It’s been shown that the smartest way to maximize wealth in the long term is to invest in a diversified portfolio of low-cost, passive funds.
Sound boring? That’s because it is.
But it works.
You pay less, worry less, and end up with more. More money which ultimately means more choice.
Instead of trying to predict what the next hot stock will be in an attempt to beat the market, we build our investment portfolios from low-cost exchange-traded funds (ETFs) that match the market. It’s not sexy, but it really does win in the long run.
What are these ETFs everyone’s so fond of? Read on for the top 6 questions clients ask us.
What’s an ETF?
An exchange-traded fund (ETF) is an investment fund that’s traded on a stock exchange, like a stock, but holds a basket of investments, like a mutual fund. Most ETFs track broad, well-established indices like the S&P 500. They tend to have much lower fees than traditional mutual funds.
We like ETFs because they’re a cheap and efficient way to build a diversified investment portfolio. They allow you to gain exposure to a variety of asset classes like bonds, equities, and real estate.
How do you choose the ETFs you use?
We look for ETFs that are low cost, have high liquidity, and have a low tracking error to their underlying index. Low management expense ratios (MERs) mean you pay less in fees so your portfolio can grow larger—more money for future you! High liquidity means your portfolio is easier to rebalance and your money is readily accessible when you need it. And a lower tracking error just means the ETF is more efficient at its job of mimicking an index.
While low fees are important, they aren’t everything. We won’t select a low-cost ETF at the expense of one of those other important factors. For example, we wouldn’t use an ETF with a low MER that doesn’t track its underlying index well, because that wouldn’t optimize the mix of asset classes in your portfolio.
How do you build my portfolio?
We build your investment portfolio using 7 different ETFs from 7 different asset classes—each ETF represents a different asset class. Asset classes are the building blocks of your portfolio, the ones we use are Canadian equities, US equities, global equities, real estate, short term bonds, medium term bonds, and real-return bonds. Held together they create an optimized portfolio.
We pick the best ETF in each of those 7 asset classes, making sure they work well together. That’s called being properly diversified. We use your risk score to determine how much of each asset class, and therefore each ETF, you should have in your portfolio.
Your risk score is determined by things like how reactive you are to market ups and downs, how long you’ll be investing the money, and what you plan to do with it. We ask you these questions when you open an account so we can suggest the best possible portfolio to meet your goals.
What’s the historical performance of these ETFs?
Since we don’t believe in putting our clients into buckets and we custom build every portfolio, we don’t have generic portfolios with historical performances we can show you. You can see the individual historical performance for any of the ETFs we use by going to our ETFs page and clicking on their fund fact sheet.
Why do you recommend the same ETFs to everyone?
We select what we believe are the best ETFs for each asset class. Our investment methodology is based on Modern Portfolio Theory, which states that you earn the greatest return for any level of risk through the optimal mix of investments.
In other words, the secret sauce is the proportions. You’ll own a different proportion of each of those 7 ETFs based on your risk tolerance, what you’re saving for, and when you’ll need the money. Same ETFs, but completely custom portfolio based on your unique situation. Because we know no two investors are alike!
Are you affiliated with any of these ETF companies?
No. We’re not affiliated with any ETF companies, so there’s no biases or conflicts of interest when it comes to choosing the ETFs we use to build our portfolios. We select ETFs for the sole reason that they’re the best available.
We choose ETFs that are in your best interest, not someone else’s.
If you have any other questions about the ETFs we use or how we build our portfolios, please send us a note at [email protected]. Or chat with us on Intercom. We’re here and happy to help!