"In a world of GLASS CEILING SMASHERS, [Golden Girl Finance Founders] Misner and McDonald are two blondes investing in total architectural overhaul." - Dolce Vita Magazine

Investing

The tell-all guide to ETFs

June 13th, 2017 by

Low-cost, easy-to-trade, large variety...what's not to like? (Hint: Read the fine print)

 
 
 

The first exchange-traded fund in the world, called TIPS, was launched on the Toronto Stock Exchange in 1990. (Yeah, Canada!) Back then, choosing an ETF was easy because there were so very few. Today, there are thousands of ETFs on the market.

Before you buy, it pays to understand the unique benefits (and risks) of this investment product.

The lowdown

What are the key benefits of ETFs?

  1. Very low cost 
  2. Trade like a stock
  3. Wide variety

The primary appeal of ETFs is that investors can build their own portfolios at a low cost. Low management expense ratios (MERs) – usually less than 0.5% per year— are much less than for comparable mutual funds which can charge up to 2-3% in MERs annually. The fact that ETFs trade on an exchange, like a stock, means investors can trade them throughout the day at a low cost by using a discount broker. The incredible variety in ETFs, ranging from traditional stock and bond index funds to commodity and derivative ETFs, means there’s an ETF for almost any investment strategy. 

Risk and reward

But ETFs come with risks too: 

  1. Market Risk
  2. Risk of Impulse Trading
  3. Liquidity Risk

Every ETF faces the risk related to the market to which the ETF is exposed. Of course, this applies to all investments. However, not all investors take the time to fully understand what particular markets to which an ETF may have exposure. This information can be found on the ETF Fact Sheet. An ETF that tracks the S&P/TSX will earn the same overall return as this index (minus fees and trading costs) and face the same risks as the index. But what about more exotic ETFs like “dynamic beta”? (Whaa?) For these, it’s imperative to read the ETF Fact Sheet to find out about the ETF’s investment strategy, benchmark, portfolio characteristics, top holdings, among other attributes.

What appears to be an advantage of ETFs (easy to trade) also becomes a double-edged sword. During market volatility, the easy access to trading ETFs may lead some investors to panic selling since many ETFs are very liquid. In this case, investors may lose out on the benefits of holding investments over the long term. Always refer to your investment plan to avoid emotionally-driven trading. 

Does the ETF you wish to purchase trade regularly and in sufficient volumes? How large is the gap between the bid and ask prices quoted? If the gaps are large, this should ring a warning bell that the ETF is not very liquid and you may not be able to trade in and out as easily as you expect—especially during periods of heightened volatility. 

Fact of the matter

There’s no doubt ETFs have changed the investing landscape for the better. Once you’ve identified your investment goals and adopted a relevant investing strategy for achieving them, ETFs are a low-cost way to implement your strategy on your own. 

If there’s one piece of advice you take away from this article, it’s: Read the ETF Fact Sheet!

To learn more about ETFs, check out ETF.com's ETF University and Canadian ETF Association’s Information Centre.

 
0 Comments
 
Jun 25 2017 12:31pm
 
 
 
 

Business - Get Listed

Golden Girl Finance was designed for women to more effectively connect with the financial services community, national brands and local businesses of all types - supporting entrepreneurs, innovators and thought leaders. It's the modern way to engage with financially savvy females. Best of all, it's simple, easy to use, and your listing is completely free.

Create your profile and start engaging with the female demographic today.

Join Now →

goldengirlfinance.com

Golden Girl Finance is a leader in financial digital media - the modern woman's guide to finance - making the discussion of money and investing real, relevant and relatable (and shockingly entertaining). With a voice that reaches millions of women across digital, print and television platforms, our goal is to engage, educate and empower women of all ages to take charge of their finances. We do not invest on readers' behalves nor offer personal advice. It is this unbiased and innovative financial literacy approach that our community values and trusts.

goldengirlfinance.com Worldwide:

Canada USA
 
A financial voice for women. Get Started Now.