The best Canadian ETFs can be a really good addition to your portfolio—if you choose carefully
With the best Canadian ETFs you won’t incur the regular capital gains taxes generated by the yearly distributions most conventional mutual funds pay out to unitholders.
Canadian exchange traded funds are also eligible for the Canadian dividend tax credit, although this only applies to Canadian ETFs that pay dividends.
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Here’s how you can find the best Canadian ETFs by following the five tips below.
1. Use passive techniques to reduce trading costs.
ETFs generally practice “passive” fund management, in contrast to the “active” management that conventional mutual funds provide at much higher costs. Traditional ETFs stick with this passive management—they follow the lead of the sponsor of the index (for example, Standard & Poors). Sponsors of stock indexes do from time to time change the stocks that make up the index, but generally only when the market weighting of stocks change. They don’t attempt to pick and choose which stocks they think have the best prospects.
This traditional, passive style also keeps turnover very low, and that in turn keeps trading costs for your ETF investment down.
Read more on why investors like ETFs.
2. The cost of holding the best Canadian ETFs is lower than holding mutual funds.
Compared to mutual funds, ETFs are less expensive to hold. ETFs give you a low-cost way to invest in a market segment. That’s typically cheaper than investing in a mutual fund with a similar focus. With fees as low as 0.10% a year for ETFs vs. mutual fund companies that can charge you 2% to 3% or higher on their funds. ETFs can save you a lot of money and boost your returns over time.
If you decide to invest in individual stocks, as well as Canadian exchange-traded funds, you should take care to spread your money out across most if not all of the five main economic sectors: Finance, Utilities, Consumer, Resources & Commodities, and Manufacturing & Industry.
Read more tips for investing in the best Canadian ETFs.
3. Be wary of theme-based exchange traded funds to avoid losses
It’s important to note that not all ETFs are created equal. For example, there are a lot of ETFs that have been created to tap into popular, but risky, themes and fads. So you need to be very selective with your ETF holdings.
Theme investing has a natural appeal. It simplifies things. Investors like it because they feel it can put their investment returns into overdrive. Some also feel it adds fringe benefits to their investing, by letting them support social or environmental objectives. Brokers also like it because it gives them a rationale to recommend a variety of stocks.
When you focus on theme investing, however, it’s easy to overlook the fundamentals.
Read more on how to avoid losses with ETFs.
4. Seek out aggressive ETFs only if they’re investing in well-established small companies that dominate their markets
Aggressive ETF selections tend to be more highly leveraged and more volatile than conservative ETFs, and they can give you bigger gains and bigger losses. This may be due to financial leverage, or to the risk in their industry or particular situation, or our estimation of upcoming changes in that risk. Keep in mind, though, that these or any aggressive investments should make up no more than, say, a third of most investor portfolios.
Ultimately, the percentage of your portfolio that should be held in either conservative or aggressive investments depends on your personal circumstances. An investor with a longer time horizon or without the need for current income from a portfolio can invest some money in aggressive ETFs or stocks.
Learn more characteristics of the best ETF investments.
5. The role of technical analysis in choosing the best Canadian ETFs.
Technical analysis is a useful tool, but only if you recognize it as one of many tools. Before making any recommendations or transactions in client accounts, I always look at a chart. However, I don’t look at the chart for a prediction of what’s going to happen. I look to see if the pattern on the chart seems to support the view I’ve formed of the stock, based on its finances and other fundamental factors.
I find it encouraging if the two seem congruent, and they usually do. But sometimes one contradicts the other, and that’s when I know I have to dig deeper, and perhaps wait until the situation clarifies itself.
Read more on when to buy the best ETFs.
Some investors decide when to buy an ETF with the help of technical analysis. What drives your decision on when to buy your ETFs?
