How to build an investment portfolio with ETFs

There’s a lot of clamour for more investing posts on MAG, so I think it’s time I gave in.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.

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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? 

NO!

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.

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:

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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:

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this is NOT a recommendation to buy! I simply selected the first ETF on the list!

 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.

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You can see approximately 7% of this fund is made up of Royal Bank of Canada stock

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:

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Note that this fund pays out quarterly, but there are many that pay out monthly. Others pay out annually or semi-annually.

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.

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Comments

  1. Good post!

    Only point I’d make is that you can buy ETFs via brokerage accounts like Questrade or with a brokerage that is at a bank

    However if all that stuff is v. scary and you really have only been saving your money in savings accounts and have no clue how to buy or trade ETFs (which are a lot like stocks) but you want to invest in things that are SIMILAR to ETFs, you should go with mutual funds which can be purchased through any bank.

    ETFS = Mutual Funds … they only differ in the way they’re traded (bought / sold).

    I have a few posts on this in my Investing Series about the little differences between the two..

    For Canadians I’d recommend Vanguard Canada and iShares if you want to buy ETFs, and TD Canada Trust E-Series at TD Bank for Mutual Funds

    For Americans, you can’t beat Vanguard. Their fees are so low it makes me cry. I was also with Charles Schwab in the U.S. but that was by default, because they also have TD Bank in the U.S. which wasn’t too shabby either.

  2. This is a timely post, as I just purchased my first ETFs! I found some ETFs through my Vanguard brokerage account that had lower expense ratios than several index funds with similar holdings. Thanks for sharing your knowledge!

  3. Does this include your retirement accounts too?
    Really hoping for another dip, so that I can invest our cash holdings. Honestly, wished I could have invested more during last year when stocks were cheaper.

    • Not all of my retirement accounts — I still keep a cash savings account and I hold a mutual fund in RRSPs in addition to my RRSP brokerage account.

      There’s always dips in the market. January KILLED me this year, glad to see it’s recovering now!

  4. I like ETFs but still prefer individual stocks that pay steady dividends. I agree that they are a great alternative for someone just starting out. Thanks for the post.

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