Posted by Mark on July 8, 2012

For folks who have followed My Own Advisor for some time, you might already know that I employ a two-pronged approach to grow my retirement portfolio across various accounts.

One approach is using dividend paying stocks from both Canada and the U.S.  From the companies I own I get steady income and some capital appreciation.  Some of my holdings include Canadian banks, pipelines, insurance companies and telecommunications companies.  I also own some U.S. dividend aristocrats.

My other approach is using broad market Exchange Traded Funds (ETFs) for passive investing.  From these ETFs I receive market returns less miniscule fees.  After reading various articles about index investing over the last few years I’ve cemented a few top reasons why ETFs work for me beyond market diversification and market returns.   Here are the others

Fact:  Index ETFs are cheaper than most actively managed mutual funds. Many mutual funds buy and sell stocks frequently in an attempt to beat the market.  Buying and selling frequently incurs costs.  Instead of all this speculation, index investors can simply focus on buying and holding broad market ETFs and leave them alone for months on end.  Many Canadian equity mutual funds have management expense ratios (MERs) over 2%.  Many Canadian equity indexed products charge less than 0.50%.  This means a mutual fund manager has to beat these indexed products by more than 1.5% just to break even.  Good luck to them.

Gotta like inexpensive.

High Transparency

Fact:  Many mutual funds report their top-10 holdings but not much else.  The unfortunate part of this is; you are never entirely sure what you own with many actively managed mutual funds.  Instead of head scratching to figure out what you actually own, many indexed ETFs are built on a model of simplicity and transparency.

Gotta like simple.

Fact:  If you invest in stocks you need to spend some time understanding these companies.  At least you should.  I read annual reports, news briefs and follow metrics like yield, payout ratio, earnings per share, cash flow and company debt to name a few.  The reality is if you’re buying a stock, somebody is selling it.  Buying stocks means I’m competing against other investors.  I will hopefully win at this game by holding the stock longer than most, collecting rising dividend income over time and capturing some capital appreciation in the process.  Indexed ETFs don’t have this effort, not even close.  With broad market indexed ETFs and a combination of them in your portfolio, you’ll get whatever returns the markets provide less miniscule fees.  This will give you more time to do other fun things.

Gotta like easy.

Diversified, market returns and throw in inexpensive, simple and easy for good measure.

You don’t hear those buzzwords when it comes to investing very often do you?  Are you investing with index ETFs?  If so, which ones?  If not, why not and what are you waiting for?