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The Problem & The Solution
The Problem with Active Mutual Funds Investment funds managed by professionals who try to outperform the market by picking stocks they believe will perform well. 😓
- High fees eating into your returns
- Frequently underperform Fail to match or exceed the returns of a benchmark index, like the S&P 500, or Toronto Stock Exchange. market averages
- Inconsistent performance year to year
- Hidden costs and trading expenses Costs incurred when buying or selling securities within the fund, which can reduce overall returns.
The Power of Index Investing An investment strategy that aims to replicate the performance of a specific collection of stocks or bonds, known as a market index, like the S&P 500 or the Toronto Stock Exchange. 💪
- Lower costs: Typically lower fees than active management
- Diversification The practice of spreading investments across various financial instruments to reduce risk. : Don't put all your eggs in one basket
- Consistent performance: Often outperforms active management over long periods
- Simplicity: No need to be a financial expert
"By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals... The people who buy those index funds, on average, will get better results than the people that buy funds that have higher costs attached to them, because it is just a matter of math."
- Warren Buffett
ETFs Exchange-Traded Fund: A type of investment fund traded on stock exchanges, much like stocks. : The Vehicle for Index Investing 🚀
Exchange-Traded Funds (ETFs) have become increasingly popular, replacing mutual funds An investment vehicle that pools money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities. for many investors.
Why the shift to ETFs?
- Significantly lower fees
- Greater flexibility in trading
- Better tax efficiency The ability of an investment to minimize tax liabilities, often through strategies like lower turnover and capital gains distribution.
- More transparency in holdings and costs
The Evidence: SPIVAStands for S&P Indices Versus Active, a scorecard that measures the performance of actively managed funds against their relevant S&P index benchmarks, providing insight into the active vs. passive investing debate. Canada Year-End 2023 😱
The SPIVA report shows that over a 10-year period, the percentage of actively managed funds that failed to outperform their benchmarksA standard against which the performance of a security, mutual fund, or investment manager can be measured.:
- 97% of Canadian Equity fundsMutual funds that primarily invest in stocks of Canadian companies, aiming to achieve long-term capital growth by focusing on the Canadian stock market.
- 98% of Canadian Focused Equity fundsMutual funds that invest primarily in Canadian stocks but may also include a significant portion (usually up to 49%) of foreign equities, offering a mix of domestic and international exposure.
- 88% of Canadian Dividend & Income Equity fundsMutual funds that invest in Canadian stocks with a focus on companies that pay regular dividends, aiming to provide both income and capital appreciation to investors.
- 98% of U.S. Equity fundsMutual funds that primarily invest in stocks of U.S. companies, providing Canadian investors with exposure to the U.S. stock market for potential long-term growth.
All-in-One ETFs: Your One-Stop Investment Solution
Imagine owning the world's markets with a single purchase. All-in-one ETFs offer a complete, globally diversified The practice of spreading investments across various financial instruments to reduce risk. portfolio A collection of financial investments such as stocks, bonds, and . in one simple package, combining the best of index investing An investment strategy that aims to replicate the performance of a specific collection of stocks or bonds, known as a market index, like the S&P 500 or the Toronto Stock Exchange. with the flexibility of stocks Shares of ownership in a company, also known as equities. . These powerhouse funds trade throughout the day on stock exchanges, allowing you to build wealth with the click of a button.
Key Features:
- Instant global diversification
- Trade like stocks during market hours The specific times during which a stock exchange is open for trading, such as 9:30 AM to 4:00 PM Eastern Time for the New York Stock Exchange (NYSE) and the Toronto Stock Exchange (TSX).
- Automatic rebalancing The process of realigning the weightings of a portfolio of assets to maintain the desired level of asset/geograpic allocation.
- Low fees compared to mutual funds An investment vehicle that pools money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities.
- One-click investing simplicity
Understanding Risk Levels:
- Higher stocks: potential returns, volatility A measure of the frequency and severity of price movements of a security or market index.
- Higher bonds Fixed-income investments where investors lend money to an entity in exchange for interest payments and the return of principal at maturity. : potential returns, volatility
Not sure about your risk level? Take the Vanguard Investor Questionnaire
Popular Providers:
Popular All-in-One ETFs:
- 100% stocks / 0% bonds: VEQT, XEQT, ZEQT
- 80% stocks / 20% bonds: VGRO, XGRO, ZGRO
- 60% stocks / 40% bonds: VBAL, XBAL, ZBAL
- 40% stocks / 60% bonds: VCNS, XCNS, ZCON
- 20% stocks / 80% bonds: VCIP, XINC
Comparison data as of August 24, 2024. RBF459 (Royal Bank Growth Mutual Fund) included for comparison. Max 5-year performance shown due to ZGRO's February 2019 inception date.
Understanding Fees & Their Impact
Management Expense Ratio (MER)
Annual fee taken directly from the investment itself. Paid to the ETF provider. Example: An ETF with a 0.20% MER costs $20 annually per $10,000 invested. A 2% mutual fund MER would cost $200 on the same amount.
Commissions
Fees paid to the brokerage every time you buy or sell an ETF or stock
Wealthsimple Trade offers commission-free trading With Wealthsimple Trade, you pay $0 when buying or selling your all-in-one ETF. This means no fees eating into your investments or discouraging frequent contributions.
Traditional banks or brokerages may charge $5 to $10 per transaction
Impact of Fees on Your Investments
After 25 years:
Low-fee ETF: $0
Bank/Brokerage ETF: $0
Mutual Fund: $0
Difference (Low-fee vs Mutual Fund):
$0
(0% more with Low-fee ETF)
* Assumes 7% annual return before fees and twice-monthly purchases/commissions
Investment Accounts & Buying ETFs
Understanding Investment Accounts 📊
- TFSA (Tax-Free Savings Account): Most popular choice for many Canadians. Contributions are after-tax dollars Money that has already been taxed. , growth and withdrawals are tax-free. Contribution room TFSA contribution room starts accumulating at age 18. The annual limit varies (e.g., $7,000 for 2024). Unused room carries forward, and withdrawals are added back as new room the following year. Check the CRA website for your personal limit. is flexible and cumulative.
- RRSP (Registered Retirement Savings Plan): Ideal for higher-income earners. Tax-deductible Money that you can subtract from your income before calculating taxes owed. contributions, tax-deferred growth, withdrawals taxed as income. Contribution room RRSP contribution room is 18% of your previous year's earned income, up to an annual maximum (e.g., $30,780 for 2023), plus any carried forward room. Your Notice of Assessment from the CRA shows your personal limit. is based on income.
- FHSA (First Home Savings Account): Best for first-time home buyers. Combines TFSA and RRSP benefits specifically for saving towards a first home. Contribution room FHSA has an annual contribution limit of $8,000, up to a lifetime maximum of $40,000. Unused room can be carried forward to the next year, but the account can only be open for a maximum of 15 years. is limited but tax-efficient.
- Non-Registered Account: No contribution limits You can invest any amount in a non-registered account, but be aware of tax implications on gains and income. , capital gains The profit earned from the sale of an investment that has increased in value. and dividends A distribution of a portion of a company's earnings to shareholders. Made as a payment to your account. are taxable.
Not sure which account to choose?
Check out this handy flowchart for picking between TFSA, RRSP, and FHSA →How to Buy All-in-One ETFs with Wealthsimple Trade 🛒
- Sign Up for Wealthsimple Trade Wealthsimple offers both managed and self-directed accounts. To buy ETFs yourself, sign up for the self-directed side (Wealthsimple Trade). Managed accounts automatically invest for you based on your risk profile (at a higher fee than ETFs), while self-directed accounts allow you to choose and buy your own investments with lower fees.
- Fund Your Account
- Search for Your Chosen ETF (e.g., XGRO)
Ensure the ETF is listed on the TSX and in Canadian dollars.
- Place a Market An order to buy or sell a stock immediately at the best available current price. or Limit An order to buy or sell a stock at a specific price or better. Order Use a limit order to invest your full balance; market orders require a 5% buffer.
- Review and Confirm Your Trade
Why Choose Wealthsimple Trade?
- Commission-free trading No fees for buying or selling ETFs, allowing you to invest more frequently without worrying about transaction costs.
- User-friendly app and desktop interface
- Quick and easy signup process
- Integrated card for banking features Wealthsimple offers high-interest savings, free ATM withdrawals, and cash back on purchases, seamlessly integrated with your investment accounts.
- Dividend Reinvestment Plan (DRIP) Automatically reinvests your dividends, allowing for compound growth without manual intervention.
- Auto-Invest feature for regular contributions
- Member of the Canadian Investor Protection Fund (CIPF)
Wealthsimple Cash: Smart Banking Solution
Your modern chequing and savings solution, featuring a prepaid Mastercard that functions like a debit card. This versatile account integrates seamlessly with your Wealthsimple investments while offering exceptional banking benefits:
| Feature | Wealthsimple | Traditional Banks |
|---|---|---|
| Interest Rate | 2.75% - 3.75% | 0.01% - 1% |
| Cash Back on Purchases | 1% | 0% - 0.5% |
| Monthly Fees | $0 | $0 - $30 |
| ATM Withdrawals (Canada) | Free | Often charged |
Key Features:
- Bill payments
- Pre-authorized debits Automatic payments set up to come out of your account on scheduled dates.
- Physical & virtual prepaid Mastercard Wealthsimple provides one physical card for in-person transactions and a separate virtual card for online or mobile payments. The virtual card has a different number, enhancing security. Both cards can be locked instantly via the app if lost or stolen, providing an extra layer of protection for your finances.
- Interac e-transfers
- Auto-deposits
- Paper cheques
- Seamless investment integration
Keys to Success & Further Learning
The Power of Patience and Consistency 🌱
- Investing is a long-term game
- Stay consistent with regular contributions
- Don't panic during market downturns
- Stick to Canadian-listed ETFs to avoid currency conversion fees
- Only invest money you won't need for at least 5 years Markets can be volatile in the short term. Investing with a 5+ year horizon allows your investments time to recover from potential downturns and benefit from long-term growth.
- If you're not ready to invest, consider a high-interest ETF like CASH CASH invests in high-interest deposit accounts with National Bank, Scotia Bank, and CIBC. As of November 6th, 2024, it offers a 3.72% yield, providing a safe option for short-term savings. Search for 'CASH' as the ticker symbol in Wealthsimple.
- Consider fee-only financial advice You pay a fixed fee or agree on fees in advance, rather than having the advisor take a percentage of your money each year. This avoids potential conflicts of interest that can come with ongoing percentage-based costs. from a fiduciary A person or entity entrusted with managing someone else's affairs, required to act with complete trust, good faith, and honesty. Fiduciaries are legally and ethically obligated to act in the best interests of those they represent.
"The stock market is a device for transferring money from the impatient to the patient."
- Warren Buffett
Further Learning 📚
Expand your knowledge with these valuable resources:
Pro Tip:
Set up automatic contributions to your investment account. This habit helps you consistently invest and benefit from dollar-cost averaging A strategy where you invest a fixed amount of money at regular intervals, like every month, regardless of market conditions. This helps spread out your investment over time and reduces the impact of market ups and downs. .
Invest in Your Future,
Get Rewarded Now!
After extensive research and personal experience with various brokers and banks, I've found Wealthsimple to be the most user-friendly and cost-effective platform for implementing the ETF strategies we've discussed. It's the platform I use personally and recommend to friends and family. If you don't already have a brokerage account or are currently paying monthly fees for banking services, I'd appreciate if you'd consider using my referral links for Wealthsimple and Simplii. These services have genuinely improved my financial life, and I believe they could benefit you too. The links provided are referral links, which may result in bonuses for both you and me, at no extra cost to you. However, you're always welcome to visit these websites directly if you prefer.
$25 Welcome Bonus
Get a $25 bonus when you sign up and fund your account using our link
Commission-Free Trading
Trade ETFs with zero commissions, pay only the low ETF MER
Best-in-Class Experience
Enjoy an intuitive app with auto-invest and dividend reinvestment features
Disclaimer: The information provided on this website is for educational purposes only and does not constitute financial or investment advice. Always conduct your own research and consult with a qualified financial advisor before making any investment decisions. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.