PETER DOLEZAL: Exchange traded funds (ETFs) – enough choice?

ETF funds in Canada are seeing an inflow of some two billion dollars monthly in new purchases

Being a strong proponent of low-cost ETFs and Index Funds as today’s most cost-efficient wealth-creation vehicles, I am often asked if enough Index-based choices are available to meet the varying investor needs, previously satisfied by thousands of mutual funds.

The answer today is a resounding yes.

In 2000, the answer was no. At that time, only a small handful of Index-Based Funds was available. Today, every major Bank offers a broad spectrum of Index Funds. Half a dozen providers offer numerous ETFs — some 300 in Canada, and almost 1,400 in the U.S. The single-largest ETF provider, i-Shares, serves about 80 per cent of the Canadian ETF market.

ETF funds in Canada are seeing an inflow of some two billion dollars monthly in new purchases. The reason for this phenomenal growth is simple — rapidly increasing knowledge and understanding. Only some 20 per cent of Canadians today understand the key features however, as they learn about ETFs and their benefits, over 70 per cent subsequently choose them as their investment vehicle. Mutual funds, with decades of familiarity, still predominate  but the gap is narrowing fast.

An investor wants to invest in Japan, China, emerging markets, developed markets outside North America, laddered bond or preferred share markets, high-yield bonds, dividend-growing equities in Canada, in the U.S., or both — for all of these interests and hundreds more, an appropriate ETF fund exists are available on the TSX Exchange, as easily as purchasing any stock.

In fact, there is such a range of ETFs in the marketplace that today’s investor has to avoid those that are designed with the higher-risk oriented investor in mind.

Beware for example, of various leveraged ETFs which allow investors to make, or lose, two or three times the value change. These higher-risk products are not recommended, except for the most sophisticated investor who is prepared to accept huge volatility and risk.

For the average long-term investor, the ETF and Index Fund choices are more than adequate to achieve superb geographic and product diversification — at a fraction of the cost of mutual funds, operating in the same market sectors. These funds can satisfy all needs, from the most conservative of investors, seeking primarily fixed-income holdings, to the more aggressive, interested in primarily equity-based investments.

Whatever your needs and desires as an investor, there exist ample choices of Index-based funds from which to choose. Minimizing holding costs, while tracking well-established Indexes, has repeatedly been proven to be a sound strategy for long-term wealth-creation and wealth-preservation.

In 2000, it may have been necessary to use high-cost mutual funds to satisfy investor needs. Today, high-quality ETFs and Index Funds abound. As investors become more knowledgeable, these funds are fast eroding the long-time grip of the performance-lagging mutual fund industry.

 

A retired corporate executive, enjoying post-retirement as an independent financial consultant, Peter Dolezal is the author of three books.