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Exchange Traded Funds (ETFs). Financial Securities (IDC4U1) Mr. M. Goldberg, Martingrove C.I., 2010. Table of Contents. Index ETF Advantages of ETFs Disadvantages of ETFs How Do I Make an ETF Investment? Couch Potato – A Simple ETF Strategy. 1. Index. What’s an Index ?
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Exchange Traded Funds (ETFs) Financial Securities (IDC4U1) Mr. M. Goldberg, Martingrove C.I., 2010
Table of Contents Index ETF Advantages of ETFs Disadvantages of ETFs How Do I Make an ETF Investment? Couch Potato – A Simple ETF Strategy
1. Index • What’s an Index? • A benchmark or yardstick that lets you measure the performance of a stock market, part of a stock market or a single investment. • Examples: S&P/TSX, S&P/TSX Canadian Bond Index. • (Source: Investor Education Fund Glossary) • Note that index numbers are based on the number 100.0, a starting or “benchmark” number, based on an original year • Charles Dow created the first index, the Dow Jones Industrial Average in 1896, which tracks the New York Stock Exchange • Today there are thousands of indices!
2. ETF • Exchange Traded Fund definition: • A fund that chooses investments based on a market index or sector. ETFs trade on a stock exchange. They are not actively managed, so costs tend to be lower than regular mutual funds. • (Source: Investor Education Fund Glossary) • ETFs often follow one particular index. • Example: The iShares “LargeCap 60 Index Fund” follows the S&P/TSX 60 index (basically the 60 top companies, by market capitalization on the TSX) trading on the TSX with the stock symbol XIU
3. Advantages of ETFs • Trade on a stock exchange – ease of purchase • You don’t have to beat the index, you’re buying the index (eg. S&P/TSX 60) • Low cost - MERs, management expense ratios, are usually under 0.8% for ETFs. Mutual Fund MERs are usually between 2.0%-3.0% to compare. • Diversification – lots of choice • Stocks, bonds, commodities, international, industrial sectors, etc. • Canadian content – you can get global exposure purchasing Canadian funds • Don’t have to worry about a fund manager (who may leave the fund eventually)
4. Disadvantages of ETFs • Trade on a stock exchange • You have to pay trading fees every time you buy and sell • You have to purchase board lots (ie. Minimum of 100 shares) • High start-up cost – (mutual funds can start with as little as $100.00) • Diversification – maybe too much choice!
5. How Do I Make An ETF Investment? • You need an account with a broker (eg. iTrade, Questtrade, major bank, etc.) • Brokers usually need $1000.00 as an initial investment • You need to be 18 • Once you’ve satisfied the above, you would buy and sell ETFs like a stock
6. Couch Potato – A Simple ETF Strategy • Developed and promoted by MoneySense magazine • Pick a few ETFs and target asset mix • Diversify according to your asset mix, and personal tastes. • Couch Potato Examples • “Classic” • 33.3% Canadian Equity • 33.3% American Equity • 33.3% Candian Bond • “Global” • 20% Canadian Equity • 20% American Equity • 20% European/Asian Equity • 40% Canadian Bond • See MoneySense’s Buyer’s Guide to ETFs for more examples
Works Cited • Bortolotti, Dan, “The Complete Couch Potato Roadmap”, MoneySense (November 2009), http://www.moneysense.ca/2009/12/17/the-complete-couch-potato-roadmap/, February 16, 2010 • Gerlsbeck, Rob, “Buyer’s guide to ETFs”, MoneySense (November 2009), http://www.moneysense.ca/2009/11/01/ready-to-build-your-own-portfolio/ • http://www.getsmarteraboutmoney.ca/tools_and_calculators/glossary/definition/Pages/index.aspx, February 2, 2010 • http://www.getsmarteraboutmoney.ca/tools_and_calculators/glossary/definition/Pages/exchange-traded-fund-etf.aspx, February 16, 2010 • http://ca.finance.yahoo.com/etf/glossary, February 16, 2010 • http://ca.finance.yahoo.com/etf/education/02, February 16, 2010 • http://ca.finance.yahoo.com/etf/education, February 16, 2010 • http://ca.ishares.com/product_info/fund_overview.do?ticker=XIU, February 16, 2010 • I created the artwork with “Wordle,” an application on wordle.net. (February 16, 2010)
