US Equity ETFs for Canadians

A while ago we covered ETF options for Canadian equities and Canadian bonds.  In this post we look at choices in Canadian listed US stock index ETFs.  A well diversified portfolio will have Canadian, US and International equities, along with bond and perhaps other offerings.

Why US Equities?

There are several reasons why every Canadian portfolio should hold at least one US equity ETF.
The US stock markets represent by far the biggest single country component in global equity assets, a bit over 36% currently according to a 2016 paper. The US equity markets are much better diversified than the Canadian equity market. If you believe in the school of  holding stocks that dominate their markets, many of the world's dominant companies are listed on US equity exchanges.

To Hedge or Not To Hedge

Many TSX listed US equity ETFs use currency hedging.  Canadian Couch Potato have provided a nice analysis of the issue of whether currency hedging is a good idea or not. Based on analysts' research. they conclude that in the case of US equities hedged to Canadian dollars that hedging "magnifies volatility rather than reducing it." We urge you to read the white papers linked in their posting, and examine commentary from experts in the last year or two, but overall it seems to us that there is no compelling case for hedging US equity ETFs to Canadian dollars. The market seems to support that view, with most twin products having somewhat larger holdings in the unhedged version.

Go Big or Go Mostly Big

Another choice to make when selecting a passive US equity ETF is whether to select a fund based on the S&P 500 index of the largest companies, or a broader index that includes medium sized companies as well. Wondering which companies are listed on the S&P 500? There is a handy S&P 500 list of companies here. I think there are arguments in both approaches - on the one hand the larger index might be argued to offer more complete diversification, while on the other hand a tiny percentage mainly of the largest companies have produced the vast majority of wealth generation over the long term. A really nice analysis by Michael Batnick shows that over the long term (last 15 years) only 8% of large cap US equities beat the index, only 5% of mid cap, and 7% of small cap.  This, and other analysis, suggests that it is not so much the size of the equity, but other factors, that cause most equities to produce zero or negative returns. While within Canada I think the larger index makes sense since the TSX 60 is so concentrated on banks, in the US the S&P 500 is well diversified across industries.

Good Choices

As was the case for Canadian bond and equity ETFs, we are in the fortunate position that there are multiple excellent choices in the US equity category, all with very modest costs. We suggest that you consider first the choices shown in the following table, but certainly other good choices exist.

As can be seen, all have large asset bases and reasonable MER, so any would be a good choice. If already invested in one, the slight differences probably do not justify the margin and commission costs of moving to another offering from the table. If making a first time purchase, I would probably consider VFV, which ties for the lowest MER, is not currency hedged, and has a large asset base.

HXS has one difference from the others that make it a good choice in certain situations.  It is swap based, which means that it does not hold the actual equities, but rather a bank based promise note that is based on those equities.  Dividends and distributions are built into the base price, but not paid directly.  Therefore income is taxed as a capital gain, and is only triggered when the units are sold. Also, there is not foreign withholding tax on income.  This makes HXS a good choice for some in unregistered accounts for those with variable incomes, and also in RESP and TFSA accounts.  HXS is also included in the Scotia iTRADE commission free list, which makes it a good choice for those purchasing in smaller amounts.

Closing Thoughts

We covered only ETFs listed on the TSX in this post.  Of course it is possible to hold US$ ETFs from the American markets within your discount brokerage.  Generally the MER is slightly less on this option, and the trading volume is much larger so liquidity is excellent. Of course you need to take into account the currency exchange costs, and you will need to do an analysis to see which is a better choice for you.

Rob Carrick annually, as part of his ETF series, has a guide to US equity ETFs, with the 2017 guide available to Globe readers here.  Also, morningstar.ca star ratings can be helpful as you make your choice. Moneysense have their 2017 review of US equity ETFs here. They continue to see VUN as an excellent choice for most passive investors, and I would agree. While there is no doubt that the ETFs that concentrate on just the large companies will outperform in some market conditions, overall I see the broader VUN as a better choice, and one that should, in the long run, offer more consistent performance.

As mentioned earlier, I would make a choice centred on the S&P 500 and one which does not use currency hedging.

If your discount brokerage account is with Scotia iTRADE, and you are starting with modest amounts to invest, HXS is a good low cost choice with tax advantages when held outside a registered account. It is also a good choice held within a TFSA, since the foreign agreements that shelter income from foreign tax withholding in RRSP or RIF accounts do not apply to TFSA or RESP accounts.

I have not in this posting considered low volatility US equity ETFs, or international choices that include US equities.  Both of those topics will be considered in future posts.

This posting is intended for education only and should not be considered investment advice. The reader is responsible for their own financial decisions.  The writer is not a financial planner or investment advisor, and reading this column should not be interpreted as obtaining individual financial planning or investment advice. For major financial decisions it is always wise to consult skilled professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.

Disclosure:  The author of this column holds the following ETFs mentioned in this article in one or more account: HXS, VUN.  No compensation by any company has been offered, requested or received for writing this column.

Developed or Emerging: Classification Systems

Before we can consider in detail the question of how much should be invested in different international markets, and how, it is necessary to be clear on what we mean by terms like emerging and developed. Markets are classified by the major index companies. As an investor it is important to know what index your passive ETF or index mutual fund follows, and which countries are, and are not, included in that index.

MSCI Classification

MSCI (Morgan Stanley Capital International) provides one of the major classification systems used in the index investing world.  They divide equity markets into Developed, Developing and Frontier divisions (there is also a Standalone market index. with national exchanges not included in any of the previous three; this mainly includes very small or very isolated exchanges). You can see the details of which country is in which classification here.

FTSE Classification

The other primary classification system is provided by FTSE (now part of the combined FTSE-Russell). FTSE stands for Financial Times Stock Exchange. They divide markets into Developed, Advanced Emerging, Secondary Emerging and Frontier. You can see current country inclusion in the categories of the FTSE here. Of particular utility is their Matrix of Markets that lists stock markets by country against index segments.  This is a simple way to see if a particular country is in an index based ETF.

Things Change

The indexes are periodically reconsidered - for example FTSE update their list usually in March of each year. The process of deciding if countries should be moved to another category is complex.  Metrics are established for that process, looking at aspects such as transparency, accountability, liquidity and size of the market.  FTSE-Russell explain their process in a white paper available here. In the MSCI classification Pakistan will move from Frontier to Emerging in May 2017.

Should We Be Doing This?

Many have commented that the term emerging economy is obsolete and should be abandoned.  Certainly markets like China and India are rapidly growing and are similar in many ways to the markets in the developed category. While five characteristics are claimed to represent emerging economies and markets, application of these descriptors is difficult.

Also, there is a problem with any category system in that two stock markets with only slight differences might result in inclusion in different indexes. For example, why are Poland and the Czech Republic included in developing, yet those economies are similar in life style, economy and political environment to neighbouring European countries that are in the developed category? There appear to be similar discrepancies in Asia.

But we do need some way to lump together economies and stock markets that share similar characteristics.  One option might be to assign a grade to each stock market on a scale (say 0 to 100) based on how developed it is.  Then we could have indexes that track only markets with a score in a certain range.  While the result might be almost identical to the current system, there would be better transparency of results.

Final Thoughts

The Vanguard ETFs follow the FTSE index, while generally speaking the iShares ETFs follow MSCI. Vanguard have a really nice listing that links ETF products against the index they follow all on one page.

While the country inclusion is pretty similar in the MSCI and the FTSE, there are differences.  For example, FTSE place South Africa in developed, while MSCI do not. The Chinese stock market is divided into A and B categories, historically on the basis of whether foreigners were allowed to invest on that market. How the A Chinese stock markets are handled affects international index funds.

In a future posting I will I discuss the fraction of global equity assets in different markets, and the implications on how we should invest globally.

This posting is intended for education only and should not be considered investment advice. The reader is responsible for their own financial decisions.  The writer is not a professional financial planner or investment advisor. For major financial decisions it is always wise to consult skilled professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.

Disclosure:  No compensation by any company, organization or individual has been offered, requested or received for writing this column.

Should You Buy Only Stocks You Understand?

Like many good questions, the answer to the question posed in the title is yes, but also no.  Let's elaborate.

Before we start, we assume that you have decided to hold some individual stocks in your portfolio, and that is a good choice for your financial situation.  That decision is a whole question in itself, and not a simple one to answer, and we will deal with in a future post.

Perhaps Warren Buffett is the best known proponent of the idea that you should only invest in what you really understand. Indeed number 7 on a list of Buffett investing quotes is "Never invest in a business you cannot understand."  Berkshire Hathaway Inc. invested mainly in big name companies operating in areas that he understood. Also, while others were rushing into technology stocks, Berkshire Hathaway Inc. stayed largely on the side (although recently holdings of Apple have been significantly increased).

It seems obvious that you should really know a company before you invest in that company.  No matter how many balance sheets you examine, how many analyst reports you read, it might be argued that you must understand the field the company operates in to truly understand it at the deepest level. It is only through that knowledge that you can reasonably predict how the company's financial situation is likely to change in coming years. Do you really understand fuel cells at a scientific and engineering level, if not why are you considering buying stocks of Ballard? Do you really know the pharmaceutical industry? If not, why are you considering Valeant?

So let's say you  have extensive work experience and academic background in the banking business.  You understand banks and insurance companies at a deep level.  More than any other area of the stock market, you feel qualified to choose which companies have a bright future, and which not so much. Indeed as Alexander MacDonald has pointed out, if you had invested only in Canadian Banks you would have out performed an other North American sector over the past 25 years.

The problem with that approach, however, is that it totally lacks in diversification, and therefore your investment portfolio is expected to be more volatile. A second possible problem is that you might depend too much on your personal expert viewpoint, and not give sufficient weight to the views of investment analysts. The 2008 financial crisis emphasized this point.

However, it is important to think about diversification across your entire financial holdings.  For example, if you have TFSA, RRSP and unregistered accounts, it is not necessary that each be fully diversified, but rather that in total your holdings are. There may well be tax reasons why your holdings in unregistered are different than in the RRSP.  The fact that TFSA accounts are not part of international tax treaties means that certain types of holdings should not be held there (more on that in a future post).

So back to our question on stocks.  If you do decide to hold a number of stocks in one or a few categories, because that is what you understand well, make sure that you balance that with broad holdings in the rest of your portfolio. Not only should no one stock represent a large part of your portfolio, but also no stock category should be a major part.

Some will work in companies where stocks in the company are either part of your compensation, or offered at an attractive price.  While it makes sense to hold those stocks, make sure that it does not represent all or most of your investment holdings. There is a good article on this topic by Eric Rosenberg here.

What are your thoughts on this topic?  Why not leave a comment?  As always, thanks for reading!

This posting is intended for education only and should not be considered investment advice. The reader is responsible for their own financial decisions.  The writer is not a financial planner or investment advisor, and reading this column should not be interpreted as obtaining individual financial planning or investment advice. For major financial decisions it is always wise to consult skilled professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.

Disclosure:  The author of this column has not received any compensation from any financial company for writing this column, and has no association with any company mentioned.  I do hold a small number of individual stocks, but neither of the two mentioned by name in this column.

If you can use Facebook, you can manage a discount brokerage account

The majority of individual investors have so far shied away from opening a discount brokerage account. I think the main reason is that they view the process as more complex than it really is.

I am an occasional Facebook user, but I must say, even though I consider myself overall moderately online sophisticated, I find aspects of the Facebook interface intimidating. Yet from early teens to grandparents, there are almost two billion Facebook users worldwide.  There is no doubt that most people can become proficient Facebook users, and value the experience. I would argue that operating an online discount brokerage account is no more difficult than using a Facebook account. Indeed, for me I find it simpler.

Overview of a Discount Brokerage Account

Let's start from looking at how a discount brokerage account works. With a discount brokerage account you purchase and sell individual stocks from the Canadian and US markets, as well as bonds, and exchange traded funds (ETFs).  Most discount brokerage accounts also allow purchase (and redemption) of mutual funds, and many also give you access to investment savings accounts and guaranteed investment certificates (GICs).

Most individuals will want to open several accounts, for example an unregistered account, an RRSP and a TFSA.  These will all show up in your list of accounts when you log on to your discount brokerage account. You will have an account number (and/or user name) and password to log in to all of your accounts at once held in your discount brokerage account. The display will show you the list of holdings in each account, along with information on how well each has performed.

Your discount brokerage account will also normally be linked to one or more external bank accounts, and you will transfer funds into or out of the brokerage accounts from these accounts. You fill out forms, and use a cheque, to initially set up these linked accounts.  For accounts with the same financial firm (e.g. Scotiabank bank accounts with a Scotia iTRADE account), the transfers will normally occur immediately, while linked accounts to another financial institution will normally take two days for funds transfer.

Each discount brokerage account will have a cash component, or possibly two, one in US funds and one in Canadian funds. These cash funds normally earn no interest, so you generally only keep small amounts as cash in the long term.

You use funds available in the cash component to buy stocks, ETFs, bonds or other items.  The process for a stock or an ETF purchase are identical, since they are both traded on a stock exchange.  You purchase these in numbers of units, and you must find the code for the stock or ETF you wish to purchase. For example, if you wanted to buy the Bank of Nova Scotia on the TSX the code is BNS (sometimes written as BNS-T to indicate the Toronto Stock Exchange).

 In a future post we will talk about how to decide how much to offer to pay, but in general you will use what is called a Limit price, which means you set the maximum amount that you are willing to pay. You can also specify how long you want your offer to purchase to remain open, from the current day up to several weeks in the future, and may select options such as only complete the trade if it is possible to trade the full number of units.

Before it is confirmed, you will have an option to check your order, making sure that the code for the stock and the price/time period are both correct. Normally you use a second code, different from your password, as trading confirmation.

When the discount brokerage finds a seller willing to sell that stock or ETF at your limit price, they will conduct the sale on your behalf, and the units will then show up in your list of holdings.  It is possible that they will purchase the units from several different buyers, so they may not all show up at the same time (or ever). You have an option to cancel an order that has not yet been filled.

You pay a commission on most purchases (there are exceptions we will cover in a future post), both when you buy the units and when they are sold.  For this reason, it is normally not wise to purchase small numbers of units, but rather save until you have sufficient funds to buy a larger number.  The commission charged typically ranges from about $5 to $15.

When you are ready to sell stocks or ETFs, the reverse process is similar.  You set a price, and time period, and your discount broker will seek to find a buyer, and when the units are sold they will disappear, and cash will appear in your cash part of your discount account, where it can be transferred to other bank accounts.

Note that there is a delay between when the sale or purchase occurs, and when the transaction has settled.  It is only when it is settled that the funds are available to transfer out, although your discount brokerage may allow you to use the funds for another purchase in the interim.  The delay from trade date to settle date is normally 3 to 4 days for stocks and ETFs.

With most discount brokerage, unless you pay a higher fee, you must place the order during regular trading hours (9:30 am to 4:00 pm Ontario/Quebec time).  You can set the time period as over a number of days or even weeks, but you must place the order when the stock exchange is open.

Purchase of mutual funds is similar but simpler.  These are normally purchased in dollars (rather than number of units), and you don't set the price as it will be at the current price automatically. The mutual fund will have a code which includes letter for the fund company and a number for the type of mutual fund.  For example, MAW104 is a balanced mutual fund from Mawer. You can place the mutual fund order at any time, but there will be a certain time that is used to determine which day's fund price will be used for the purchase.

The bond process is somewhat similar, but different enough we will not cover it here.  Our recommendation for most individuals is to hold your bonds through ETFs, rather than through direct bond holdings.  We also have not covered items such as margin accounts, which we do not recommend, at least for someone beginning with a discount brokerage account.

What a Discount Brokerage Account is NOT

A discount brokerage account is not a financial advisor.  While there are tools that will allow you to research information on mutual funds, stocks, exchange traded funds and ETFs, a discount brokerage account is not intended to offer you any advice on what you should hold in your portfolio.  It is a tool to buy and sell investments, not guidance on what those investments should be.

You are in charge, and you make the decisions of when and what to buy and sell. Your discount brokerage should provide an easy to use interface to do this,  at a reasonable cost. It should provide transparency on your holdings and their performance over time.

Canadian Discount Brokerage Companies

The major banks offer discount brokerage accounts, as do a number of other companies.  Here is a list of some of the main players in the Canadian market.

• BMO InvestorLine
• CIBC Investor's Edge
• Desjardins Online Brokerage
• HSBC Invest Direct
• National Bank Discount Trade
• Qtrade Investor
• Questrade
• RBC Direct Investing
• Scotia iTRADE
• TD Direct Investing

Rob Carrick regularly reviews discount brokers.  Moneysense also review discount brokerages.  I strongly recommend reading these reviews to narrow your choices, but then consider the list below on what to look for in a discount broker to see which is the right fit for you, rather than simply going by the overall letter rating.

What to Look For in a Discount Broker

We could write a number of columns on what to look for when selecting a discount broker, but at this time will offer a list of some features.  You should decide which are most important to you.

• Commissions Since most trades will result in commissions, both at the time of purchase and sale, it is important to be clear on these costs.  Some companies will have different commissions depending on how active you are as a trader, and/or how much you have invested, so be sure to know the commission that will apply to you.
• Other Fees  Some companies have other fees for certain types of accounts if the amounts held are less than a certain minimum.  There will also normally be fees for closing an account.  Be clear on the other fees that you are likely to incur.
• Exchange Rates  If you plan to hold US dollar stocks or ETFs find out how currency exchange works, and whether you can hold cash in US dollars (for example if you sell a US stock, and then want to use that money to buy another US stock, can you keep it in US funds to not incur two currency exchanges).
• Ease of Use  Some discount brokerage accounts are easier to use than others, so try to use independent ratings to narrow your search to two or three finalists, and then have them demonstrate their platform before you make your final selection.
• App Most discount brokerages have some sort of app to use with their accounts, but this may have limitations compared to the full web access.  If this is important to you, check out the features and ease of use of the associated app on your platform of choice (iOS or Android).
• What Can You Buy  If you plan for your portfolio to hold mutual funds as well as stocks and ETFs, make sure that your discount brokerage allows this (and not just for mutual funds from that financial institution). If you would like to hold GICs within your investing accounts, see if that is available.
• Research While there are many sources of research outside of your discount brokerage, it is certainly convenient if you can get detailed research information, including analyst reports, within your discount brokerage account.  Ask what is available before you make your final decision.
• Reports You don't want to have to separately manage reports so that you will know how much income your LIF or RIF accounts will generate in the next year, or what the overall past performance of your different accounts have been.  Make sure that this, and more, is readily available. When you sell instruments you will need to pay capital gains income tax on the profit, so it is important that Realized Gain/Loss is also readily tracked.
• Linked Accounts Make sure the process is easy to link ideally more than one bank account to your discount brokerage.  If you find everything else about equal, there are advantages to setting up your discount brokerage account with the institution you currently bank with.
• Stability It is cumbersome to change discount brokers, so make your initial choice carefully.  Consider how stable the institution is, and how confident you are that they will still be operating in the discount brokerage field in 20 years (or whatever your investment horizon is).
• Special Features  Almost all of the companies will offer special features, like inducements to set up an account (agreeing to pay transfer fees or offering so many free trades), items that will have no commissions on purchase or sale, etc. Is a practice account important as you get familiar with trading, and if so is one offered? One advantage of the TD Direct Investing is that it provides access to the TD e-Series. Scotia iTrade have about 50 commission free ETFs if you set up your discount brokerage account with them.

Final Thoughts

If you still feel that a discount brokerage is not for you, you may want to consider a financial advisor who will, in addition to offering advice on what you should hold in your investment portfolio, assist with the mechanics of purchasing stocks, ETFs or mutual funds on your behalf.  Discount brokerage firms such as Scotia  iTRADE have forms that allow you to designate someone as a trading authority on your account.  The account will be yours, but they will be able to make trades on your behalf (but not withdraw funds from your account).  It is sort of like learning to fly, having a pilot and co-pilot, either one of which can run the show.  If you feel comfortable giving this role to a trusted family member, your designated trading authority does not need to be a financial professional.

If you don't want to get involved at all in a discount brokerage account, then a robo-advisor might be the best choice for you. We will cover these in a future column, but essentially you provide a profile online about your situation, plans, risk aversion, etc., and the robo-advisor will make a choice on how you should be invested, and purchase the instruments (usually ETFs) for you.

Another option is to use a balanced mutual fund, which can be purchased through an institution or advisor or directly in some instances such as the Tangerine Investment Funds).

But our central argument is that operating a discount brokerage account is not rocket science.  If you do online banking to pay bills and transfer funds, you can learn to handle a discount brokerage account. If you use Facebook proficiently, you are already over-qualified, in my opinion! With a discount brokerage account you will have access to many excellent low-cost investment vehicles that are not otherwise available to you.

This posting is intended for education only and should not be considered investment advice. The reader is responsible for their own financial decisions.  The writer is not a financial planner or investment advisor, and reading this column should not be interpreted as obtaining individual financial planning or investment advice. For major financial decisions it is always wise to consult skilled professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.

Disclosure:  The author of this column has a number of discount brokerage accounts, registered and unregistered, held through Scotia iTRADE, and has been a long term investor using that platform since its inception. No compensation by any company, organization or individual has been offered, requested or received for writing this column, and no association is implied.

Mutual Funds vs Exchange Traded Funds

While purchase of individual stocks and bonds makes sense in some investing plans, for most seeking a diversified investment portfolio, mutual funds or exchange traded funds (ETFs) will be the choice.  In this post we introduce these products, and examine the differences and similarities between these investment vehicles.

Mutual Funds

Mutual funds are offered by all of the major financial institutions, as well as by companies operating only in the mutual fund space. The folks at FundLibrary keep track of the Canadian funds available (using the Fundata Canada database), and as of early 2017 there were 17,471 different mutual funds operated by 449 companies in Canada. The actual number of funds is larger still, since a number of funds have different clones that hold essentially the same products (there may be a form of the fund when it is sold through a discount brokerage, and a different form for those sold through financial advisors).

You can purchase mutual funds through your financial institution, through some financial advisors, or through a discount brokerage (in a few cases those with large holdings can purchase them directly from the fund company).

The expense structure for mutual funds can be complicated, but the situation is becoming simpler and much more transparent due to recent legislation. You will pay a percentage of the holdings each year to account for the operations of the mutual fund (the costs of purchasing and selling stocks, administrative costs, etc.) There may, or may not, be charges at time of purchase or redemption in addition.  We will look in detail at the costs of mutual funds and ETFs in a future column.

Some mutual funds track an index (e.g. the TSX Canadian stock index, or a bond index), but many have a more complicated structure, aimed at for example providing regular income or providing the right mix of stocks and bonds for a certain retirement age.

If one is going to just hold a few financial products, a balanced fund, that holds a mix of stocks, bonds and possibly other instruments, can be the simplest choice. For example, the Phillips Hager & North (PH&N) balanced mutual fund RBF1950 holds a mix of about 36% bonds, along with equities from Canada, the USA and internationally. By going to the information sheet linked above you can see the holdings, cost, and past performance of the fund.

Exchange Traded Funds (ETFs)

As the name implies ETFs are bought and sold on a stock exchange.  For most individual investors it will only be economical to hold ETFs if you have a discount brokerage account (a topic for a future column).  You purchase and sell ETFs through this brokerage account.

In Canada the major players in the ETF field are iShares by Blackrock,  BMO Asset Management, First Asset, Horizons ETFs, and Vanguard Investments Canada,

The idea of an ETF is that it holds a number of financial products, usually stocks or bonds, in a package. In most case the products held match some index (or compilation of several indexes according to a formula).

For example, the iShares XIC ETF tracks the Canadian composite stock index, so in one product you hold essentially a bit of each company on the TSX, in proportion to the size of that company.

As another example the Vanguard VUN ETF tracks essentially the entire US stock market, with an index including companies of different sizes and from all sectors.  It holds a little more than 3500 individual stocks.

Some ETFs hold bonds, with a common example being the Vanguard VAB ETF, which invests in high quality government and corporate Canadian bonds with a variety of durations.

Comparison

As the above demonstrates some ETFs and mutual funds will hold very similar products, although in general more mutual funds are active, in the sense of not simply tracking an entire stock exchange index. They have a lot in common, in that they both hold a number of products, usually at least 50 and often thousands of individual stocks.

• How bought/sold:  ETFs are bought and sold on a stock exchange, while mutual funds can be bought and sold without a brokerage account. You sell ETF's in terms of number of units, while you redeem mutual funds in dollar amounts generally.
• Price: The price of a mutual fund is set once a business day (at end normally), and you redeem or purchase at this price in dollar units (there is usually some minimum price).  The cost of an ETF will, like a stock, go up and down throughout the day. 
• Guarantee/Risk: There is no guarantee on the value of either a mutual fund or an ETF. These are not like investment bank accounts and GICs and they do carry risk that you can lose principal value. The amount of risk depends on what the holdings are in the ETF or mutual fund, rather than one being in general more risky than the other.
• Costs: We will explore this in more detail in a future post, but in general the annual management costs will be lower in ETFs and in mutual funds. However, there will be a per transaction cost so when you buy and sell ETFs there will be this additional cost (there are exceptions we will explore in future columns). In general it does not make sense to do frequent trading in small amounts of an ETF due to these costs.
• Transparency: In general both products are transparent regarding holdings, past performance, etc., although the situation is most clear for ETFs that track an index.
• Reinvestment: Normally ETFs will offer a DRIP option to reinvest dividends in additional units, if that is your wish, and normally mutual funds can be set up similarly if desired.
• Name: Most ETFs have a three letter stock exchange designation, such as VAB or XIC, while in general mutual funds have a combination of letters and numbers in a longer name such as RBF1950, with the first letters designating the mutual fund company (RBF means Royal Bank Fund, who handle PH&N funds now) and the latter part being the number of the actual mutual fund.

This posting is intended for education only. The reader is responsible for their own financial decisions.  The writer is not a financial planner and reading this column should not be interpreted as obtaining individual financial planning advice. For major financial decisions it is always wise to consult skilled financial professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.

Disclosure:  The author of this column holds funds in the mutual fund (RBF1950) and all ETFs mentioned in this column (XIC, VUN, VAB).