Before we dive into the much deeper details about ETFs let's first discuss what it is?
ETFs, or Exchange-Traded Funds, are shares that trade on the market while buying shares in multiple companies or sectors.
What this means for you as an investor is that while you're purchasing an ETF through your broker, you'll be effectively benefiting from the basket of shares that the investment fund owns.
What are some of the main types of ETFs? Should you be interested in them? We'll break them down for you while introducing you to some of the best ETFs in Canada.
Dividend stocks are companies that pay you a small sum of money in exchange for being a shareholder.
While there are strong arguments to be made about how Enbridge and the other dividend aristocrats are also some of the strongest businesses on earth, the appeal of dividends for many investors boils down to one thing: being able to make consistent money through investing.
When you're collecting dividends you can reinvest or pay bills as needed while also enjoying some capital appreciation in many cases.
ETF managers invest in multiple companies as a general rule. Dividend ETFs are ones that specialize in purchasing dividend-paying shares.
Yes! There are several that you can find on both the TSX and the NYSE Arca.
This one depends on your investment goals. However, a dividend, especially if it's deposited into your TFSA every month or every quarter, can give you financial flexibility over time.
If perks like:
. . . All sound good to you, then may dividend ETFs may be a good fit.
This one depends at least in part on your long-term plans. If you're primarily interested in tracking the indexes while getting some cash on the side, stocks like XEI and XIU track primarily with the S&P and the TSX.
On the other hand, if looking for higher yields on shares that you plan to hold forever, HAL and XDIV are two Canadian names that may be able to give you what you're looking for.
If you looked at the market lows that came with the 2008 financial crisis and the 2020 pandemic sell-off and thought "I don't want my money to be involved in this.", low-volatility ETFs may be the solution you've been looking for.
Low-volatility ETFs are funds that are focused on giving you maximum stability. The fund manager purchases shares in companies that just don't see a lot of movement in share price. Although you may lose out on growth during a market upswing, these ETFs can be a great option for risk-averse investors.
If you're looking for ETFs that deliberately lean into the "low volatility" part of "low volatility ETF":
ZLU, VUN, and XMU are funds that have generated tremendous returns through U.S. exposure. Meanwhile, TLV and ZLB will give you Canadian exposure, solid returns, and a stable portfolio value.
If you're a particularly risk-averse investor, who just wants a guaranteed return, the bond market may have a special appeal.
As a general rule, during times of economic hardship and uncertainty, bonds will often do well. But in a market where the S&P500 is hitting new daily highs, demand for bonds tends to drop accordingly.
A Canadian bond ETF is a fund that invests specifically in a bunch of bond markets while applying specific bond-related strategies. Because bonds can be short-term, medium-term, or long-term, you can have varying yields depending on your appetite for risk.
In addition, many bond ETFs will offer monthly dividends. That makes these ETFs a great choice for investors who want a reliable income whether the market is in trouble or not.
This one will depend on your timeframe and your goals, but if you're primarily concerned with income, bond ETFs like XSE, VLB, and VDY are all solid picks for Canadian investors.
Although the U.S. has been a dominant financial force for most of our collective living memory, there are still solid businesses outside of North America that are worth investing in.
If you've ever gone to bed angry about not being able to invest in the upward trajectory of an EU bank, for instance, an international equity ETF will give you all the benefits of diversification and then some.
These are ETFs that invest in foreign stocks. For Canadian investors, these would be non-Canadian markets.
If you've been dying to invest in German stocks or in the Asian market, but you want the convenience of buying shares on a North American exchange, international equity ETFs will let you have the best of both worlds.
The best international equity ETF is one that's run by managers who are familiar with the facts on the ground in other countries. If there are opportunities to purchase shares in solid companies that just so happen to have issued their shares on foreign stock exchanges, the best international ETFs will be on it.
As far as ETF options go, BlackRock's XAW ETF gives you access to international markets with a particular emphasis on global diversification. This ETF has a return of 10.09% since inception at the time of this writing and is designed to be the kind of ETF that you invest in without having to think too much about it.
You know how the low volatility ETFs we talked about earlier are chosen based on their stability, predictable returns, and ability to let investors say things like "I'm only down by about 2% or so." when the markets are in meltdown mode?
Emerging markets ETFs are kind of the opposite of that. These are funds that will buy the stocks of companies in less developed economies.
And while this can help out your portfolio in the sense that an emerging market ETF may not be as closely tied to the U.S. stock market as something like BlackRock's XEI, it does come with slightly more risks simply because there are more unknowns involved with buying lesser-known stocks in even lesser-known economies.
Emerging markets ETFs have some features in common with international equity ETFs in that they're funds that are focused on purchasing foreign shares. However, while international ETFs will often lean on foreign securities in established markets, emerging market ETFs will be a little higher risk.
Like any other kind of ETF, emerging market ETFs can be an asset to your portfolio as long as you have a strategy. They can diversify your portfolio while also allowing you to cash in on what could potentially be the next India or China.
Do you have any markets, like biotech or real estate, that you strongly believe in even if you don't want to spend time purchasing individual companies? Or is there a particular sector that could dramatically outperform the market at large?
In 2020, ARKK, a tech ETF, had a stunning return. Canadians who see some sectors doing better than others in the future can cash in on their instincts by purchasing a specialty ETF.
Would you like the certainty of being able to throw all your investment money into a single fund that you never have to look at until retirement?
You may want to consider purchasing an all-in-one ETF. It's a strategy that can take couch potato investing to a whole new level.
Put simply, an all-in-one ETF is a fund that handles securities and investments in different shares, markets, and ETFs so that you don't have to. If you've always wanted to just buy one investment and pay one MER fee, this ETF option makes it possible.
The answer to this depends on how involved you want to be in your investment journey. If you want to simplify your investing in a big way, this is the perfect way to do exactly that.
If you could get some of the best money managers and investors in the world to manage your portfolio for you, would you start investing?
ETFs are a class of securities that Canadians can use to effectively do just that.
And by taking the time to purchase some of the best ETFs in Canada, you can quickly and easily start positioning yourself for financial success in the future.
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