Why invest in ETFs?
As a new investor, you have much to think about, including your investment objectives, your financial circumstances, your risk tolerance and your time horizon. When choosing investments, you’ll also need to consider these factors: return potential, risk factors, fees, ease of access, and the effort needed to maintain their portfolio.
Some investors are comfortable with buying, selling and monitoring the performance of individual stocks. Others prefer investments with built-in diversification that are professionally managed, such as mutual funds and ETFs. However, mutual funds usually have a substantially higher fee than comparable ETFs. Here’s a more detailed look at the benefits of ETFs:
- Built-in diversification: ETF providers pool money from many investors and invest it in a portfolio of many stocks—potentially hundreds. For example, many popular ETFs attempt to replicate the performance of stock market indexes like the S&P 500 or the S&P/TSX 60.
- Lower risk: Greater diversification has the potential to lower investment risk. For example, if you own 10 stocks, each making up 10% of your portfolio, and if one of those stocks crashes by 50%, your overall portfolio will take a big hit. However, if you own 50 stocks, each making up 2% of your portfolio, poor performance by one or two stocks will not create as big a dent in your returns.
- Lower fees: ETFs and mutual funds charge investors a fee—the management expense ratio (MER)—calculated as an annual percentage of your invested money. ETF MERs are usually lower than those of comparable mutual funds. ETF fees typically range from under 0.1% (for passive ETFs) to over 0.5% (for actively managed ETFs). Plus, having lower fees means more investment gains you can compound over the long run.
- Easy to buy and sell: ETFs are bought and sold on stock exchanges, like stocks are. All you need is a brokerage account. This makes it easy and convenient for new investors to access ETFs.
- Access through an online broker: It’s 2023, so you probably want to access and manage your investments digitally. I do! You can easily buy, sell and manage ETFs through one of the many online brokers in Canada. Each broker has its pros and cons. Learn more about the best online brokers in Canada in 2023.
- Different types of ETFs: There’s an ETF for different types of investors and risk profiles. For example, you could choose to buy one that tracks the U.S. stock market, one that tracks the global stock market, or one that invests in alternative assets like real estate, precious metals—and even bitcoin. Some people like to build a portfolio of multiple ETFs, but if you’re a new investor and want an even easier, done-for-you option, you could consider all-in-one ETFs.
What is an all-in-one ETF?
All-in-one ETFs may be a good option for investors who don’t want to spend a lot of time maintaining their portfolios. These ETFs offer diversification across asset classes in just one ETF. For example, in the past, if you wanted to invest in a balanced portfolio of equity and fixed income, you’d have to buy at least two ETFs—one for each asset class. Now, you can consider investing in a solution like Fidelity’s All-in-One Balanced ETF, which invests about 59% of its funds in equity, about 39% in fixed income, and about 2% in crypto.
While the fee for an all-in-one ETF is typically higher than that of an ETF that passively tracks a stock market index, the added advantage of a Fidelity All-in-One ETF is the convenience of automatic portfolio rebalancing, which means Fidelity periodically buys and sells assets to maintain the ETF’s strategic asset allocation.
Fidelity offers All-in-One ETFs with the following target allocations:
|Fidelity All-in-One ETFs||Conservative||Balanced||Growth||Equity|
All-in-one ETFs for “core and explore” investing
So, are all-in-one ETFs right for you? If you’re a new investor who’s still learning the ropes, or if you prefer ease and convenience over flexibility, they’re worth considering.
Even experienced and seasoned investors who enjoy investment research, portfolio construction and portfolio management may find a use for all-in-one ETFs, as part of a core-and-explore approach to investing. In this case, all-in-one ETFs could form the passive “core” of the portfolio, with other individual ETFs forming the more actively managed “explore” portion of the portfolio.