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Portfolio Strategy

For small accounts, mutual funds aren't the only option Add to ...

The myth that mutual funds are automatically the best choice for new investors or those with small accounts can go unchallenged no longer.

With as little as $2,000 to $2,500 in your account, it can make sense to buy exchange-traded funds, or ETFs, through an online broker. With as little as $50,000, a portfolio of stocks looks economically sensible.

Advisers will never tell you this because there's no money in setting up these kinds of accounts for clients. It's more lucrative for advisers to put small or new accounts in funds or, worse, wrap accounts, which are bundles of funds. In both cases, advisers and their firms receive a steady stream of commission revenue over the years.





With as little as $2,000 to $2,500 in your account, it can make sense to buy exchange-traded funds, or ETFs, through an online broker. With as little as $50,000, a portfolio of stocks looks economically sensible.




It must be said that mutual funds are still a justifiable choice for the small account. Professionally managed, funds are widely accessible - both in terms of the amount of money you need to invest and the places where you can buy them - and you can often invest in them without any purchase fees or commissions.

But funds are also comparatively expensive to own through the fees they charge their customers on an ongoing basis. That's why some investors prefer ETFs and portfolios of individual stocks, both of which are cheaper to own in the long run. Lower fees don't guarantee you higher returns, but they're certainly an advantage to investors.

This holds true for both large accounts and smaller ones. In this edition of the Portfolio Strategy column, we'll look at some guidelines for deciding whether ETFs and stocks make sense as a fund alternative.

First, let's look at someone who wants to get started with investing through regular contributions and has no portfolio. Mutual funds are an ideal way to go here because of the low upfront minimum required investments, and the availability of pre-authorized chequing (PAC) plans.

The Toronto-Dominion Bank and Industrial Alliance fund families deserve recognition for having a minimum initial investment requirement of $100. AIC has a $250 minimum, while most other fund families are at $500 or $1,000.

New investors need to be aware of purchase commissions with mutual funds. No-load funds don't have any, and you can sell your holdings without costs as well (fees may apply if you buy and then sell within a month or two).





ETFs have become a strong competitor to mutual funds because they have low ownership fees and highly competitive returns. ETFs trade like stocks, which means two things. You need a brokerage account, and you have to pay commission fees to buy and sell.




Technically speaking, most other funds charge either upfront sales commissions or redemption fees should you decide to sell in the first several years after you buy. However, a growing number of investment advisers, plus virtually all online brokers, offer a wide variety of funds with purchase commissions and redemption fees waived.

ETFs have become a strong competitor to mutual funds because they have low ownership fees and highly competitive returns. ETFs trade like stocks, which means two things. You need a brokerage account, and you have to pay commission fees to buy and sell.

Note: The Claymore family of ETFs has arrangements with some investment dealers to allow clients to make regular, commission-free contributions to its funds once they have made an initial purchase. Generally, though, new investors should typically expect to pay as much as $20 to $29 to buy between one and 1,000 shares of an ETF using an online broker (yes, you can buy any number of ETFs you want). If you were to invest in ETFs on a monthly basis, you could rack up commissions of as much as $348 a year. That's prohibitively expensive until you have upwards of $17,500 in your account.

At that level, $348 in commissions represents just less than 2 per cent of your total holdings. Add the fees that you'll pay to own ETFs to this amount and your total costs will be in line with what many mutual funds charge.

If you make regular investments less frequently, say once per quarter, it's cost effective to replace funds with ETFs with even smaller accounts. Paying quarterly $29 commissions to buy ETFs starts to make sense when you have $6,000 or more in your account.

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