3 Index Investing Options

Take the stress out of investing and sit back and relax…. by investing passively in index funds.

Investing can be stressful. What stock do I pick? Should I sell now? Should I buy now? What’s my strategy? Is my portfolio beating the market? How much am I paying in fees?

Use an indexing strategy to help take the stress out of investing:

1) Find something that’s easy to set up and easy to maintain
2) Keep it low-cost
3) Invest in index funds to achieve market returns (as opposed to actively trying to beat the market)

I recommend building a portfolio of Index ETFs (Exchange Traded Funds) that each hold a basket of stocks which tracks major indices (like the S&P 500 or TSX) at very low cost.

Here are 3 options:

Option 1: Buy Index ETFs with a Discount Brokerage (~0.15% Fee)

Model Growth Portfolio

This consists of opening up a brokerage account (like BMO Investorline or TD Waterhouse), then buying ETFs. A typical growth portfolio consists of 25% Canadian Index, 25% US Index, 25% International, and 25% Fixed income. You can re-balance regularly, maybe semi-annually.

The below ETFs are what I happen to own but you can pick and choose your own desired ETFs (iShares, BMO, and Vanguard are the largest providers in Canada).

ModelPortfolio.PNG

PROS:

  • Low cost (fee roughly 0.15%)

  • Greater control over ETF selection

  • Can be more tax efficient if held across multiple accounts (RRSP, TFSA, Non-registered)

CONS:

  • Steep learning curve

  • Trading fees to buy and sell ($10) - not optimal for small regular contributions

  • Need to keep track of asset allocation and re-balancing portfolio on your own

Option 2: Buying an All-In-One Asset Allocation ETF (0.22% Fee)

In January 2018, Vanguard released the first all-in-one asset allocation ETF. Instead of buying 4 or 5 ETFs and managing and re-balancing the portfolio yourself, you can buy one ETF which accomplishes the same thing (achieving near market returns). See below for the three Vanguard all-in-one solutions:

 Source: Vanguard Canada website: https://www.vanguardcanada.ca/individual/etfs/about-our-asset-allocation-etfs.htm?cmpgn=PS0117CABAPDS0006

Source: Vanguard Canada website: https://www.vanguardcanada.ca/individual/etfs/about-our-asset-allocation-etfs.htm?cmpgn=PS0117CABAPDS0006

Horizon has also came up with their own all-in-one ETFs which may be better for non-registered accounts. You can read about them here.

PROS:

  • No need to keep track of ETFs and rebalance on your own

  • Fees pretty low (0.22%)

  • Simplified solution

CONS:

  • Slight learning curve with opening up discount brokerage account and implementing trades

  • Trading fees ($10), not optimal for small regular contributions

Option 3: Using a Robo-advisor (~0.5% Fee + ~0.15% ETF Fee)

Robo-advisors are relatively new to Canada but are making a lot of waves in the industry as investors seek low cost solutions. Robo-advisors will take your portfolio and invest it into a pre-determined mix of index ETFs based on your goals and risk tolerance, and do all the re-balancing for you. These accounts are easy to set up and relatively low cost. For example, Wealthsimple’s standard fee is 0.5% (plus ~ 0.15% ETF fee). For more information on Robo-advisors, see my article "Robo-advisors: Rise of the Machines".  You can also compare the fees between Canadian robo-advisors at this great site www.autoinvest.ca .

PROS:

  • Very easy to use

  • Helps you create an appropriate portfolio

  • Automatic re-balancing

  • No trading fees, ability to make smaller automatic contributions

CONS:

  • Higher cost than buying your own ETFs (an extra ~0.5%)

  • Less ability to customize ETF portfolio

If you’re unsure about how you’re currently invested and they fit in with your family finances, book a free no obligation consult with me. I also do investment portfolio reviews!