Exchange Traded Funds (ETFs) seem to be multiplying daily, and evaluating how they might fit into your portfolio can be confusing.
ETFs give investors exposure to a group of securities, and trade on exchanges like stocks. Most of us think of ETFs based on well known market benchmarks like the S&P/TSX index, but now ETFs can also be based on very specific sectors like natural gas, gold, REITs, etc… and are often traded actively.
Outside of institutional investors, sophisticated investors with adequate time, knowledge and access to quality research, may be comfortable acting as their own portfolio manager. However, most investors find they are better served by the biggest funds in Canada, which on the whole have delivered good returns, with more stability and less drama.
An actively managed portfolio is often more diversified amongst companies, sectors and geographic regions, avoiding many of the excesses and flaws inherent in simply tracking an index. Unlike ETFs, many of the biggest funds have beaten the indexes over numerous time periods.
While ETFs are often promoted as being more cost effective than managed portfolios, they are usually actively traded, so trading costs over the same time horizon need to be considered when comparing their lower management fees.
ETFs can offer sophisticated investors a compelling alternative to professionally managed portfolios, but they may not be appropriate for all investors, and are not without risk.
Note: ZLC offers mutual funds through Qtrade Asset Management, member of MFDA
