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Inside the Market Here’s a cost-effective strategy for jumping into the falling markets

Stock traders follow stock prices at the New York Stock Exchange, Friday, Jan. 15.

Mark Lennihan/AP

The latest development in Canada's ETF price war suggests a strategy for investors who want to take advantage of falling stock markets, but don't know where to begin.

In fits and starts, the cost of owning basic exchange-traded funds has been falling for the better part of the past two years.

Just recently, BlackRock Canada announced that the annual management fee for the iShares Core S&P U.S. Total Market Index ETF (XUU-T) and iShares Core S&P U.S. Total Market Index ETF CAD-Hedged (XUH-T) has been set at 0.07 per cent, which the firm says is the lowest cost way to get access to the entire U.S. stock market in Canada. The all-in management expense ratio will be somewhat higher, maybe around 0.1 per cent. But that would compare to the 0.15 per cent MER for the Vanguard U.S. Total Market Index ETF (VUN-T).

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Vanguard's U.S. total market ETF is bigger and more liquid than its iShares competitor, if slightly more expensive to own. VUN also offers more diversification – the financials sector is largest at 19.5 per cent, followed by tech and health care at 16.2 and 14.1 per cent, respectively. Financials are the top sector in XUU at almost 43 per cent, followed by 13.7 per cent for tech and 10.2 per cent for health care.

Either total market ETF can work for the investor who wants to capitalize on cheaper U.S. stocks without making calls on individual stocks, on sectors or on whether small, medium or large-cap stocks will outperform when the market turns around. With total market ETFs, large-cap stocks like the ones in the S&P 500 get the highest weighting. But there's also significant exposure to smaller stocks. In VUN, for example small- and medium-cap stocks account for about one-third of the portfolio.

Frankly, this fuller market exposure has not been an asset recently. While the S&P 500 has declined for the year to date, it has done better than the total market. But that's a function of investors showing some level of preference in uncertain times for big blue chip stocks. Over the long term, you should expect both a little more risk and somewhat higher returns from the broader holdings of a total market ETF. Bottom line, you're buying low if you start moving into an S&P 500 fund and even lower if you buy a U.S. total market fund.

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