When a cost-conscious investor wants to bail on mutual funds, the usual solution is to try exchange-traded funds.
Here, we arrive at a major logistical issue for the DIY investor who wants to swap mutual funds for ETFs. How, exactly, do you make the switch? If you’re an experienced online investor, you’ll want to laugh about this. But it’s a serious issue – my experience with readers tells me that many find the jump from mutual funds to ETFs is huge. A quick example is this reader query: “Hi Rob. Currently, I hold mutual funds in my RRSP. How do I switch from mutual funds to ETFs (and have these ETFs in my RRSP)?
Here’s a quick and dirty plan for moving into ETFs from mutual funds. This isn’t the cheapest, smartest or best approach, but it’ll do fine for someone who needs a roadmap.
Step One – Choose an online broker
My annual online brokerage ranking might help here. Or, just head to your bank and ask to open an account with its online brokerage arm. Fund your new brokerage account – RRSP, TFSA, non-registered or whatever – by transferring money into it from your chequing account.
Step Two – Pick ETFs
My annual ETF Buyer’s Guide might help here. Or, try a new series of TSX-listed balanced ETFs from the Canadian arm of the U.S. investing giant Vanguard. There are three of these ETFs, one for conservative investors, one for balanced investors and one for people seeking aggressive growth. Each fund holds a selection of low-cost Vanguard ETFs that is designed to provide a complete balanced portfolio.
Step Three – Learn to use the machinery
You buy and sell ETFs like a stock. To learn the ropes, go to your broker’s equity order screen – equities are stocks – and play around with it. Add the ticker symbol for your balanced ETF and try submitting a trade. You’ll have a chance to kill the order before it’s sent for processing. You’ll be asked what type of order you want to place. The simplest is the market order, where you pay the current market price. For an ETF like the Vanguard balanced funds, this is fine. You’ll pay a fair price.
Step four – Set up a regular investing plan
For smaller accounts it probably makes sense to invest in your balanced ETF on a quarterly basis. At $10 per trade, a common commission, your total annual costs for quarterly purchases in a $25,000 account would drag down your returns by just 0.16 per cent. At $60,000, monthly commissions would reduce returns by 0.2 per cent. That’s fair.
Step Five – Keep repeating Step Four
Balanced ETFs do it all for you in distributing your investment dollars into your chosen mix of stocks and bonds. There’s no easier way to get into ETFs from mutual funds.
Rob Carrick