ETF Investing Tips for Dummies

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First of all, what is an exchange-traded fund (“ETF”)?


Okay, before I start…

I don’t want you to fall asleep on me, but let’s quickly cover the basics that you should know before we move on to the fun stuff!

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For those who don’t know, ETFs are investment vehicles that track equity indices, bonds, commodities, currency, as well as multi-asset and alternative investment strategies.

In this post, we will focus on ETFs that track the equity markets.


Essentially a hybrid between a stock and a mutual fund, these little babies have become popular since the first ETF was born in 1993 – the S&P SPDR (pronounced “spider”).

According to stats from the Canadian ETF Association, ETF assets continue to grow – hitting a new record of $135.2 billion in Canada alone.

To start investing, you can open a registered or non-registered trading account with any financial institution. But before you do, you might want to learn a thing or two about them compared to mutual funds.

Ready guys??

Okay, let’s do it!!



The battle between ETFs and mutual funds

Photo by Hermes Rivera on Unsplash


Like mutual funds, ETFs track a basket of assets or an equity stock index.

For example, the ETF with ticker symbol “XIU” tracks and mimics the S&P/TSX 60 index. In simple terms, this fund would simply hold and track Canada’s 60 largest and most liquid stocks.

But unlike mutual funds, ETFs trade like single stocks on major exchanges such as the New York Stock Exchange (NYSE) and Toronto Stock Exchange (TSX).

Using “XIU” as an example again, this ETF trades exactly like the stock of Apple (“AAPL”) or Facebook (“FB”) on an exchange. For that reason, ETFs provide continuous liquidity throughout the day by allowing you to buy and/or sell them at their market price.

Unlike a stock or ETF, mutual funds generally do not trade on an exchange. Their prices, also known as net asset value (NAV), do not vary during the trading day because their NAVs are set at the end of the day.



The costs?

Because ETFs trade like stocks, you will incur transaction costs at the time buy and sell them. Depending on your financial institution, they typically cost $10 per transaction no matter how many units you buy or sell. Going back to the “XIU” example, if you buy 100 shares or 1,000 shares at $21.90 per unit, it will cost you $10 each round.


Example 1: Buy 100 shares at $21.90

Purchase $21.90*100 shares=$2,190. Less $10 transaction fee would leave you with $2,180 invested.


Example 2: Buy 1,000 shares at $21.90

Purchase $21.90*1,000 shares=$21,900. Less $10 transaction fee would leave you with $21,890 invested.


Based on the examples above, your costs in terms of percentage are lower when you purchase more units. Again, the same concept applies to the disposal of shares.

If you frequently buy small quantities, these transaction costs will add up quickly and reduce your overall returns. Luckily, small brokerages such as Questrade offer commission-free ETFs. The only time you would pay for a transaction is when you sell. But even so, Questrade charges only $4.95 to sell compared to the big banks at $10.

Despite the transaction costs, the benefit is that most ETFs have lower MERs compared to their cousin mutual funds.


“What’s an MER?” you ask.

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MER stands for management expense ratio. Don’t confuse the MER with management fees. Though related, they are not the same.

With ETFs, the MER includes all management fees plus the harmonized sales tax (HST), and other costs. To gain a better understanding of MERs, management fees, and other costs, I attached a link to this article for you.

Despite your investment in a mutual fund or ETF, the MER is applied to the fund itself and not on you. In other words, your returns are shown on an after-fee basis, and you will never see them in your statements. But at the end of the day, it still matters because higher MERs eat a chunk of your profits as your portfolio grows bigger and bigger.

This article by Jim Yih, a well-respected financial expert on retirement planning, mentioned that the average MER in Canada of all mutual funds is 2.53%. That’s a lot compared to most ETFs!



Mutual funds have more than just MERs!

Not just that, but in addition to MERs, some mutual funds may also have their own transaction fees (called “loads”) expressed in terms of a percentage of your investment.

There are two types loads: front-end and back-end.

With front-end loads, you pay a fee when you purchase the fund (i.e. to enter the fund). For example, if the front load fee is 3% and you invest $10,000, say bye to $300 in fees. That now leaves you with $9,700 invested (and that’s before the MER).

On the other hand, back-end loads are paid at the disposal of units (i.e. to exit the fund). This back-end fee can either be flat or decrease over the years. With the latter, if you hold long enough – typically five to seven years – you won’t have to pay a fee to exit the fund. You can think of this as a penalty fee for selling early!

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Of course, there are also mutual funds with no loads, but more likely than not, they still have high MERs compared to similar ETFs.

With all that said, ETFs are my go-to! They are generally an efficient and low-cost investment vehicle for average retail investors, like you and me.


My ETF picks

To make your life easier, I compiled a list of my favorite ETFs that track a few popular stock indices.


The following information is for entertainment purposes and opinion based. I am not a certified financial planner. So, please do your research and consult with a professional adviser. Most importantly, invest according to your level of risk tolerance. Overall, I am not responsible for any of your investing decisions.


XIU iShares S&P/TSX 60 Index ETF 0.18%
XIC iShares Core S&P/TSX Capped Composite Index ETF 0.06%
IVV iShares Core S&P 500 ETF 0.04%
XQQ iShares NASDAQ 100 Index ETF (CAD-Hedged) 0.39%
XSU iShares U.S. Small Cap Index ETF (CAD-Hedged) 0.36%
XEF iShares Core MSCI EAFE IMI Index ETF 0.22%


Although I like to choose a few single stocks (not shown here), I prefer to keep my overall portfolio simple. After all, I believe that less is more.

On a side note, I admit that I have a preference for US holdings.



For starters, it took me a long time to finally buy into a Canadian index (sometime in 2016). Idk what it was, but as mentioned, I was extremely biased towards US holdings.

I know…

I’m Canadian, but I had most of my holdings in US-based stocks and funds.

Pretty sad, eh?

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Anyway, I now hold XIU but not XIC.

I included XIC in this list because I was debating between these two. Despite my choice for XIU due to higher liquidity, I still like XIC for these reasons:

– It provides more diversification than XIU (XIC contains 250 companies whereas XIU contains 60)
– You have exposure to smaller Canadian companies
– Any single holding is capped at 10% (this avoids large concentration on a single stock)
– It has a lower MER (XIC is 0.06% whereas XIU is 0.18%)

For more information on XIC, I attached a link to its fact sheet. On the other hand, you can also read XIU’s fact sheet here.



If you plan to hold the S&P 500 for the long term, and you’re not concerned about currency swings, I would recommend holding a US-listed ETF such as IVV. Not to mention, it has a very low MER of 0.04%.

This is something I regret not doing due to my stupidity in the past.

Instead, I bought the Canadian-listed ETF, XUS which essentially tracks IVV. In other words, XUS is the $CAD version of IVV.

The crappy part? I’m incurring an MER of 0.10% – a difference of 0.06%.

This is substantial in the long run, even after accounting for the conversion cost from $CAD to $USD.

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However, if you don’t plan to hold for the long term, or if you are concerned about currency fluctuations (and you just want to hold $CAD), I would recommend XSP. This is also a Canadian-listed ETF – the “CAD-hedged” version of XUS. The MER of XSP is 0.11% but “hedging” it means you’re protected against any currency fluctuations in $CAD vs. $USD.

For more information, take a look at their fact sheets:

IVV (US-listed iShares Core S&P 500 ETF)
XSP (Canadian-listed CAD-Hedged iShares Core S&P 500 Index ETF)
XUS (Canadian-listed iShares Core S&P 500 Index ETF)



I invested in XQQ (Canadian-listed) because I wanted exposure to tech companies such as Apple, Google, Facebook, and Amazon. Instead of purchasing them individually and incurring multiple transaction costs, I’m better off holding an ETF that tracks the Nasdaq 100. Not just that, but I would also gain exposure to other holdings listed on this index. In essence, this would lower my concentration risks from solely holding these four companies.

Not to mention, because I wanted more exposure to Apple (“AAPL”), I decided to purchase the single stock a few years ago. Some may call this “overweight.” That is, if your portfolio is “overweight” in a specific stock or sector, it means that you hold proportionately more weight of a stock (in my case, Apple) compared to the benchmark (i.e. Nasdaq 100).



In addition to the blue-chip tech companies, I wanted something with greater growth potential in the long run. So, I decided to take on higher risks, but with greater expected returns.

With that said, I included XSU (Canadian-listed and CAD-hedged) in my portfolio. This fund tracks the Russell 2000 Index, a widely used benchmark for the performance of small-cap stocks.

If you’re Canadian like me, you can choose to hedge your CAD dollars to protect yourself against any movements in $USD – the reason why I chose XSU.

As mentioned earlier, if you plan to hold for the very long term, and you’re not concerned about the currency risks, you can opt for the US-listed ETF, ticker symbol IWM.


Generally speaking, I prefer holding a small-cap ETF over a basket of individual small companies. These ETFs offer better diversification and reduces the volatility of owning individual stocks.

If you believe in the “small-cap effect” then these two ETFs would be a great choice.


Without going into technical detail, Investopedia summarizes the small-cap effect:

“The theory holds that smaller companies have a greater amount of growth opportunities than larger companies. Small cap companies also tend to have a more volatile business environment, and the correction of problems – such as the correction of a funding deficiency – can lead to a large price appreciation. Finally, small-cap stocks tend to have lower stock prices, and these lower prices mean that price appreciations tend to be larger than those found among large-cap stocks.”


You can find more information about these ETFs on their fact sheets:

IWM (US-listed iShares Russell 2000 ETF)
XSU (Canadian-listed CAD-Hedged iShares U.S. Small Cap Index ETF)



Lastly, I chose XEF (Canadian-listed iShares Core MSCI EAFE IMI Index ETF) for international diversification purposes. This index fund is not hedged against any currency fluctuations, and it tracks more than 2,500 companies across the developed regions of Europe, Australasia, and Far East (“EAFE”).

Generally, it doesn’t hurt to include a few good foreign investments in our portfolios. In fact, financial experts always emphasize on international diversification. That’s because including them can lower your portfolio risks.

For more information about international diversification and XEF, check out this post from the Canadian Couch Potato.

You can also check out the XEF (Canadian-listed) fact sheet here.


How to invest in ETFs when you are in Canada:

If you live in Canada, you can open a TFSA (Tax-Free Savings Account) and/or RRSP (Registered Retirement Savings Plan) account so that you can start investing in ETFs.

The TFSA is similar to the Roth IRA where investment contributions are using your post-tax income, but all gains are tax-free.

On the flip side, RRSP (Registered Retirement Savings Plan), like the 401K, are investment contributions using your pre-tax income. This is how you shelter your income for the benefit of paying less taxes. In this account, all of your investment growth would be compounded over the years (using your pre-tax income), but gets taxed when you take it out. Most people take this out during retirement when their tax brackets are lower (in most cases).

I won’t cover the details of the TFSA and RRSP here, but for more savvy information, head on over to Enoch’s Savvy New Canadians posts:

TFSA vs. RRSP: Factors to Consider

TFSA Contribution Limit Over The Years (2009 to 2019)

TFSA Annual Limit, Contribution Room, and Penalties for 2019 


More related posts on investing:

How To Invest: A Beginners Guide to Investing in The Stock Market
The 5 Best Investment Apps For Beginners



My Conclusion

I’m not here to bash mutual funds. In fact, there are legitimate reasons why some choose to invest in mutual funds (another topic discussion left for a future post).

Instead, I’m here to encourage DIY investing by making “financial jargon” easy to understand. On top, I want you to be aware of the different types of fees and costs.

I’m by no means suggesting that I’m some financial expert – I’m not. Even if I was, there is still a lot for me to learn! Overall, learning and gaining knowledge is a continuous journey!

Not to mention, there are a lot of technical information and discussions about various ETF strategies out there today!

But for now, my message to you is to keep it simple. Like I mentioned, less is more and that’s how investing should be!

Understanding the basics of ETFs is as easy as ABCs! C’mon, even your grandma gets it!

So what are you waiting for? Get your DIY groove on and start investing in simple ETFs!

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