is Consider this article as your guide to index funds in Canada. As we know, the COVID-19 pandemic has changed the course of everything we do. People’s lives have taken a 360-degree turn, and investing is one of the factors among them. I say this because we have now a record number of people entering the stock market. And everyone is in a race to make quick bucks.
Generating market-beating returns have become harder than ever. Hence, to ease your predicament there is a product known as index funds. Best suited for newbie investors to earn good returns and become immune from the disappointment of not beating the markets. Below is a comprehensive explanation of what, why, and how of Index funds in Canada.
Index Funds – What are they?
As the name says index, it is a kind of ETF (Exchange-traded fund) or Mutual Fund that is designed in a way to replicate a specific market benchmark index. This can include S&P 500, S&P TSX Index (Canada’s benchmark index), or any other benchmark that includes a set of companies based on the weighting methodology of the index.
Investing in these indexes gives you the direct exposure to participate in the top companies of a particular country. It offers you a great amount of diversification.
The Functionality of Index Funds in Canada
Understanding the nitty-gritty of Index funds is as simple as investing in them. Let’s start with investing types to understand how to efficiently invest in Index funds in Canada.
Passive vs Active Investments
Passive Investing is sitting tight and enjoying the ride. If you are patient enough to hold your investments for longer-term, you can easily have a handsome compounded return. Index fund manager just invests in the companies that are present in that particular investment and does not happen to buy and sell more securities.
Only Index rebalancing lets the fund manager change the portfolio. More and more people are indulging themselves in passive investing as they are also affordable.
In an active investment approach, the fund manager tries to beat the market by actively selecting securities with the help of sophisticated analysts that specializes in security analysis. As you can anticipate, it takes a lot to pursue active investing and hence more fees are charged with an elevated risk level.
Does It Provide Diversification?
Let’s say index funds’ second name is diversification! As the saying goes, “Don’t put all your eggs in one basket”. Index funds just help you to put your eggs in different baskets namely Large cap, Mid Cap, Small-cap, and also across sectors.
You can sleep well knowing that one or some of your holdings won’t put much downside risk to your investment. It’s a good risk mitigation strategy, and I can feel you are now more excited to invest in Index funds in Canada.
Let’s Answer the Why of Index funds!
No matter how tempting the investment product might sound, you have to align it with your goals and risk tolerance. The Oracle of Omaha Warren Buffett loves Index funds and has also recommended them to many investors. Let’s explore the pros and cons of investing in Index funds in Canada
Advantages of Index Funds
- Cost-efficient and diversification benefits
- Easy to access
- Not a time-consuming endeavor
- Easy to predict
- Easy to achieve market returns
Disadvantages of Index Funds
- Not suitable for investors involved in active investing
- Not for someone looking for short term investing
- No discretion for stock selection
Difference between Mutual funds, Index funds, and ETFs
These instruments are analogous and can create a lot of confusion while choosing one of them. Rest assured. We will look at some of the fundamentals of these investment vehicles that will help you to make the right call.
ETFs are based on securities that trade in a stock exchange. You can buy/sell units of ETFs just like a stock. ETFs in themselves are diversified in which they are available for different asset classes like commodities, bonds, etc.
Professional management is required to manage an ETF and there are active as well as passive ETFs. Transaction costs, brokerage, liquidity, and other factors should be taken into consideration before investing in an ETF.
Mutual funds share many traits as ETFs. Basically, mutual funds collect money from people like you and me and invest it based on the fund’s objective and theme. This is the best route for long-term wealth generation.
Professionally managed and a notch higher fee than ETFs. One big differentiating factor is unlike ETFs, you can trade it only once a day. Mutual funds are offered across asset classes and more classified within the asset classes as well. Once you have determined your risk and return criteria, you can invest in that kind of mutual fund that maximizes your return.
Invest in Index Funds in Canada
Technology disruption has made everything available to us with just a click. You can invest in index funds through your broker trading platforms. Now with the onset of discount brokers, you can reduce the cost of investing. That too with just a little knowledge of that interface.
Platforms like Questrade or Wealthsimple allow you to invest in index funds. These platforms are self-directed and assist you to trade without bringing any broker into the picture. Some platforms refrain from giving advice, while others might charge you extra fees for recommending investments.
For novice investors, platforms like Robo-advisors take care of all the worries regarding investments. They help investors choose the appropriate investments and then manage those investments.
What is the Conclusion?
No matter how compelling any investment product or asset class sounds, you should not view anything in isolation. Consider various factors as discussed above and make the right call of securing your life by making the right investments. I hope this guide has helped you in maneuvering your investment journey for index funds in Canada.