Murray Callaghan, Callaghan Wealth Management
The exchange traded fund (ETF) has emerged in recent years to compete with the mutual fund as the most popular investment vehicles.
ETFs are based upon the performance of an underlying index and they attempt to mimic the movement of stock markets or derivatives thereof. They provide a level of diversification within a general or specific sector but without the oversight of a portfolio manager. For that, they come at a reduced fee.
There is significant empirical evidence that most mutual fund managers do not outproduce their benchmark index (nor
do ETFs) once fees are taken into account. That said, some do and broad scale generalities don’t always tell a balanced
I personally like many of the advantages provided by ETFs and competition is good for the consumer. More recent advocacy by the mutual fund industry means that those licensed will be able to offer more ETFs to their clients once a proficiency exam has been completed.
The array of choices available in ETFs today is staggering. For most, a portfolio approach of a handful of core ETFs is likely more than sufficient.
I wouldn’t anticipate that they will supplant the mutual fund any time soon though given the economics to mutual fund distributors. Rather, distributors are being forced to offer the products to reduce the flow of money to alternatives.
A truism in investing is that investment behaviour is the largest determinant of investment success. Whether you choose to own stock directly or participate through mutual funds or ETFs those with a strong understanding and committed to a well-diversified and consistent approach will be rewarded. Those, frequently in and out of flavour of the day approaches will fare no better than in the past.
Murray Callaghan is a Certified Financial Planner with 15 years’ industry experience. He partners with external portfolio managers and insurance providers. Reach him at 250.286.9968 or visit his website at www.crwealthmanagement.ca.