Welcome to our detailed guide on Investing in ETFs, where we cover how to use Exchange Traded Funds (ETFs) as the cornerstone of any investment portfolio.

Reputable ETF providers like Vanguard, iShares, BMO ETFs, and Charles Schwab, provide investors with plenty of low-fee options that can offer diversified exposure to equities in Canada, the USA, international developed markets, and international emerging markets.

Tailoring the weighting of each market to individual investor needs can significantly enhance portfolio performance while managing risk.

Why ETFs?

ETFs combine the diversification benefits of mutual funds with the ease of trading akin to stocks. They offer a simple, cost-effective, and efficient way to gain exposure to a wide array of asset types, industries, and global markets. Here’s why ETFs are a foundational element of many self-directed investors’ portfolios:

1. Diversification: ETFs increase the diversification of assets owned by pooling together hundreds or thousands of individual stocks or bonds.

2. Low Cost: Typically, ETFs have lower expense ratios compared to mutual funds, making them an attractive option for cost-conscious investors. Ideally, I like to look for a Management Expense Ratio (MER) of less than 0.25% for index funds (and sometimes as low as o.03%!) or a MER of less than 0.4% for thematic ETFs that track certain commodities, cryptocurrencies or trends.

3. Flexibility: ETFs can be bought and sold instantly throughout the trading day at the market price, which provides easy trading when buying or selling. 

4. Transparency: Holdings within ETFs are disclosed regularly, allowing investors to see exactly what they own.

Building An ETF-Based Portfolio

A well-constructed ETF portfolio will encompass a mix of equities from Canada, the United States, international developed markets, and international emerging markets.

Here are some things for an investor to think about when constructing an ETF portfolio:

1. Understand Your Investment Goals and Risk Tolerance: Before deciding on your ETF allocation, assess your financial goals, investment horizon, and risk tolerance. This evaluation will guide the weighting of each market and asset type in your portfolio.

2. Selecting the Right ETFs: Choose ETFs that align with your investment strategy:

• For Canadian equities, consider ETFs that are traded on the TSX, and offered by Vanguard, iShares or BMO, all of which offer index funds or sector-specific funds like Canadian Banks, Canadian REITs, or Canadian Dividend Stocks.
• For U.S. equities, Vanguard and iShares offer low-cost ETFs that trade on the NYSE or TSX, and cover various US indexes (i.e. S&P 500, Nasdaq, Dow Jones) as well as a broad range of industries and sectors in the U.S. economy. Charles Schwab offers similar low-cost ETFs, but they only trade on the NYSE.
• iShares and Vanguard provide a variety of ETFs focusing on international developed and emerging markets. These ETFs provide diversified exposure to global markets, providing growth opportunities beyond North America’s borders. Developed markets include Europe, Japan, and South Korea. Emerging markets include India, China, Brazil, South Africa, Mexico and Saudi Arabia. 

All-in-one ETFs like XEQT from iShares, VEQT from Vanguard, and ZEQT from BMO are quickly becoming a favourite for self-directed investors who are looking to spend less time managing their portfolio, while maintaining global exposure to stocks. See our All-In-One ETFs Guide for more info on these great ETFs.  

3. Portfolio Weighting: Allocate your assets across these markets based on your risk tolerance and investment objectives. A conservative investor might favor more developed markets for their stability, while a more aggressive investor might allocate more to emerging markets for higher growth potential.

4. Regular Monitoring and Rebalancing: Market dynamics can shift the initial weightings of your portfolio. Regularly review and rebalance your ETF holdings to maintain alignment with your investment strategy. See our Guide to Rebalancing Your ETF Portfolio for more information. 

Example Allocation Strategies

Conservative Portfolio: This type of portfolio, often preferred by retirees, tends to focus more on fixed-income ETFs (60%+), with up to 40% allocated to equities (aka stocks) from the U.S., Canada and developed markets.

Balanced Portfolio: A mix of equities (often 60%) and fixed income (usually 40%), with a balanced equity distribution across the U.S., Canada, and all  international markets. 

Growth-Oriented Portfolio: This type of portfolio usually has a higher allocation towards equities (80-100%), and in some cases, a small allocation to fixed income (maximum of 20%). Growth portfolios usuallyhave exposure to U.S., Canadian and international equities, and some investors may place a higher weighting on emerging markets if they feel there are greater growth prospects there. 

Final Thoughts

Incorporating ETFs into your investment portfolio offers a simple solution to achieving global diversification, managing risk, and pursuing growth across a spectrum of global markets.

By selecting low-cost ETFs from leading providers such as Vanguard, iShares by BlackRock, BMO ETFs, and Charles Schwab, investors can construct a portfolio that aligns with their unique financial goals and risk preferences.

Remember, the key to successful investing lies in educating yourself, developing a solid investing plan, investing regularly with whatever cash you have available, and having a long time horizon. 

At Hybrid Portfolio Investor, we’re committed to providing you with the resources, insights, and wisdom needed to navigate the world of ETF investing.