ETFs are performing well at a lower cost

Name a mutual fund category and I'll show you its slimmer, more athletic alter ego.

Canadian equity funds? Take a look at the iUnits S&P/TSX 60 Index Fund or the TD S&P/TSX Composite Index Fund. Both will cost you a lot less to own than any Canadian equity fund and both have been in Olympic form lately.

Natural resource funds? Your ETF alternative is the iUnits S&P/TSX Capped Energy Index fund. Bond funds? Consider the iUnits Canadian Bond Broad Market Index Fund. U.S. equity funds? Try the iUnits S&P 500 C$ Index Fund.

For every category of mutual fund, there is at least one ETF alternative that offers all the benefits of index investing. Indexing means buying into the returns of a major stock index, rather than having a fund manager choose the best stocks to own. Indexing is fairly simple, so it's cheaper in terms of the fees it charges unitholders. Also, you're sure to make virtually what the index makes with indexing, whereas regular mutual funds often fall short of their benchmark indexes.

Are ETFs better than traditional funds, then? The best way to answer this question is to say that having both kinds of funds in your portfolio is a good strategy.

You probably own funds already. To work in some ETFs, identify the various assets class to which your funds belong and then look for the corresponding ETF. A good place to start is the Globeinvestor.com website, where the Filter function can help you make your way through the 230 ETFs listed on the Toronto, New York and American stock exchanges. Let's confine ourselves to the TSX-listed ETFs here, just for simplicity. Funds listed on U.S. exchanges are easily available through any broker (you need a brokerage account to buy ETFs), but the sheer number and variety of them can be overwhelming for newcomers.

The core of most investor portfolios is a Canadian equity fund. If you want broad exposure to Canada's stock market, the TD S&P/TSX Composite Index Fund is worth consideration, as is the iUnits Composite Canadian Equity Index Fund. Prefer to focus strictly on blue chips? Then the iUnits S&P/TSX 60 Index Fund is the way to go.

Value investing, where under-valued stocks are sought out, has proven itself as a way of providing good long-term results and decent down-market protection. If you want a value-oriented Canadian ETF, take a look at the TD Select Canadian Value Index Fund. If you prefer the more aggressive growth style, check out the TD Select Canadian Growth Index Fund. TD's value and growth ETFs are the most expensive broad-market ETFs with Management Expense Ratios (MERs) of 0.55 per cent, but they're bargains when compared to the average 2.50-per-cent MER of big Canadian equity mutual funds.

Performance-wise, Canadian market ETFs look very strong. The average Canadian equity fund return for the three years to Oct. 31 was a compound average annual 17.5 per cent, while the iUnits S&P/TSX 60 Index Fund averaged 20.6 per cent and the TD S&P/TSX Composite Index Fund averaged 20.2 per cent.

For exposure to the stock markets outside Canada, you can pair up the iUnits S&P 500 C$ Index Fund, which tracks the widely followed S&P 500 index, and the iUnits International Equity C$ Index Fund, which provides exposure to stock markets outside North America.

ETFs also have you covered if you want to emphasize a particular sector in your portfolio. There are funds that specialize in real estate investment trusts and stocks in the energy, gold and information technology sectors, among others. If you like dividend stocks or want exposure to all income trusts, not just REITs, then take a look at a couple of new ETFs that will be introduced later in December.

A properly balanced portfolio should have some exposure to bonds, and ETFs again offer lower-cost counterparts to mutual funds. If you prefer the comparative safety of a short-term bond fund, then consider the iUnits Short Bond Index Fund. For exposure to the entire bond market, your alternative to a traditional bond mutual fund is the iUnits Canadian Bond Broad Market Index Fund.

With interest rates as low are they are, fees are an especially important consideration with bond funds. The short-term bond ETF has an MER of 0.25 per cent and the broad market fund has an MER of 0.3 per cent, which compares to very hefty average of 1.86 per cent for bond mutual funds.

The downside of owning ETFs is that they expose you to the full extent of a pullback in the big stock indexes, something a mutual fund can avoid by holding cash or conservative stocks. Also, there are some people running mutual funds -- notably in the Canadian equity category -- who have shown the ability to consistently beat the stock markets over long periods of time.

Owning mutual funds is fine, then. But it's also a good idea to have their slimmer, more athletic cousins working for you as well.

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