Help clients understand ETFs

ETFs are one of the most poorly-understood investments among Canadians, says a special report by the BMO Wealth Institute.

• 19% of Canadian investors claim to be knowledgeable about ETFs compared to traditional investments such as GICs (58%) and mutual funds (55%).
• However, once told about the benefits of ETFs, 60% report that they would add them to their portfolios.

“Exchange traded funds have only been around for the last twenty years so it’s understandable that Canadians are still in the process of familiarizing themselves with them,” said Chris Buttigieg, senior manager, wealth planning strategy, BMO Financial Group

But worldwide, more investors are considering ETFs when determining what investments to include in a retirement savings portfolio, the report adds.

Read: ETF strategies for a downturn

Why Opt for ETFs?

The report identifies the key benefits ETFs provide, including:

• Access to a diversified basket of stocks, bonds or commodities

• Low management fees

• Easy buying and selling, as they are traded like a stock on the stock exchange

• Transparency of holdings, so that investors can always can see what they own

• A targeted investment approach by being associated with broad markets as well as particular regions, markets, sectors or themes

• Tax efficiencies due to lower portfolio turnover

Read: Canadian ETF market grows apace

Using ETFs for retirement

The report also has a number of ETF tips for beginners:

Focus on asset allocation: ETFs provide low-cost access to indices, allowing exposure to the desired asset classes and resulting in appropriate asset allocation.

Hold multiple asset classes: ETFs represent every asset class, cover international markets, and provide exposure to every sector of the market, allowing investors to create a broadly diversified investment portfolio with a small number of ETFs, at a low cost.

Rebalance: Since ETFs come as a basket of stocks, bonds or commodities, dealing with groups of holdings in a single transaction simplifies the rebalancing process and reduces risk.

Diversify: ETFs can play a key role in diversification.

Defer taxes: Low-cost corporate class mutual funds that hold ETFs allow investors to move from one portfolio to the next without triggering any tax until their money is withdrawn.

Read: ETFs for portfolio defense