Exchange traded funds (ETFs) are one of the greatest breakthroughs for investors in the history of wealth creation, thanks to their accessibility for new investors and typically lower fees than a mutual fund1. High fees can be wealth destroyers.

The greatest favour you can do for yourself, in my opinion, is to check on the fees that you pay for your investments and the fees you pay to any advisor. In my view, you should not hand over a disproportionate amount of your wealth on an ongoing basis.

What is an ETF? It’s all there in the name. It is a fund that trades like a stock. ETFs are available on a stock exchange. Just as you might buy Apple stock on an exchange, you can purchase an ETF that buys the ‘whole stock market’ for the United States. For example, you can enter one ticker symbol and buy 500 of the largest (and well-known) companies in the U.S. And, you’ll be able to buy and own those great companies at a potentially lower cost. According to Morningstar Direct, F Class mutual funds charge an average management fee of 0.79%, while Canadian ETFs have an average management fee of 0.48%[1].

Building the ETF Portfolio 

You’ve likely heard the investment expression, “Don’t put all of your eggs in one basket.” You want to own many baskets. The U.S. stock market is wonderful and home to some of the most vibrant and successful companies on Earth. But you may also want to own many Canadian companies, companies in Europe, Asia and around the globe. ETFs can make it easy to own those many baskets of stocks. 

You can purchase an ETF that gives you access to the Canadian stock market, an ETF that holds European stocks, then Asian stocks, and on and on. Investors may build their portfolio around those Canadian, U.S. and international stocks (often called equities). 

With an ETF, you can aim to achieve a diversified risk exposure by having an investment vehicle that has exposures across different companies, or perhaps regions. With a well-diversified ETF portfolio, you can own thousands of companies on all continents. 

Here’s an example (for illustrative purposes only):

*Canadian stock ETF
*U.S. stock ETF
*International stock ETF

Managing the Risks of Stocks 

Owning stocks makes you, essentially a part business owner, and is historically and arguably the greatest wealth builder. According to Goldman Sachs data from the past 140 years, the average U.S. stock market return for 10 years is 9.2%.2 But it’s not a straight line-up, and keep in mind, there is no guarantee of those generous returns. Past performance does not guarantee future returns. 

Those companies trade on stock markets and the stock prices can fluctuate wildly at times. A stock ETF could potentially fall by 20%, 30% or even by 50% in a major correction. It can be quite the roller coaster ride at times – particularly following the 2020 pandemic market volatility, where we have seen wild swings.

Bonds Can Be Shock Absorbers

Bonds may help smooth out the ride for your portfolio. Bonds can work like shock absorbers as they have the habit of going up in price as stocks go down; bonds typically offer an inverse relationship to stocks.3 Of course, there is no guarantee of that inverse relationship, but bonds typically ‘do their thing’ to keep an eye on those volatile stocks. 

ETFs can make it easy to add those bonds and potentially reduce the risk level of the portfolio. Investors can choose from Canadian bond ETFs, U.S. bond ETFs and international bond ETFs. 

A potential portfolio asset allocation could include (for illustrative purposes only):

*Canadian stock ETF
*U.S. stock ETF
*International stock ETF
*Bond ETFs 

To reduce the risks, investors may also choose to hold a cash position4 plus some gold price and gold stock ETFs; holding cash and gold ETFs are typically viewed as safe haven strategies during economic downturns5. I even hold a small position in bitcoin as a portfolio diversifier. 

Creating an ETF portfolio that matches your tolerance for risk is crucial. 

Passive Versus Active Investing 

When we write about buying the ‘whole stock market,’ that is a reference to passive investing. There are no arbitrary decisions based on what companies you might purchase and own. There is no analysis on what companies might be ‘better.’ With passive investing, the fund will simply buy the most valuable companies on a stock market. You own the biggest companies based on their value.

With active investing, a fund manager will do extensive analysis in the attempt to find companies that they feel offer the best investment opportunity and fit the investment objectives of the associated ETF. 

There are passive and active ETFs. Active ETFs can typically have higher fees6, in my view, that can be money well spent at times.

You can build an ETF portfolio with passive or active ETFs. You might employ a mix of both styles. 

The Canadian Robo-Advisors

If you want a managed portfolio and advice you can go Robo. A Robo-Advisor can give you access to comprehensive and globally diversified portfolios.

With a Robo-Advisor, you can complete everything online, from start to finish. If you want to talk to a real live human, no problem. Assistance and investment advice is available at all of the Robos. Financial planning is also available at a few of the Robo shops.

The most popular Robo Advisors are Wealthsimple, Questwealth (from Questrade), Justwealth, Nest Wealth, Smartfolio from BMO, ModernAdvisor and Invisor. 

ETFs: How and Why? 

Fees matter. ETFs may allow you to keep your fees as low as possible. I encourage you to do the research and gain the knowledge to be able to create your own ETF portfolio, or invest in one of the one-ticket portfolios. 

To invest in ETFs, you would open a discount brokerage account and enter those ticker symbols to buy and sell. Top rated discount brokerages include Questrade, Qtrade, TD Direct Investing, National Bank Direct Brokerage and Scotiabank’s iTrade.

If you have any questions, feel free to reach out. You can use the contact form on my site. I’m happy to help. A great site for investment basics is getsmarteraboutmoney

You can also reach out to the experts at Horizons. 

Dale Roberts is an investor advocate and fan of low-fee investing. He is the founder of the blog Cut The Crap Investing, and he also writes a weekly column for MoneySense.

1 F Class mutual funds charge an average management fee of 0.79%, while Canadian ETFs have an average management fee of 0.48%. Via Morningstar Direct as at November 18, 2020.
2 SP Global, as at July 15, 2020. https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/s-p-500-returns-to-halve-in-coming-decade-8211-goldman-sachs-59439981
3 NASDAQ, as at October 11, 2016. https://www.nasdaq.com/articles/price-correlation-between-stocks-and-bonds-2016-10-11
4 Yahoo Finance, as at July 21, 2020. https://finance.yahoo.com/news/cash-safest-asset-now-etfs-170005596.html
5 BNN Bloomberg, as at May 11, 2020. https://www.bnnbloomberg.ca/gold-etfs-luring-record-amounts-of-cash-despite-risk-asset-rally-1.1434593
6 Wealthtender, as at December 3, 2020. https://wealthtender.com/insights/investing/etfs/active-etf-basics-active-etf-expense-ratio/

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. BetaPro Bitcoin ETF (“HBIT”), and BetaPro Inverse Bitcoin ETF (“BITI”), which are a 1X ETF, and an up to -1X ETF, respectively, as described in the prospectus, are speculative investment tools that are not conventional investments. Their Target, an index which replicates exposure to rolling Bitcoin Futures and not the spot price of Bitcoin, is highly volatile. As a result, neither ETF is intended as a stand-alone investment. There are inherent risks associated with products linked to crypto-assets, including Bitcoin Futures. While Bitcoin Futures are traded on a regulated exchange and cleared by regulated central counterparties, direct or indirect exposure to the high level of risk of Bitcoin Futures will not be suitable for all types of investors. An investment in any of the BetaPro Products is not intended as a complete investment program and is appropriate only for investors who have the capacity to absorb a loss of some or all of their investment. Please read the full risk disclosure in the prospectus before investing. 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.