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ETFs
Exchange Traded Funds (ETFs) or as one wag likes to say, mutual funds for grown ups.
Wikipedia describes "an ETF [as] a pool fund invested with a stated investment objective,
for example, a tracker fund for the energy sector or geographical area. Shares owned in
this fund by investors are in turn traded on an exchange." An ETF is a liquid investment
(you can buy or sell it at any time), that trades on the stock market like a share. It
represents the shares that make up the index or the area the ETF is focused on. The price
will fluctuate with the price fluctuation of the underlying securities. There are 79 ETFs
traded in Toronto and more in the US. You can purchase ETFs on a wide variety of areas,
either geographically or by sector (oil or mining for example). You can buy an ETF on the
stock market just like you would a stock and it mirrors the performance of the market minus
a fee of about 0.2%. Not too bad especially when compared to mutual funds that charge 2.5%
and remember that only 25% of the mutual funds give you better performance then your ETF.
Investment professionals like pension fund managers and mutual fund managers that manage
hundreds of millions of dollars use ETFs. I have seen ETFs used by mutual fund managers to
get money quickly into a rising market while they try and figure out the stocks they want to
purchase.
There is a large and growing selection of ETFs. Canada was the first market to introduce
an ETF. An ETF is referred to as a "passive" investment. There is no benefit (or hindrance)
of having an "active" manager. Over 70% of active mangers under perform the index they are
measured against. When it comes to mutual funds last years performers are not indicative of
this years winners, for a whole bunch of reasons. As well they charge about 2.5% or more MER
to manage the fund. Remember the markets long term return is about 10% and these guys charge
2.5% that means they have to be a whole lot smarter then the market just to get the 10%
since they have such an expensive MER. Your ETF should mirror the performance of the market
about 10% over the long run minus -0.2%for a return of about 9.8%, close enough to 10%. If
you think your manager is better then the market then read article on Efficient Market Theory.
I disagree with the theory but there are very few mangers that have a superior track record.
These managers could change funds, retire, or have too much cash thrust upon them to be able
to continue their winning ways. Go with the ETF.
GICs
I have mentioned GICs only in passing. I don't like locking in my money for long periods of time unless I can get close to 10% returns. GICs usually have penalties if you need to get your money out early and the yields are pretty low now.
Mutual Funds
Mutual Funds with their high MERs and poor performance are a necessary evil for small investors. Some Mutual Funds will have charges to either buy the fund or if you redeem it within the first few years. This is where the banks Mutual Funds are good since they don't charge that redemption fee.
Margin
Margin, or debt by another name. The brokerage account that you have set up will allow you to borrow against your investments, maybe as much as 50% of your $10,000. With interest rates so low (about 4.25%) it seems like a good idea if you can make 10% on your investments. But what if the market goes down by 13%? Your $10,000 investment plus your $5,000 borrowing is now worth $13,050 and the bank wants you to put another $2,000 in your account (this is referred to as the margin call)! You are worth $2,000 less then you where before and you have to find another $2,000. It is probably better to borrow only 20-30% or $2,000 to $3,000. That way if the market drops by 13% the banks won't request any more money since you are still within the 50% borrowing limit. Be careful with margin/debt, not everyone is comfortable with it.
