A question we’re hearing from clients these days is whether to shift out of mutual funds into ETFs — Exchange Traded Funds. While mutual funds are often at the core of investment portfolios, their high fees combined with the fact that many don’t outperform the market are leaving some investors frustrated and ready to try something new.

Like mutual funds, ETFs are a bundle of investments, diversifying the risk of holding a single stock or bond and at the same time broadening the opportunity for returns. But unlike mutual funds, ETFs trade on the stock market and your ETF investment goes up and down with the market index it’s tied to.

So in effect you have a stock — your ETF — that represents a bundle of stocks, bonds or other assets. The ETF could be based on Canadian stock market index, the S&P/TSX index for example. This index includes about 250 Canadian stocks and the index goes up and down depending on how well the basket of stocks that it holds does. While the index is going up, so are your fortunes. But as it goes down, so does the value of your ETF investment.

While it may tempting to do a complete about turn on your investment strategy in the search for more lucrative returns it’s important to think it through. You could be jumping from the frying pan into the fire!

In making your decision, consider the following:

Fees:
ETFs have lower fees than mutual funds. Because they track a pre-determined basket of investments, they don’t demand the same research and attention by the companies that offer ETFs.  Also, they’re sold primarily through discount brokerage firms so you aren’t paying an advisor for advice.

Homework:
You may be paying lower fees but you’ll have to do your own homework. You’ll have to research ETFs and make your own buying and selling decisions. There are now hundreds of different ETFs available.  Are you ready to be a do-it-yourself investor?

Advice:
A mutual fund portfolio also delivers advice. If you have a good advisor — and you should talk to a few in various organizations before making a choice — your advisor will consider such factors as your risk tolerance, your retirement plans, the rest of your portfolio mix and other items that would weigh on investment decisions.

Ultimately there is no single solution. What’s most important is working through the process, doing the research, educating yourself and asking the questions that will help lead you to financial strategy that’s comfortable for you.

Read more:
ETFS vs Mutual Funds – Which One Wins
Canadian Couch Potato