Exchange Traded Funds have become increasingly popular for Canadians looking to save for retirement – although many of us are unaware of the benefits.
The best course of action is to sit down with a financial advisor to learn more. An advisor will first examine your specific investment needs, whether planning for retirement or saving for your child's education. Once a plan is in place, assessing the level of risk is next.
Once your advisor understands the level of risk you are willing to take, he or she may create a portfolio that combines ETFs with stocks, bonds, mutual funds and other investments to provide a higher level of diversification and protection against downside risk. ETFs are known to provide liquidity in your portfolio and create a more holistic investing approach.
For investors who want to learn more about ETFs on their own, here are five tips:
1. Look at risk-adjusted returns – Consider ETFs that use alternative strategies to achieve the highest rate of return possible while maintaining lower overall volatility. Investors and advisors can find an appropriate level of balance between risk and return, such as a government bond-focused ETF (which will be much more stable and liquid), versus an emerging markets-focused ETF, which may have more short-term volatility due to the underlying investments.
2. Diversify – ETFs are extremely valuable to investors because with a single purchase you can access entire markets or strategies, giving you a very cost-effective way to build a diversified portfolio. Companies such as First Asset Exchange Traded Funds provide ETF solutions that can complement a broader portfolio, mitigate risk and help protect against volatility.
3. Avoid unnecessary trading – Focus on the longer-term potential and do not adopt a "day-trader" mentality. Since you will pay a fee each time you buy or sell an ETF, it's important to limit the frequency of your trades and choose an online broker that offers the most competitively priced commissions.
4. Trading time is everything - Because the price deviation of an ETF can be greatest during the start and end of the trading day, investors can alleviate spreads and pricing discrepancies by restricting buy or sell orders to 15 minutes after open or 15 minutes before close. Investors should also avoid trading ETFs on days when the market is up and down, as volatile trading sessions are not an ETF's friend, and it can be hard to know the true value of a purchase.
5. Understand currency risk – Many investors don't want currency risk with their international investing. Consider investing with currency-hedged ETFs. These give investors comfort that they are getting exposure to the asset class they are investing in, without having to worry about what the currency does.
