COLUMN: Ask the Money Lady – ETFs and MFs

Dear Money Lady: I am a new investor, and I wanted to know if I should buy mutual funds or ETFs (exchange traded funds) or should I get both? Can you let me know what you think? Darren.

Great question Darren – most people choose mutual funds and ETFs to invest.

Both are considered good investments for the long-haul investor enabling you to trade a basket of stocks, bonds, styles or foreign stocks like a single stock without the risk of single stock ownership. The idea is that if one stock turns out to be a lemon, it doesn’t spoil the whole bunch. Let’s look at an example, if you were holding an ETF that followed the Dow 30 Industrial and one component of this fund fell due to a bad news report, that doesn’t mean the stock price of the fund will necessarily drop. If the other holdings are doing well, they could potentially make up for the bad news that is specific to the poor stock in the fund. Another benefit would be the ability to invest in broader market segments.

Here’s something to keep in mind. Many economists believe in the theory of sector rotation, which means that most of the time, money will move from sector to sector as one loses favour and the other gains popularity. I am not sure myself if I tend to believe this all the time, however it is clear that some sectors perform better at different times than others. Therefore, being able to move your money into a stronger sector and out of a weakening one can be quite advantageous and something easily done using ETFs.

When investing with ETFs and mutual funds you want to pick based on your planned time in the market. What I mean is, if you plan on holding the investment for one to two years, then pick the mutual fund. If however, you only want to hold your investment choice for a couple of weeks or months, then you should choose an ETF instead. ETFs can be bought and sold throughout the day in the stock market however mutual funds can only be bought or sold once per day based on the closing NAV price. The other main difference is in the fund management. Mutual funds are actively managed, and ETFs are passively managed. This means mutual funds will be controlled by an active investment manager while the ETFs are just setup to mimic a particular index with no real involvement from the portfolio manager. Because of this it is said that ETFs have a more accurate realized cost to the funds when you buy them, based on the bid/ask spread at the time of purchase, versus a mutual fund that has money coming in from all investors on a daily basis to then be managed and put to work by the portfolio manager.

When you are looking to invest in ETFs, mutual funds or even index funds – try to pair them with other complimentary funds that work either in tandem or as opposites, to mitigate your risk exposure. A good example might be to capture a Canadian Bank ETF with an Insurance ETF. If you are wanting to offset risk, but still provide for growth, you will want to diversify across sectors, market capitalization, geographic regions and investment styles. Always do your homework and remember, you can’t know it all. Get a professional advisor to help you choose what is right for your money and start creating the “right” opportunities for the future you deserve.

Christine Ibbotson is a Canadian author, finance writer and syndicated money coach on BNN Bloomberg. She is also part of the everyday lineup on CTV Your Morning in every province. If you have a money question you want answered free – send it to: info@askthemoneylady.ca.