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How to Invest in ETFs?

April 23, 2014 - 0 comments

This week, the BMO announced it is following the path set by Blackrock about three weeks ago and cut the management fees on some of its mainstream ETFs to rock-bottom levels. At the time of the Blackrock announcement, we emphasized that while managing costs is extremely important to investment success, there are other good reasons to invest in ETFs. This time, I would like to share what PWL looks for when building portfolios with ETFs or any other investment vehicle.

  1. Portfolio Architecture
    A proper investment vehicle must capture the market risk premiums efficiently without incurring unwarranted risks. Portfolio architecture will address issues such as:
    • Is the ETF properly diversified? Can the bankruptcy of one or a few issuers affect your wealth significantly?
    • Are you getting exposure to large, mid and small cap stocks?
    • Does the ETF hedge currency risk?
    • Does the ETF hold derivative products?
  2. Taxes
    Some ETFs and mutual funds are structured to minimize taxes and some are not. For example, the fact that some Canadian ETFs hold US ETFs instead of the actual underlying stocks may have some tax implications for investors, even if held in an RRSP.
  3. Your Game Plan
    Equally important is the global strategy underlying to the ETF selection. What’s your bond strategy? What kind of maturities and what is the issuer quality you are looking for? What kind of stock portfolio do you want? Global or Canadian? Do you have a preference for value, small cap or dividend stocks? Do you want exposure to “alternative” asset classes such as REITs and High-Yield Bonds? What are the appropriate weights for these asset classes and why?

Bottom Line

In summary, while low fees are great, they are just one concern when selecting ETFs for your portfolio. In my opinion, portfolio architecture, taxes and your game plan are as essential to your financial success as fees. 

By: Raymond Kerzérho with 0 comments.
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