ETFs or mutual funds. Making the best choice for your financial future
You’re probably familiar with mutual funds. Most people have encountered them at some point — either through their banks and financial advisors, or their friends complaining about the fees.
ETFs are a newer investment, which people tend to associate with lower fees and broad diversification.
“So, what is the difference between a mutual fund and an ETF?”
Mutual funds are bundles of stocks and bonds that are managed for you by a bank or investment firm. Traditionally, they’re taking a hands-on approach to try to beat the market.
With actively managed mutual funds, you have managers who are trading a lot to take advantage of opportunities. However, this active trading comes at a cost, which usually translates into higher fees.
Most ETFs, or Exchange-Traded Funds, tend to take a different approach. They were primarily set up to track an index of investments (eg. The S&P 500 is an index of 500 publicly-listed US stocks and an ETF could track it. But you could have track indexes of tech stocks, energy investments, real estate investments, etc).
With most ETFs, portfolio managers are trying to reproduce the holdings and performance of an index. They give investors diversified exposure to an index at a low cost.
With those kinds of funds, managers don’t need to rebalance as often. That could mean lower costs for them. In turn, they can charge lower fees for the client.
“Which one is a better financial fit for me?”
Based on the above description, you might be wondering, “Why should I take a hands-off approach and match indexes, when I can take a hands-on approach and try to beat them?”
Unless the person managing your mutual funds is Warren Buffet (and I’m pretty sure it’s not), there’s a strong likelihood they’ll underperform. A lower-cost ETF likely makes more sense because of their better affordability (lower fees), track record of performance and other factors I’ll compare below.
|Affordability (what you spend vs. what you save)||Canada has some of the highest in the world, with an average management expense ratio (MER) of 2.2%.||Compared with mutual funds, the fees for most ETFs are lower. For example, the MER for WealthBar’s Balanced ETF Portfolio is 0.34%.|
|Track record of performance||Nearly 90 percent of Canadian equity mutual funds underperformed the market over a 5-year period.||The TSX composite index outperformed equity mutual funds over a 5-year period. An indexed ETF would have tracked similar performance.|
|Transparency of assets||Mutual funds can have names that don’t quite track the underlying investments. For instance, many Canadian equity mutual funds have exposure to foreign stocks.||These funds are more transparent. The ETF that tracks the TSX composite index, for instance, only holds Canadian stocks.|
So you can see that in most cases, the money you save by going with an ETF is significant. WealthBar offers a variety of low-cost ETF portfolios to meet the needs of any type of investor. Hand-picked and managed by a team of experts, you can invest online in an ETF portfolio in minutes.
Are you ready to invest? Talk to a financial advisor to find out your options.