Many readers are curious about how I’m managing my money, since so much has changed since I went from indebted undergrad to finance-savvy (maybe?) almost-MBA.
A quick recap of my personal investment history:
I bought my first mutual fund in 2009 and started contributing $50 each month plus any extra money I had. Diligent investing and market recovery ensured this investment grew at a quick clip. I was blissfully ignorant of exactly how good my gains were because I had no frame of reference. In my mind, investing was supposed to be the best way to grow money, so my little mutual fund was doing exactly what it was supposed to do. (I would later cash this out after graduation to make a $5,000 payment on my student debt, eliminating my federal loan entirely.)
Fast forward to 2011 and I bought my first common stock. I was already blogging by this time and felt over-confident about money. Throughout 2012 and 2013, I profited big time on safe picks like General Electric and AT&T. My portfolio grew and spit out regular dividends, which I reinvested in more stocks. By the end of 2013, the once $20,000-in-debt-girl was now $20,000-stock-portfolio-girl. Talk about a turn-around! I would like to claim investing savvy for all my portfolio gains, but it was a matter of slow & steady contributions, market recovery, reinvestment of dividends, and the occasional lucky pop (like the time I bought shares Netflix under $220 and sold at $350). I still hold my original stable stocks, but in the second half of 2013, I started directing money away from common stocks and into ETFs.
Can you replicate my portfolio and its performance?
The gains of my portfolio depend as much as when holdings were bought as what it was that I purchased. It’s a mixed product of my own management and market performance — this is why investing in stocks is risky.
But that doesn’t mean you can’t create a robust, profitable stock portfolio of your own.
When I started investing with Questrade, ETFs weren’t available the way they are now — otherwise I should have been all over them. Questrade is still my favorite brokerage to manage all my investing, particularly with ETFs. At Questrade, buying ETFs only costs a few pennies, which is a far cry from the $5 or even $30 trading fees that banks typically charge. By keeping my trading fees low, my money is able to work harder for me and my wealth is able to grow without being held back by high trading costs.
What is an ETF?
“an ETF is an investment fund that holds a collection of investments, such as stocks or bonds. It trades like a stock on a stock exchange.” – The Financial Post
A quick comparison of stocks vs. ETFs:
Looking at that table, two of my favourite things about ETFs is 1) no fees to buy through Questrade and 2) receiving a monthly dividend. The combination of these two things is something awesome: as you receive dividend payouts from ETFs and stocks, you can reinvest them back into the ETF, even if you can only afford to buy one unit at a time. As a general rule, I don’t like to invest in stocks unless I have at least $1,000, but if I have $20 lying around in my brokerage account, I’m buying another unit in an ETF!
How to get started buying ETFs
Firstly, you need to open a brokerage account. You can do this through any big bank or through an online brokerage like Questrade. You will generally need $1,000 to $5,000 to open the account. If you don’t have $1,000 lying around, start saving. Putting aside a few hundred dollar every month will give you time to research the ETFs you might be interested in, which brings me to the next point.
How to select an ETF
The easiest way to choose your ETFs is to review them online on a site like iShares. You’ll see something like this:
This gives you the basic overview of the fund: when it was started, how its been performing, the value of the assets are under management, the number of holdings (thats the number of companies in the fund), and the fees. Note with ETFs the management fees are built into the fund — you won’t get a bill for them or anything! This is a great summary of the ETF, but all the information is in the prospectus, which you an receive as a PDF through the in the upper right corner there.
The next thing you want to look at is Holdings. This is what stocks are held in the fund and how much each stock makes up of the total fund value.
As you can see, the ETF contains a lot of different holdings — in this case, from different industries. This is another reason ETFs are so great: they allow you to diversify your investments without you having to manage a number of different stocks.
Look at the holdings to see if the ETF contains companies and sectors you want to invest in. Note that ETFs are “exchange trade funds” which means they’re traded on the exchange — this means the percentage of each holding can and does change.
Receiving income from an ETF
If you click on Distributions, you will get a record of dividend payouts for the fund that looks like this:
There’s a bit of terminology on this page that you should be familiar with:
- The Ex-date is the date after which, if you sell your ETF holding, you will still receive the payout for that month.
- The Record date is the date by which you must purchase the fund in order to receive the payout for it that month.
- The Payable date is the day you will receive your dividend payout.
- The DRIP price is the Dividend Re-Investment Plan price – the cost to buy one unit automatically with the dividends being paid out to you. Using this method, instead of receiving cash, you will receive more shares in the ETF (this is set up through your brokerage and you can select how much you want to DRIP).
- The PACC price is the Pre-Authorized Cash Contribution price – like the DRIP price, it is the cost to buy one unit automatically, but this uses cash in your account rather than dividends they just paid you.
Look at the dates to determine how often the fund pays out. Many ETFs are monthly, but others are quarterly, semi-annually, or annually.
To calculate the payout you will receive:
# shares you hold x cash payment declared = income
The payout varies based on the holdings in the ETF. Some ETFs will be more consistent than others and always pay the same, others might vary. The best part?
You can hold ETFs in tax-friendly accounts like RRSPs and TFSAs.
ETFs are a great way to get a lot of exposure to a number of different stocks, even if you only have a small amount to invest. Furthermore, receiving a regular payout from your investments that you continuously reinvest is a great way to build wealth.
For more information about buying ETFs, Rob Carrick did a great series on the topic for the Globe & Mail.