How to choose an ETF

Like mutual funds, ETFs provide managed portfolios of stocks, bonds or other securities. Unlike mutual funds, ETFs are, like their name says, “exchange-traded”—you can buy or sell them just like stocks—and they often charge much lower management fees than mutual funds. Most mutual funds employ teams of expensive experts to hand-pick investments, while ETFs are often passively managed, designed to simply replicate a specific index, keeping costs low. (Some mutual fund companies offer passive “index” funds, however, while some ETFs follow complex active strategies. In general, you should expect to pay less for a passive strategy, regardless of the type of fund.)

By far the biggest advantage of ETFs is their remarkable versatility. Whatever your investment strategy, you can probably find an ETF to help you achieve it, on an online trading platform such as Qtrade Direct Investing. Here’s an overview of the different ETF types:

Index ETFs track, or mimic, specific indexes like the TSX 60. Instead of buying 60 stocks individually, investors can “buy the market” with a single trade, purchasing an ETF like Horizons S&P/TSX 60 Index (HXT), for example. It’s a simple solution for do-it-yourselfers who want to invest but lack the skills or interest to manage their own portfolios. People who own only a few stocks can add broad market exposure with an index ETF, reducing their risk by increasing diversification.

Geographic ETFs offer portfolios with a specific geographical focus of different markets. They’re an inexpensive way to add global exposure to a Canadian portfolio or invest in high-growth international markets like China and India.

Sector ETFs invest exclusively in a specific sector. If you’re bullish about agriculture, for instance, consider iShares Global Agriculture Index ETF (COW). You can buy ETFs focused on base metals, consumer staples, energy and many other sectors.

Responsible ETFs can help you align your investments with your values, offering portfolios free of fossil fuels, for instance, or rated highly for gender diversity.

Factor ETFs target characteristics like value, growth or low volatility, factors that academic research has identified as drivers of superior long-term performance.

Asset allocation ETFs hold stocks and bonds in specific proportions, so you can select the appropriate asset mix for your risk tolerance. Some investors may sleep better at night with more of their money in bonds, while others prefer to own a portfolio heavily weighted in stocks, for greater potential growth. Asset allocation ETFs automatically rebalance, maintaining your desired asset mix. For long-term investments like registered retirement savings plans (RRSPs), this can be a convenient way to “set it and forget it.”

Asset class ETFs hold a single asset class—alternatives, commodities, preferred shares, real estate, etc., helping you add another dimension of diversification to your portfolio.

Thematic ETFs provide exposure to investment sectors or groupings, like health and wellness, the economic impact of the millennial generation, or advances in genomics and immunology. Because they’re narrowly focused, thematic ETFs can be more volatile, so they’re perhaps best suited for the “explore” part of a hybrid core-and-explore portfolio.

Getting started

With any investment, you should start your research by considering your goals, time horizon and risk tolerance. Other factors to evaluate when choosing ETFs include:

Tracking error

For index ETFs, the manager’s role is to make sure the portfolio accurately replicates the performance of whichever index the fund is designed to track. “Tracking error” is the difference between the index’s performance and the ETF’s, reflecting how well the ETF actually matches the underlying index.

MER

Like mutual funds, ETFs charge management and operating costs to the fund holders. The management expense ratio (MER) discloses these costs as a percentage of average dollars invested. As mentioned, MERs are often lower for ETFs than mutual funds, reflecting their lower research costs. Comparing costs can be tricky because mutual funds and ETFs may include a trailing commission of around 1% for the professional advice you receive when you buy from a financial advisor. If you make your own investment decisions, you should pay only the management and operating costs, usually also around 1%. Most ETF MERs are less than 1%, often significantly less. For example, Horizons S&P 500 Index ETF (HXS) is a mere 0.10%. Read the fine print, though, because MERs vary widely.

Trading cost

The cost to trade an ETF differs by broker. Currently, Qtrade Direct Investing is offering one of the best ETF bargains in Canada: You can trade 100-plus carefully curated ETFs for free, with no minimum investment. The list includes a who’s who of world-class investment firms including BlackRock (iShares), State Street Global Advisors, Horizons, Invesco, Vanguard and WisdomTree. Because ETFs are exchange-traded, you can buy U.S. ETFs just as easily as U.S. stocks. Nearly half of Qtrade’s selection is U.S.-listed, including some innovative options not offered in Canada.

Qtrade Direct Investing was ranked Canada’s number 1 online investing platform 24 times in the past 17 years (including the top spot in MoneySense’s 2020 best online brokers). Its award-winning platform includes real-time quotes, portfolio analytics, screening tools, analyst reports and more, plus an expert support team ready to help whenever you need a more human touch. So, if you’re new to ETFs, Qtrade is a great place to start investing with confidence. 

More on ETFs:

• The MoneySense ETF Finder Tool
• What is growth investing?
• How to be a better investor

About Stephanie Griffiths

Consulting editor Stephanie Griffiths was an award-winning investor for almost 20 years before returning to her roots in journalism, completing a Master’s degree in 2016.

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