When picking the top Canadian ETFs two of the keys are low management fees and following a “traditional” approach to tracking indexes
The top Canadian ETFs generally practice “passive” fund management, in contrast to the “active” management that conventional mutual funds provide at much higher costs. Traditional Canadian ETFs stick with this passive management—they follow the lead of the sponsor of the index (for example, Standard & Poor’s).
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.
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The top Canadian ETFs have lower management expenses
Management expense ratios are typically much lower on ETFs than on conventional mutual funds because most ETFs take a much simpler approach to investing.
It’s important for investors to research and review the management expense ratio of every mutual fund and ETF they plan on investing in. Is the MER fee higher than other comparable funds or ETFs? Have the fees increased year over year? A mutual fund with a high MER is definitely a negative unless the fund has shown exceptional performance over time. As always, take a long view on MERs and their impact on the overall long-term returns on your investments.
Top Canadian ETFs will likely involve “traditional” conditions
We think you should stick with “traditional” ETFs. As mentioned earlier, traditional ETFs practice “passive” fund management, in contrast to the “active” management that conventional mutual funds provide at much higher costs. However, many “new” ETFs also look to add in some active management. Traditional ETFs stick with passive management—they follow the lead of the sponsor of the index.
It’s worth repeating: This traditional, passive style also keeps turnover very low, and that in turn keeps trading costs for your ETF investment down.
5 things to consider while looking for top Canadian ETFs:
- Know how broad the ETF is, so you can determine its volatility. The broader the ETF, the less volatility it may have. A sector-based ETF, like one that tracks resource stocks, may be more volatile.
- Know the economic stability of countries when investing in international ETFs. It’s also worth mentioning that foreign leaders may not be your ally when it comes to passing laws or imposing regulations that can affect your investments
- Know the liquidity of ETFs you invest in.
- Consider buying ETFs in a lump sum rather than with periodic small amounts, so you can cut down on brokerage fees.
- ETFs can be volatile, even with the diversification they offer.
Bonus tip: Avoid stop-loss orders when investing in the top Canadian ETFs
Market setbacks always revive investor interest in the stop-loss order—“stop” for short. A stop is an order to sell a stock if it falls to a price you choose. You can apply stops to ETFs as well as stocks.
On average, up to a third of your stocks drop after you buy, just from random fluctuations. Using stops will force you out of any stock that puts on a temporary dip.
In deciding when to sell, it pays to consider all available information, not just price fluctuations.
It’s extremely rare to meet investors who have improved on their investment results over long periods by using stops or any other fixed rules on selling. These rules just ensure that you’ll do a lot of buying and selling and spend money unnecessarily on brokerage commissions.
Some “new” ETFs can be more expensive and involve additional fees. Do you avoid them all together or do you keep an eye out for new ETFs of great value?
Do you prefer broad ETFs or is there a sector-based ETF that you like?
