One of the many great things about investing in exchange-traded funds is how easy it is to find out what they cost, what they hold, how they’ve performed and how much income they pay.
ETF companies offer this information in their online product profiles, but the level of disclosure and presentation of data varies from company to company. That’s why it’s vital to check the ETF Facts document for any fund you’re considering.
ETF Facts is a standardized four-page document that regulators require investment firms to provide clients who buy ETFs. To find ETF Facts for a particular fund you’re researching, find its online profile and click on the tab that says “documents” or “literature.” A quick and easy way to find an online fund profile is to google the ETF company’s name along with the relevant stock symbol. Example: BMO ZCN for the BMO S&P/TSX Capped Composite Index ETF, which has the symbol ZCN.
Here are some key bits of information to focus on in an ETF Facts document that go beyond the data that ETF companies typically offer on their websites:
-Average daily trading volume: Gives you a sense of the level of investor interest in a particular fund. Popular ETFs often trade in the hundreds of thousands of shares per day on average, or more. A thin trading volume would be in the hundreds of shares per day on average, or the low thousands.
-Number of days traded: Lets you know if there are days when an ETF doesn’t trade at all, which is an indication that it hasn’t caught on.
-Average bid-ask spread: Average daily trading volume and number of days traded all play a role in the bid-ask spread for an ETF, which is the gap between the highest amount buyers will pay for shares and the minimum sellers will accept. The smaller the spread, the better. It suggests an ETF is highly liquid, and that you’ll be able to buy or sell easily at very close to the going market price. A bigger spread suggests it could be difficult to buy and sell at an advantageous price. A big ETF that trades hundreds of thousands of shares per day might have an average bid-ask spread of .05 to 0.1 per cent or less.
-Trading expense ratio: A fund’s management expense ratio, or MER, shows all the costs of owning a fund except commissions for trading stocks in the portfolio. For that, you need to look at the trading expense ratio, or TER. Fund Facts documents show you both the MER and TER, which can be as low as zero or 0.01 per cent for big index-tracking ETFs. Actively managed ETFs often have higher TERs.
-- Rob Carrick, personal finance columnist
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Ask Globe Investor
Question: Now that we can make contributions to our tax-free savings accounts for 2023, I’m curious to know: How much would one’s TFSA have been worth at Dec. 31, 2022, if one had contributed the maximum each year and invested it in either a stock index fund or a bond index fund? This will help me decide what to invest in this year.
Answer: Before I reveal the results, I’ll explain my methodology.
I selected two popular exchange-traded funds: the iShares S&P/TSX 60 Index ETF (XIU-T) and the iShares Core Canadian Universe Bond Index ETF (XBB-T). For both, I assumed the maximum contribution was invested at the start of each year from 2009 (when the Tax-Free Savings Account was introduced) through 2022. I made no allowance for trading commissions or – because we’re investing in a TFSA – taxes.
I then found the total returns for each ETF over 14 different investment periods (2009 through 2022, 2010 through 2022, 2011 through 2022, and so on) and calculated what the initial investment in each period would have grown to as of Dec. 31, 2022.
The total dollar amount invested in each ETF was $81,500, which is the sum of the maximum annual TFSA contributions from 2009 through 2022 – $5,000 for the years 2009 through 2012, $5,500 for 2013 and 2014, $10,000 for 2015, $5,500 for 2016 through 2018 and $6,000 for 2019 through 2022. (For 2023, the TFSA limit was increased to $6,500.)
So how did each ETF make out? Drum roll please …
It wasn’t even close. Stocks blew bonds out of the water.
An investor who put all TFSA contributions into XIU – which holds 60 of the largest Canadian companies by market capitalization – would have ended up with $147,247 at the end of 2022. XIU’s compound annual growth rate over those 14 years was about 8.4 per cent, which assumes all distributions were reinvested in additional ETF units.
An investor who chose XBB – which holds a diversified basket of Canadian government and corporate bonds – would have ended up with $89,700. XBB’s compound annual growth rate was about 2.7 per cent – less than one third of XIU’s annual return.
The lesson? If your goal is to grow your wealth over the long run, stocks are the way to go. True, stocks are generally more volatile than bonds, but that’s the price investors pay for the superior returns they deliver.
That’s not to say investors should avoid bonds, or guaranteed investment certificates, altogether. When safety is your key consideration, such as when you are saving for a home or a child’s education, fixed-income investments have their place. It’s also prudent to keep a portion of your portfolio in bonds or GICs to provide some stability. But if you play it too safe with your investments, you may regret it down the road.
--John Heinzl (E-mail your questions to email@example.com.)
What’s up in the days ahead
Bonds have been on the comeback trail of late. Gordon Pape will tell us why the time has arrived to start having them in your portfolio again and has some top ETF picks to do so.
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Compiled by Globe Investor Staff