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The mutual fund/ETF conundrum

by | Jan 22, 2012 | OTHER, SELF-PUBLISHED

Q – I am interested in adding exchange-traded funds to my investment portfolio. Currently, I hold 100% in mutual funds. I am not clear on the difference between the two, except I understand the cost is lower. I am a self-directed investor and do not rely on the advice of an advisor. Is this a good idea? – Ilene D., Vancouver, BC

A – Ilene, the question you need to ask yourself is, “Do you believe in active or passive investing”? Mutual funds are managed by professional money managers and are constantly being rebalanced in an attempt to achieve the highest return possible for its investors by making calls against or for the direction of the markets. Managers will move in and out of positions as they try to outperform the market. You pay for this indirectly through fees charged to the fund by the manager (as distinct from commissions or loads you might pay yourself to a broker or advisor). These fees are published as the Management Expense Ratio, or MER. There is no guarantee the manager will outperform the market. If they call it wrong, they will underperform the market.

An exchange-traded fund, or ETF, is a “passive” investment. In an ETF the money manager will purchase securities to match an existing index, say, the S&P/TSX Composite Index or the S&P 500 Composite. Since an ETF just tracks the index, it will rise and fall with the index. The manager does nothing, and simply acts as a caretaker. There is no “active” management, and hence you pay a much lower fee.

If you are an active investor and are looking to diversify your portfolio, you might want to consider a small position in an ETF to test the waters. If you believe in strictly active management, then an exchange-traded fund strategy may not be for you.

The decision to hold ETFs in your portfolio is not cut-and-dried. My recommendation is to investigate both options, and if you require further clarity, to engage a professional financial advisor to assist you in deciding which approach or combination best suits your investor profile. – R.T.

© 2023 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.

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