A few great reasons why I own ETFs

A few great reasons why I own ETFs

For folks who have followed My Own Advisor for some time, you might already know that I employ a two-pronged approach to grow my retirement portfolio across various accounts.

One approach is using dividend paying stocks from both Canada and the U.S.  From the companies I own I get steady income and some capital appreciation.  Some of my holdings include Canadian banks, pipelines, insurance companies and telecommunications companies.  I also own some U.S. dividend aristocrats.

My other approach is using broad market Exchange Traded Funds (ETFs) for passive investing.  From these ETFs I receive market returns less miniscule fees.  After reading various articles about index investing over the last few years I’ve cemented a few top reasons why ETFs work for me beyond market diversification and market returns.   Here are the others…

Low Costs

Fact:  Index ETFs are cheaper than most actively managed mutual funds. Many mutual funds buy and sell stocks frequently in an attempt to beat the market.  Buying and selling frequently incurs costs.  Instead of all this speculation, index investors can simply focus on buying and holding broad market ETFs and leave them alone for months on end.  Many Canadian equity mutual funds have management expense ratios (MERs) over 2%.  Many Canadian equity indexed products charge less than 0.50%.  This means a mutual fund manager has to beat these indexed products by more than 1.5% just to break even.  Good luck to them.

Gotta like inexpensive.

High Transparency

Fact:  Many mutual funds report their top-10 holdings but not much else.  The unfortunate part of this is; you are never entirely sure what you own with many actively managed mutual funds.  Instead of head scratching to figure out what you actually own, many indexed ETFs are built on a model of simplicity and transparency.

Gotta like simple.

Low Effort

Fact:  If you invest in stocks you need to spend some time understanding these companies.  At least you should.  I read annual reports, news briefs and follow metrics like yield, payout ratio, earnings per share, cash flow and company debt to name a few.  The reality is if you’re buying a stock, somebody is selling it.  Buying stocks means I’m competing against other investors.  I will hopefully win at this game by holding the stock longer than most, collecting rising dividend income over time and capturing some capital appreciation in the process.  Indexed ETFs don’t have this effort, not even close.  With broad market indexed ETFs and a combination of them in your portfolio, you’ll get whatever returns the markets provide less miniscule fees.  This will give you more time to do other fun things.

Gotta like easy.

Diversified, market returns and throw in inexpensive, simple and easy for good measure.

You don’t hear those buzzwords when it comes to investing very often do you?  Are you investing with index ETFs?  If so, which ones?  If not, why not and what are you waiting for?

27 Responses to "A few great reasons why I own ETFs"

    1. Hey Ed14,

      I prefer VTI, lower MER (0.06%) and I’ve also read currency-hedging, is not very precise over the long haul. I prefer to have my money in the local currency, meaning, US stocks and US ETFs in USD $ and Canadian stocks and Canadian ETFs in CDN $. That said, VUS is an excellent product. Low cost. MER is 0.15% I recall.

      Hedging benefits an upward Canadian dollar. Not sure how much higher it can really go.

  1. @My Own Advisor

    Yes, always have some stocks on my watchlist. However, most high dividend payers blue chips are still very highly priced, and so I am looking at lower-yielding ones that may offer more capital appreciation. Hence my over-concentration in commodities and oil, since they have done the worst this year.

    But regardless, I am still going to try buying ETF’s/indexes first, in an attempt to control my gambling nature. I really don’t want too many individual stocks.

    1. Hey Peter,

      That’s the struggle I’m having as well. I’d like to buy more VTI, but at the same time, I’d like to own some more dividend payers, especially US stocks. The problem is, I see XOM and some others priced too high. Even VTI is priced high in my opinion. I need the markets to fall a bit, so I can buy something. I have enough KO, PG, JNJ.

      I see myself owning about 50 blue-chips long term, 40 CDN and about 10 US. Other than that, I will index everything. That should be good to battle any market climate and provide some nice income, don’t you think?

  2. An advisor can never be right 100% of the time, and based upon almost forty years of Investing,most people change advisors fairly often as their needs are not always met.
    The use of ETF’s over Mutual Funds is a No Brainer, Fund Managers move, Funds go out of business, ETF’s are transparent , low cost, consistant.
    I use an Asset Allocation plan, assign % weightings to various classes, then buy the ETF which is best of class in that area.
    The current climate dictates an overweight to CDZ,XTR, XSCB,JNK.
    I know rates are going back to 10%, not sure when, but when the signals are there, it won’t happen overnight, i will go cash and wait, then move back in.
    JNJ,PFE,MMM.ABBT,VZ, are buy and hold,they are my kid’s Estate.

    1. You’re right Howard. Thanks for the comment.

      I like your asset allocation plan, sounds smart. I think CDZ is a great ETF in any climate. I don’t know much about XTR, only that the fees are about 0.60% and you’re getting a blend of bonds, REITs and utility stocks. What are your thoughts about owning many of the holdings in XTR directly?

      I don’t know about JNK but I can infer it means you’re missing a “U” and it’s a bond. 🙂

      I like the holdings in your kid’s estate. I’d like to buy MMM, but it’s too pricy right now.

  3. @TM @ Young and Thrifty

    I would say that perhaps a lot of the behavior gap has more to do with emotions than education. My point would be that if you pay 0.5-1% more, but it saves you from a 4% drag from your behavior then that is money well spent. We all know that fees matter, but at the same time some things are worth paying for. I can tell you that just not having a discount brokerage account prevents a person from doing a lot of dumb things. As I said, some people don’t need this, but I would guess the overwhelming majority would benefit from it.

  4. @A Young Investor

    Why don’t we simply encourage investors to spend a couple hours getting educated on personal finance basics instead of encouraging them sacrifice tens of thousands of dollars in investment returns over a lifetime of investing? I read the column over the weekend and it kind of upset me actually. I wrote a response column over on my site detailing why he is wrong and the mutual fund industry is ridiculous.

  5. I have used ETF’s in the past and mostly agree with your points, however I think that often times ETF’s are a little oversold by their advocates; perhaps that or mutual funds are overly criticized. Tom Bradley recently wrote a column for the G&M related to this issue, but I think a couple important things should be mentioned. ETF costs are largely lower because they do not pay trailer fees to an advisor and whether that is cost effective depends on your assets and the value of advice you are receiving. I think that a lot of research has shown that investor behaviour is a much greater drag on returns than the 1% trailer fee so a good advisor may be more than worth their cost if they have a restraining effect. Personally I am glad to no longer have a discount brokerage account so that I don’t have the ability to waste time and money tinkering with my portfolio. ETF’s should be easy, but in practice people either obsess over them and incur too many commission fees (and small costs due to buy/ask spreads) buying and selling at bad times or they ignore them completely and never rebalance (admittedly better than the first option).

    Now, there are lots of poor mutual funds and advisors who charge too much and deliver too little, but quality can be found. Personally, I moved all my accounts to Steadyhand about a year ago and have never regretted it. They do not pay trailer fees either, but provide advice and restraint when needed. There are a number of other quality companies as well if a person looks for them.

    For some people ETF’s are superior, but I think for a lot of people that is not necessarily the case. Mathematically they probably should win out, but one thing about life is that it is not a math equation. Just my 2 cents.

    1. @Devin,

      Great, detailed comment, thanks for that!

      ETF costs are lower because the active management involved is lower, therefore, little need for intervention. With Steadyhand, the good thing is, you get largely unbiased and personal portfolio attention. That costs money and if you’re willing to pay for it, a small fee, firms like Steadyhand do it best. Personally, I’m comfortable with my portfolio and running it. Will I always feel this way? Maybe not, but for now, it works for me.

      Whether you’re using mutual funds, ETFs, or you directly invest in stocks, the best thing you can do is get out of your own way as much as possible. Check your emotions at the door. Easy to say, hard to do. ETFs tend to do this better than most, because you are guaranteed index returns less miniscule fees.

      I think you’re a smart person to have moved your portfolio to Steadyhand, they are “one of the good guys” out there.

  6. I don’t yet and the only reason is I can’t find someone who sells them and am too scared to do it myself. But I have a pension built up that is just sitting there getting eaten away by mers so I have to learn how and soon

  7. Great post Mark.

    I own small portion of VEE as well as VT. Other than that, it is all e-series. Finally, my gambling side dictates that I own a couple of stocks as well. The proportion of individual stocks is a bit higher than I would like, and it is also too concentrated in OIL! = )

    But yes, indexing is awsome, as you said, especially since I know you put it all in your RRSP. Set it, (pretty much) forget it.

    1. Thanks Peter. I don’t own VT, but am looking at VTI. The cost of VTI is too much for me right now. Ha, gambling side, I laughed at that.

      Are you looking to buy more stocks now? Curious – prices are coming down for many blue-chips. That’s exciting.


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