I’ve built my investments using Exchange Traded Funds (ETFs). In years before ETFs were commonplace, I invested in mutual funds instead. But why have I used ETFs?

Attribute 1: They are easy to buy and sell.

They list on the stock markets, meaning that buying and selling (should be) easy and cheap.

Attribute 2: They are portable.

Because they list on stock markets, you can buy them using any self-directed investment platform. Whether it’s one of the bank’s platforms (e.g. CIBC’s Investor’s Edge, BMO’s Investorline) or one of the independents (e.g. Questrade, QTrade, Wealthsimple), it shouldn’t matter who you do business with.

Attribute 3: ETFs offer a passive, inexpensive way to invest in an index.

As stated elsewhere, I am not a stock-picker, and I don’t worry about sector analysis. I buy, and I hold. A “passive” ETF is one that simply follows the makeup of a given stock index. Some of the more common indicies you’ll come across are the TSX 60 (for Canadian stocks), the S&P 500 (for US stocks) and MSCI EAFE (for everywhere else). The easiest way to judge the priciness of a given ETF is to look for the MER, which is the “Management Expense Ratio”. Canadian passive index ETFs should be at or below 0.20% MER, meaning that they should cost you less than 2 dollars for every thousand dollars you have invested, per year.

But not all ETFs are created equal.

As the ETF market has exploded, companies have launched all manner of kooky ETF products that adhere to attributes 1 and 2, but break attribute 3. They are typically not passive (and have highly paid money managers pulling levers behind the scenes), not cheap (because of the money managers, pay attention to the MERs). So the blanket statement “ETFs good, mutual funds bad” is not universally true.

Many ETFs copy each other.

A quick google search for “TSX 60 ETF” reveals a bunch of ETFs, that, on the face of it, all look to track the S&P/TSX60 index.

• Blackrock’s iShares XIU
• BMO’s ZIU
• GlobalX HXT (this one is quite different¹ from the other two from a tax perspective, but otherwise, it mirrors the makeup of the other two).

Picking one ETF over the other may be a matter of seeing if your provider treats them differently. For instance, my provider (QTrade) allows HXT to be bought and sold at no fee. Not so for XIU/ZIU. On the other hand, BMO Investorline clients can buy/sell ZIU at no charge. Avoiding unnecessary fees, no matter how small, is an ongoing hobby.

ETFs: The simple, portable, inexpensive way to build a diversified portfolio at a risk level that’s appropriate to you

ETFs are what I have used to build my retirement portfolio at an average cost of around 0.2% of the overall value. A typical financial advisor will charge 5 to 10 times as much. For me, that math doesn’t work.

1. This is a gross simplification, to be sure. I’ve used HXT in my non-registered accounts because of its unique tax treatment, but don’t use it elsewhere. ↩︎