
$160
Vanguard FTSE Developed Markets ETF
VEA
$97
Commercialization is tainting a good thing
Innovation is a great thing. Usually. In the world of ETFs, a few big players (BlackRock, State Street Global Advisors, Vanguard) jumped in early when the going was hot. Now, in order to get their share of the pie, a number of new players have entered the fray with some pretty wild ETFs. “Let’s invest in all companies whose CEO is named Fred!” Okay, no Fred portfolio exists, but the way things are going, it could happen.
We tend to like our ETFs vanilla plain, maybe with a few sprinkles. They should follow indexes that make sense. And, above all, their expense ratios should be looooow. When ETFs first hit the market, most had expense ratios that hovered in the 0.20 to 0.40 percent range. Strangely, the growth in the market has created a big divide. The more basic ETFs, such as those that track the S&P 500 or S&P/TSX Composite Index, have, due to a lot of competition, come down in price. At present, there are dozens upon dozens of ETFs that carry expense ratios of 0.10 percent or less.
Conversely, many of the newer, more complicated ETFs (and we don’t use “complicated” as a compliment), have expense ratios edging up into the ballpark of what you would pay — even what you would’ve paid several years back — for mutual funds. In the U.S., approximately 140 ETFs now carry net expense ratios of 1 percent or more; 19 of these have an expense ratio of over 2 percent.
Not all ETFs must follow traditional indexes — the ETF format allows for more variety than that. (Actually, when you think about it, some of the traditional indexes, like the Dow, are pretty dumb. You find out why in Chapter 3.) But the ETF industry has lost some of its integrity over the past few years with higher expenses and some awfully silly investment schemes.
The rest of this book can help you to sidestep the greed and the silliness — to take only the best parts of ETF investing and put them to their best use.
Chapter 2
What the Heck Is an ETF, Anyway?
IN THIS CHAPTER
Distinguishing what makes ETFs unique
Deciding between traditional and customized indexes
Seeing the appeal of ETFs to large investors
Understanding commissions
Investigating the pros and cons of active versus passive investing
Banking your retirement on stocks is risky enough; banking your retirement on any individual stock, or even a handful of stocks, is Evel Knievel-jumping-the-Snake River-style investing. Banking on individual bonds is typically less risky (maybe Evel Knievel jumping a creek), but the same general principle holds. There is safety in numbers. That’s why teenage boys and girls huddle together in corners at school dances. That’s why gnus graze in groups. That’s why smart stock and bond investors grab onto ETFs.
In this chapter, we explain not only the safety features of ETFs but also the ways in which they differ from their cousins, mutual funds. By the time you’re done with this chapter, you’ll have a pretty good idea of what ETFs can do for your portfolio.
Understanding the Nature of the Beast
Just as a deed shows that you have ownership of a house and a share of common stock certifies ownership in a company, a share of an ETF represents ownership (most typically) in a basket of company stocks. These days, to buy or sell an ETF, you place an order with a broker, generally (and preferably, for cost reasons) online, although you may be able to place an order by phone. The price of an ETF changes throughout the trading day, which is to say from 9:30 a.m. to 4:00 p.m., Toronto time, going up or going down with the market value of the securities it holds.
Originally, ETFs were developed to mirror various indexes:
The Toronto 35 Index Participation fund, the first ETF ever created, was set up to track the TSE 35 Composite Index. The TSE 35 followed Canada’s largest and most liquid companies.
One of Canada’s most popular ETFs, the iShares S&P/TSX 60 Index Fund (XIU), was created in 1999 and tracks the performance of the S&P/TSX 60. Like the TSE 35 did, this index follows the 60 largest Canadian companies.
The SPDR S&P 500 (SPY), American’s first and largest ETF, represents stocks from the S&P (Standard & Poor’s) 500, an index of the 500 largest companies in the United States.
Since ETFs were first introduced, many others, tracking all kinds of things, including some rather strange things that we dare not even call investments, have emerged.
The component companies in an ETF’s portfolio usually represent a certain index or segment of the market, such as large Canadian value stocks, small-growth stocks, or micro cap stocks. (If you’re not 100 percent clear on the difference between value and growth, or what a micro cap is, rest assured that Part 2 defines these and other key terms.)
Sometimes, the stock market is broken up into industry sectors, such as financials, energy, and technology. ETFs exist that mirror each sector.
Regardless of what securities an ETF represents, and regardless of what index those securities are a part of, your fortunes as an ETF holder are tied, either directly or in some leveraged fashion, to the value of the underlying securities. If the price of TD bank stock, 10-year Government of Canada bonds, gold bullion, or oil futures goes up, so does the value of your ETF. If the price of gold tumbles, your portfolio (if you hold a gold ETF) may lose some glitter. If Suncor Energy’s stock pays a dividend, you are due a certain amount of that dividend — unless
