Exchange Traded Funds Flashcards
What’s an Index?
A benchmark or yardstick that lets you measure the performance of a stock market, part of a stock market or a single investment.
Examples: S&P/TSX, S&P/TSX Canadian Bond Index.
Note that index numbers based on the number 100.0, a starting or “benchmark” number
Charles Dow created the first index, the Dow Jones Industrial Average in 1896, which tracks the New York Stock Exchange
Today there are thousands of indices!
What are Exchange Traded Fund?
A fund that chooses investments based on a market index or sector. ETFs trade on a stock exchange. They are not actively managed, so costs tend to be lower than regular mutual funds.
From the Investor Education Fund’s glossary
ETFs often follow one particular index.
Example: The iShares “LargeCap 60 Index Fund” follows the S&P/TSX 60 index (basically the 60 top companies, by market capitalization on the TSX) trading on the TSX with the stock symbol XIU
What are the advantages of ETFs?
Trade on a stock exchange – ease of purchase
You don’t have to beat the index, you’re buying the index (eg. S&P/TSX 60)
Low cost - MERs, management expense ratios, are usually under 0.8% for ETFs.
Diversification – lots of choice
Stocks, bonds, commodities, international, industrial sectors, etc.
Canadian content – you can get global exposure purchasing Canadian funds
Don’t have to worry about a fund manager (who may leave the fund eventually)
What are the disadvantages of ETFs?
Trade on a stock exchange
You have to pay trading fees every time you buy and sell
You have to purchase board lots (ie. Minimum of 100 shares)
High start-up cost – (mutual funds can start with as little as $100.00)
Diversification – maybe too much choice!
What is diversification/Asset Mix?
Asset Mix
Basically the mix of equities (eg. Stocks) and fixed income (eg. Bonds) and cash and other investments you have in your portfolio (cash equivalents, commodities)
Many advisors recommend at least 5% of your portfolio should be held in cash
Depends on you level of risk tolerance and age
Fixed Income general rule of thumb – your age should be your percentage of fixed income in you portfolio
If you’re 5 years or less away from retirement or less, most of your portfolio should be in fixed income investments, to avoid volatility nest egg
How Do I Make An ETF Investment?
You need an account with a broker (eg. iTrade, Questtrade, etc.)
Brokers usually need $1000.00 as an initial investment
You need to be 18
Once you’ve satisfied the above, you would buy and sell ETFs like a stock
What is a simple ETF strategy?
Developed and promoted by MoneySense magazine
Pick a few ETFs and target asset mix
Diversify according to your asset mix, and personal tastes.
Couch Potato Examples
“Classic”
33.3% Canadian Equity
33.3% American Equity
33.3% Canadian Bond
“Global”
20% Canadian Equity
20% American Equity
20% European/Asian Equity
40% Canadian Bond
Important: Rebalance your portfolio once per year!!!
See MoneySense’s Buyer’s Guide to ETFs for more examples
