Should You Use ETFs?

Exchange Traded Funds (“ETFs”) are one of the best ways to easily diversify your investment portfolio. For new and seasoned investors alike, some ETFs can provide broad exposure to global stock markets and some can provide broad exposure to passive income through dividends.

ETFs can be one of the best and simplest ways to invest in the stock market, and are potentially an excellent choice for your retirement portfolio, your child’s college fund and more.

ETFs vs. Mutual Funds

ETFs and mutual funds are similar in many ways. Both represent a collection of securities that trade as a single unit, and both are managed by a fund manager to whom you pay a management fee. However, there are a few differences to be aware of before you choose one or the other.

ETFs Typically Have Lower Fees than Mutual Funds

It’s not uncommon for F Class mutual funds to charge an average management fee of 0.79%. Canadian ETFs, on the other hand, have an average management fee of 0.48%.1

Over time, fees can drastically eat into your portfolio returns, reducing your portfolio by tens or even hundreds of thousands of dollars. Keeping your fees low is one of the easiest ways to maximize your returns over the long term, which is what makes ETFs such a popular choice among a wide range of investors.

ETFs Trade On An Exchange Like A Stock

Because ETFs trade on a stock exchange, you can buy and sell them throughout the day while the market is open. You can place an indication to purchase or sell mutual funds at any time, though you would need to wait for the next official closing valuation of that fund for the order to be fulfilled. Furthermore, you can only purchase whole shares of ETFs, whereas you can purchase partial shares of mutual funds.

Because you trade ETFs on an exchange, you need to be aware of trading commissions charged by your brokerage. Another potential investment cost saving: several discount brokerages in Canada have even made it free to buy and sell ETFs!

Why Might I Buy ETFs Instead of Individual Stocks?

ETFs may reduce concentration risk in your portfolio by providing exposure to dozens, or even hundreds of individual securities.

You can create a balanced investment portfolio by purchasing only two or three ETFs, or in the case of a one ticket solution, just a single ETF. To do the same with individual stocks would likely require owning more than 50 and likely into the hundreds of individual securities. For new investors, those with small accounts, or those with limited time to manage an entire portfolio, ETFs are a shortcut to enjoying the diversification benefits of accessing a broad segment of the stock market or an asset class without having to manage a portfolio.

If you want to further diversify your portfolio in a specific niche industry or type of stock, you can use ETFs for that too. You can find ETFs focused on technology, pharmaceuticals, natural resources and more. There are also ETFs that contain only dividend-paying stocks, if you are looking to increase your passive income in your investment portfolio.

In other words, you can use ETFs to build a highly personalized investment portfolio that suits your individual risk tolerance and investment goals.

Passive Investing In A Self-Directed Portfolio

Furthermore, because there is a fund manager and investment analyst managing the ETF, you don’t need to make any trading decisions like you would for individual stocks. If the idea of poring over dozens of earnings reports before market open sounds like a chore to you, you’re probably better off investing in ETFs instead of stock picking.

Contributing to the ETFs in your portfolio on a regular basis will allow you to take advantage of dollar-cost averaging, a passive investing strategy that gives you peace of mind in the short-term and potentially manage risk over the long term. If you really want a hands-off approach, set your eligible ETFs up on a DRIP, so any dividends earned are used to buy new shares. You may have an automated investment portfolio in no time!

However, if you do like to make some active trades, investing in ETFs doesn’t mean you have to stop! I personally use broad market ETFs to make up the foundation of my portfolio, then select individual stocks for specific investment goals or just for fun. As a result, I still get all the fun and benefits of active stock trading, while the majority of my capital remains well-diversified through ETFs.

I’ve been investing in ETFs since I started investing! Over the past 10 years, they’ve allowed me to take advantage of stock market gains and earn passive income while providing risk-diversification in my investment portfolio. ETFs now make up the bulk of my TFSA and RRSP — as well as my daughter’s RESP — and are the cornerstone of my long-term investment strategy for my family’s financial security.

1 Morningstar Direct, as at Nov 18, 2020.

Commissions, management fees and expenses all may be associated with an investment in exchange traded products managed by Horizons ETFs Management (Canada) Inc. (the "Horizons Exchange Traded Products"). The Horizons Exchange Traded Products are not guaranteed, their values change frequently and past performance may not be repeated. The prospectus contains important detailed information about the Horizons Exchange Traded Products. Please read the relevant prospectus before investing.

The views/opinions expressed herein may not necessarily be the views of Horizons ETFs Management (Canada) Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

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Commissions, management fees and expenses all may be associated with an investment in exchange traded products managed by Horizons ETFs Management (Canada) Inc. (the "Horizons Exchange Traded Products"). The Horizons Exchange Traded Products are not guaranteed, their value changes frequently and past performance may not be repeated. Certain ETFs may have exposure to leveraged investment techniques that magnify gains and losses and which may result in greater volatility in value and could be subject to aggressive investment risk and price volatility risk. Such risks are described in the prospectus. The prospectus contains important detailed information about the ETF. Please read the relevant prospectus before investing.

The Horizons Exchange Traded Products include our BetaPro products (the “BetaPro Products”). The BetaPro Products are alternative mutual funds within the meaning of National Instrument 81-102 Investment Funds, and are permitted to use strategies generally prohibited by conventional mutual funds: the ability to invest more than 10% of their net asset value in securities of a single issuer, to employ leverage, and engage in short selling to a greater extent than is permitted in conventional mutual funds. While these strategies will only be used in accordance with the investment objectives and strategies of the BetaPro Products, during certain market conditions they may accelerate the risk that an investment in shares of a BetaPro Product decreases in value. The BetaPro Products consist of our Daily Bull and Daily Bear ETFs (“Leveraged and Inverse Leveraged ETFs”), Inverse ETFs (“Inverse ETFs”) and our BetaPro S&P 500 VIX Short-Term Futures™ ETF (the “VIX ETF”). Included in the Leveraged and Inverse Leveraged ETFs and the Inverse ETFs are the BetaPro Marijuana Companies 2x Daily Bull ETF (“HMJU”) and BetaPro Marijuana Companies Inverse ETF (“HMJI”), which track the North American MOC Marijuana Index (NTR) and North American MOC Marijuana Index (TR), respectively. The Leveraged and Inverse Leveraged ETFs and certain other BetaPro Products use leveraged investment techniques that can magnify gains and losses and may result in greater volatility of returns. These BetaPro Products are subject to leverage risk and may be subject to aggressive investment risk and price volatility risk, among other risks, which are described in their respective prospectuses. Each Leveraged and Inverse Leveraged ETF seeks a return, before fees and expenses, that is either up to, or equal to, either 200% or –200% of the performance of a specified underlying index, commodity futures index or benchmark (the “Target”) for a single day. Each Inverse ETF seeks a return that is –100% of the performance of its Target. Due to the compounding of daily returns a Leveraged and Inverse Leveraged ETF’s or Inverse ETF’s returns over periods other than one day will likely differ in amount and, particularly in the case of the Leveraged and Inverse Leveraged ETFs, possibly direction from the performance of their respective Target(s) for the same period. For certain Leveraged and Inverse Leveraged ETFs that seek up to 200% or up to or -200% leveraged exposure, the Manager anticipates, under normal market conditions, managing the leverage ratio as close to two times (200%) as practicable however, the Manager may, at its sole discretion, change the leverage ratio based on its assessment of the current market conditions and negotiations with the respective ETF’s counterparties at that time. Hedging costs charged to BetaPro Products reduce the value of the forward price payable to that ETF. Due to the high cost of borrowing the securities of marijuana companies in particular, the hedging costs charged to HMJI are expected to be material and are expected to materially reduce the returns of HMJI to unitholders and materially impair the ability of HMJI to meet its investment objectives. Currently, the manager expects the hedging costs to be charged to HMJI and borne by unitholders will be between 10.00% and 45.00% per annum of the aggregate notional exposure of HMJI’s forward documents. The hedging costs may increase above this range. The manager publishes on its website, the updated monthly fixed hedging cost for HMJI for the upcoming month as negotiated with the counterparty to the forward documents, based on the then current market conditions. The VIX ETF, which is a 1x ETF, as described in the prospectus, is a speculative investment tool that is not a conventional investment. The VIX ETF’s Target is highly volatile. As a result, the VIX ETF is not intended as a stand-alone long-term investment. Historically, the VIX ETF’s Target has tended to revert to a historical mean. As a result, the performance of the VIX ETF’s Target is expected to be negative over the longer term and neither the VIX ETF nor its target is expected to have positive long-term performance. Investors should monitor their holdings in BetaPro Products and their performance at least as frequently as daily to ensure such investment(s) remain consistent with their investment strategies.

Horizons Total Return Index ETFs (“Horizons TRI ETFs”) are generally index-tracking ETFs that use an innovative investment structure known as a Total Return Swap to deliver index returns in a low-cost and tax-efficient manner. Unlike a physical replication ETF that typically purchases the securities found in the relevant index in the same proportions as the index, most Horizons TRI ETFs use a synthetic structure that never buys the securities of an index directly. Instead, the ETF receives the total return of the index through entering into a Total Return Swap agreement with one or more counterparties, typically large financial institutions, which will provide the ETF with the total return of the index in exchange for the interest earned on the cash held by the ETF. Any distributions which are paid by the index constituents are reflected automatically in the net asset value (NAV) of the ETF. As a result, the Horizons TRI ETF receives the total return of the index (before fees), which is reflected in the ETF’s share price, and investors are not expected to receive any taxable distributions. Certain Horizons TRI ETFs (Horizons Nasdaq-100 ® Index ETF and Horizons US Large Cap Index ETF) use physical replication instead of a total return swap. The Horizons Cash Maximizer ETF and Horizons USD Cash Maximizer ETF use cash accounts and do not track an index but rather a compounding rate of interest paid on the cash deposits that can change over time.

*The indicated rates of return are the historical annual compounded total returns including changes in per unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. The rates of return shown in the table are not intended to reflect future values of the ETF or returns on investment in the ETF. Only the returns for periods of one year or greater are annualized returns.