There are many reasons for the shift many investors are making toward exchange traded funds (ETFs). This significant transition which has pulled a large chunk of money out of actively-managed portfolios and redirected these funds into passive options like ETFs has shaken up the financial services industry in a big way.
For those still on the fence about whether or not to move various savings (retirement or not) into passive funds like ETFs, I would encourage such investors to do their homework on the fees their portfolio is paying out relative to those of ETFs.
I’ve touched on this many times before, but fees really turn out to be the difference for many investors over the long haul. If you think about a stock market that provides investors average annual returns over long periods of time of roughly 6%-7%, paying an active manager a fee of 2% would effectively eat up around 30% of the growth potential of a portfolio’s return.
Over long periods of time, this 2% could end up being very significant due to compounding. Many ETFs have extremely safe and diversified options for investors, with fees often less than 0.1%!
Taking advantage of those lower fees by contributing on a frequent basis to one’s retirement or savings account (a “set it and forget it” approach) is one of the ways investors can grow wealth over time without realizing how fast their savings are growing, due in part to the fact that automatic withdrawals from one’s chequing account does not require any work at all for investors, other than setting up the initial withdrawal amount and frequency, and potentially adjusting over time as needed.
This can be beneficial for investors who get stressed out about money- by buying a set amount (in dollar terms) of an index ETF, the portfolio can grow on its own, and investors can sleep easy knowing their money is tracking the financial markets, and they’re beating most hedge funds in terms of performance each and every year.
Invest wisely, my friends.
