ETFs (exchange traded funds) are a strong alternative to actively managed portfolios and have been gaining a lot of momentum over the past ten years. The pros of ETFs are there low costs/fees and the broad diversification one can achieve by holding one fund.
In an earlier post we talked about how a passive/dormant approach to investing often wins out against most investments portfolios that feverishly buy and sell in an attempt to time the market (active portfolio). Keep in mind the average active managed portfolio only beat the index in five of the last 20 years. With that in mind I’ve selected my Top 5 ETF Funds below.
TOP 5 ETFs
1) XIC: iShares Core S&P/TSX – this ETF is managed by Black Rock and is part of the iShares family. The fund holds almost 250 of the largest market capitalization public companies in Canada. With a ridiculously low fee of 0.05% (compared to some actively managed mutual funds are above 2.00%) this one had to be near the top of the list.
Fund Fee – 0.05%
10 Year Avg Annual Return – 6.8%
2) VUN: Vanguard US Market Index – this would be the US counterpart to the above Canadian market fund XIC. It attempts to mirror entire US market at a low cost. The fund holds over 3,500 different equities for a large of diversification.
Fund Fee – 0.15%
10 Year Avg Annual Return – N/A (fund started in 2013 – 25.67 return since inception)
3) VSB: Vanguard Short-Term Bond Index – ETF’s do not discriminate against bonds. Much like equity ownership (stocks), ETF’s group together different types of bonds or fixed income investments to allow for greater diversification for a low fee.
Currently, interest rates are ridiculously low, which means they will likely rise eventually. If you recall back to your economics class; when interest rates rise, bond prices fall. So, why then buy bonds at all? They still provide a less volatile stream of income, however, by purchasing SHORT-TERM bonds you won’t be hit as hard if and when interest rates rise.
VAB provides both corporate and government bonds for a good mix of yield and security. Again, all of this at a very low cost.
Fund Fee – 0.10%
10 Year Avg Annual Return – N/A (fund started in 2012 – 3.23% return since inception)
4) VXC: Vanguard All-World – No portfolio would be complete without a little international exposure. This fund contains equities from some of the largest corporations in the world. It’s important to note the fund holds approximately 50% of US equities (due to its relative size), so you should consider that when purchasing strictly US fund ETF’s (such as VUN mentioned above)
Fund Fee – 0.25%
10 Year Avg Return – N/A (fund started in 2014 – 22.15% return since inception)
5) ZDB: BMO Discount Bond Index – One complaint of bonds is they are not the most tax-friendly investments when held in taxable accounts. That’s because interest (which bonds pay out) to the investor is taxed at a very high rate.
I’ll spare you the boring tax details of why this fund is more tax effective, but for all you keeners out there take a look at this MoneySense article. Basically, the fund contains bonds that will reduce your overall taxable generated by the ETF.
Fund Fee – 0.10%
10 Year Avg Return – N/A (fund started in 2014 – 6.37% return since inception)
Depending on where you’re at in your investing journey a different allocation of fixed income/bonds and equity ETFs should be selected (usually the older or less adverse you are to risk, the higher percentage of bond funds you should own)
These top five ETFs probably won’t be the most exciting investment you’ve ever held, but odds are they’ll produce long-term returns that the average Wolf of Wall Street-type would brag about to their buddies.by