Want to understand what’s driving the growth of ETFs in Canada? Here’s everything you need to know about ETF investing.
Exchange-Traded Funds (ETFs)
ETFs are a collection of stocks, bonds or other investments that you can buy and sell as a unit. They are similar to mutual funds, but with a key difference: they track the performance of a specific market or index.
That means there is no management professional selecting investments in the fund with the hopes of beating the market. Instead, an ETF holds all the investments in a particular region (such as Canadian equities), sector (such as real estate) or index (such as the S&P 500) with the intention of matching that market’s performance overall.
This difference makes ETF investing the go-to option for savvy Canadians. Here’s why:
- Less risk. Your investment returns are based on overall market returns, rather than a fund manager’s luck in choosing “winning” investments.
- Ultra-low fees. Because you don’t have to pay for the services of an active fund manager, the fees on ETFs are as low as 0.15%, compared with 2% to 3% for actively managed mutual funds. By paying less in fees for ETFs, you maximize your returns.
- No minimum to invest. You can get into the market with the purchase of a single share of an ETF, if that’s all you can afford.
- Since ETFs hold all the investments in a benchmark index, you always know what you’re invested in, and how those investments are performing.
How to Buy ETFs in Canada
You can buy ETFs through the services of a traditional financial advisor or brokerage. But that sort of defeats the purpose of choosing ETFs — avoiding high fees — because an advisor or traditional brokerage will charge you sizable fees on top of the fees charged by the individual ETFs.
There are two much better low-cost options for purchasing ETFs:
- Open an account with an online brokerage. Also called discount brokerages, online brokerages like Questrade allow you the flexibility to build your own portfolio of ETFs. Online brokerages offer the lowest fees on ETFs, but you have to be comfortable with DIY investing. This means performing all the transactions yourself, making all the choices about what investments to buy, and deciding how much risk you feel you can tolerate in your portfolio. Aside from the 0.15% or so management fee charged by the ETFs, other costs of using an online brokerage often include a flat annual maintenance fee and a small charge for each ETF trade or sale.
- Use the services of a robo advisor. If you are not comfortable doing all your ETF transactions manually and would prefer some guidance on which ETFs to buy, a robo advisor like Wealthsimple or BMO Smartfolio may be a better alternative. They can offer you a ready-made portfolio of ETFs that matches your risk tolerance, and you can automate your transactions so you can set it and forget it. Robo advisors are slightly costlier than online brokerages, with management fees usually less than 1%, but still cheaper than mutual funds.
Best Online Brokers for ETF Investors
Choosing the right online broker depends in part on your needs. For example, if you expect to make frequent trades, you’ll want to choose a broker with a low per-trade fee. Similarly, if you don’t have a large portfolio of investments, you’ll want to avoid brokers who charge extra fees on small accounts.
Here’s a summary of our picks for the best online brokers in Canada. If you want more detail than provided here, take a look at Young and Thrifty’s Ultimate Guide to Canada’s Discount Brokerages.
Best Low-Fee Broker: Questrade
With no annual fees and a low minimum investment of just $1,000, Questrade is hard to beat on cost. Trading fees run from $4.95 to $9.95, and you can purchase ETFs for free! That means that you can transfer money into your Questrade account and build an ETF portfolio for $0. There is a quarterly “inactivity fee” of $24.95 if you don’t perform any trades, but it’s easily avoided it if you keep your account balance above $5,000.
A bonus: Young and Thrifty readers who open a Questrade account get $50 in free trades.
Best User-Friendly Online Broker: BMO InvestorLine Self-Directed
If a platform’s ease of use is important to you, BMO InvestorLine is the broker for you. Both the online and mobile platforms are intuitive and easy to navigate, and a trove of research is provided to help you succeed as an investor.
Best Broker for Research: Virtual Brokers
In addition to an impressive research centre to help you make investment decisions, Virtual Brokers offers free ETF purchases, $9.95 trades, and waives the account fees for balances over $5,000. Read our full Virtual Brokers review or get started with Virtual Brokers.
Best Broker for Customer Service: Qtrade
Slightly pricier than Questrade, with a $100 annual fee and trading fees of $8.75 each, Qtrade is known for its superior customer service. To better understand what you get with Qtrade, we suggest to read and compare Qtrade vs Questrade in our review.
Best Robo Advisors for ETF Investors
Robo advisors are really taking off in Canada, with new providers entering the market all the time. Here’s a brief rundown of our top robo advisor picks, summarized from Young and Thrifty’s Complete Guide to Canada’s Robo Advisors.
Best Robo Advisor Overall: Wealthsimple
With no minimum investment amount, low fees (0.60% to 0.70%) and a broad selection of ETFs including Halal and socially responsible funds, Wealthsimple is a good choice for any investor.
Plus, Young and Thrifty readers get their first $10,000 managed for FREE for a year.
Best Hybrid Robo Advisor: BMO Smartfolio
BMO Smartfolio combines the passive investing approach of ETF investing with the human touch of having a team of advisors actively adjust your portfolio when necessary. Here’s an enticing promo:
Young and Thrifty readers get their first $15,000 managed for FREE for one year.
Best Low-Fee Robo Advisor: Questwealth Portfolios
Like it’s sibling Questrade, very low fees (0.39% to 0.44), a reasonable minimum investment ($1,000) and a wide variety of funds including socially responsible investments make Questwealth Portfolios very competitive on cost.
Best Robo Advisor for Mature Investors: Nest Wealth
Nest Wealth’s conservative low-risk investments make sense for mature investors with large portfolios, since those with $75,000+ pay just $40 a month (in addition to the 0.13% ETF fees).
ETF vs Mutual Fund
As previously mentioned, Canadians pay 2% to 3% of their total investment portfolio in fees annually for actively managed mutual funds but pay as little as 0.15% for ETFs in Canada.
But does the extra money an investor pays for mutual funds translate into superior returns? The short answer is no. Most actively managed mutual funds in Canada don’t perform well over the long run.
For the 10 years ending in 2017, for example, less than one-quarter of the country’s actively managed Canadian equity funds outperformed their respective benchmarks; just 6% of Canada’s actively managed international equity funds delivered higher than market returns, and less than 2% outpaced the S&P 500.
What does that mean in practical terms?
Say a mutual fund manager is lucky enough to meet the annual benchmark for blue-chip stocks in a given year. If the benchmark was 10%, your take-home returns on that mutual fund will be somewhere around 7.5% (10% minus 2.5% fees).
If you had instead invested in an ETF of blue-chip stocks, you would automatically match the annual benchmark since the ETF tracks the entire market of blue-chip stocks. And your take-home earnings would be considerably larger at 9.85% (10% minus 0.15% fees).
In other words, even when actively managed mutual funds do match or better market performance (which the data shows is not very often) investors may never receive those additional earnings because the fund manager takes such a sizable cut off the top.
So, you have a choice — pay more for mutual funds and watch your investment returns be eroded by fees, or pay less for ETFs to maximize your investment returns.
ETFs are easy to buy, have extremely low fees, minimize risk and maximize returns. They are appropriate for both beginners and seasoned investors since you can choose the convenience of a robo advisor to help you select a portfolio of ETFs that works for you, or take a do-it-yourself approach with an online brokerage. Either way, you will save a bundle over mutual funds.
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