Friday, 1 September 2017

Investing in ETFs



The cost of investing in Exchange Traded Funds (ETF) is continuing to decrease has become FREE. National Bank of Canada recently announced that investors will no longer have to pay commissions on all Canadian or US ETFs.  Prior to this, Questrade offers no commissions on ETF purchases only, while  Scotiabank’s ITrade also offers no commissions on selected ETFs.   Sooner or later, all major brokerages will follow suit.

Just as an education piece, ETFs differ from mutual fund in that you can purchase or sell them during the day at different prices, while trades on mutual funds are based on pricing at the end of the day.  The biggest advantage of ETF is the Management Expense Ratio (MER). A popular ETF traded in TSX such as XSP, which is based on the S&P 500 has an MER of 0.1%, while a similar mutual fund may have an MER of at least 1%.   Furthermore, actively managed mutual funds charge more than 2.5%, and the greatest irony is that almost all actively managed mutual funds do not beat an index fund based on the S&P 500!.

With the elimination of the commission, the gap between the cost of investing in ETF and mutual fund has further increased. There is no reason not to open a brokerage account and start investing in ETF, or move your existing mutual fund to an ETF.  
1% may not sound much, but over a longer horizon, it becomes material. See the difference below assuming one invest $1,000 per month for 40 years :

MER Differential
Leakage
0.5%
($41,536)
1.0%
($112,904)
1.5%
($167,440)
2.0%
($244,727)
2.5%
($333,710)

As you can see above, over a 40 year period, if you continue to invest in an underperforming mutual fund that charges a high MER, you stand to lose almost $245,000 assuming a 2% differential in MER.

And, to make matters worse, one also has to pay an additional fee or at least 0.5% or more to an investment advisor to manage an underperforming portfolio. As a result, you already end up paying almost $334,000 in incremental fees alone assuming a 2.5% MER differential and  0.5% in Advisory Fees.


If you wonder whether or not you have the know-how to invest in ETF, drop me a line at Razorback2628@gmail.com  for some free advice on investing in ETFs.  Note that I am a Certified Financial Planner (CFP). 

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