How to Invest and Research Your ETF
Everyone online (worth their salt) tells you to invest in index funds. Well this blog should give you a good high level overview of everything you need to know to get started.
But what are they?
Well index funds are essentially a fund (a pool of investments) that track an index. There are many different indexes some of the three popular ones in the US are the S&P 500, Dow Jones, and Nasdaq. However there are others like Nikkei 225, Russell 2000, MSCI World, Bloomberg US Aggregate Bond Index, and many many more.
What are the differences?
The S&P 500 tracks the biggest 500 publicly US companies.
The Dow Jones Industrial Average (DJIA), is one of the oldest indexes but only tracks 30 prominent US companies and is price-weighted (compared to market cap—weighted like most other indexes).
The Nasdaq Composite focuses primilary on technology based companies.
The Nikkei 225 tracks the top 225 Japanese companies,
The Russell 2000 tracks the smallest 2000 US Companies.
The MSCI World, tracks1,508 top companies throughout the world
There’s also indexes for bonds, real estate, commodities, specific industries, or countries.
What’s the point of an index? To have a benchmark to compare yourself to. When it comes to investing the idea is to pick an index that is similar to what investment strategy you’re using. You’re investing only in US stock ETF’s then comparing to the MSCI World makes less sense vs comparing to the S&P 500. Historical studies also show that over 95% of professional investors do worse than the index over the long term.
So how do you invest in Index Funds?
Usually through an Exchange Traded Fund (ETF).There are some good low-fee Mutual Fund but be careful because there’s lots of high-fee mutual funds that commission-based Financial Advisors will try to push on you especially at the big banks. So I will focus on ETFs moving forward but most of the info is applicable to both.
For example to invest in the S&P 500 you can buy the ETF:
VFV (For Canadians) or VOO (For Americans).
How do you find the ETF you want?
What I will do is google the index then add “ETF” and the country you’re in.
Here is an example below:
How can you research an ETF? Let’s say your friend tells you about this great new ETF called VEQT that they invest in, and tell you to buy it too, what should you do?
Here’s my checklist:
Google the ETF and find their ETF’s official website. Different companies will have their own version of similar ETF's. The main ones in Canada are Vanguard, Blackrock, and iShares funds. You can do this my just googling the ticker symbol (ie. VEQT, VOO, etc.) of the ETF and it should pop up. Sometimes you may need to add “information” or “ETF” to find the ETF’s website.
For VEQT this would look like this:
Click the Vanguard website to find all the info you need for this ETF.
2. Once you’re on the ETF website you want to know the following:
Most important thing is the Management Expense Ratio (MER), this is the total cost the company will take. The lower the better. Some companies will try to hide this information and you may need to scrolls far down to the bottom to find it (this is a red flag).
Some MER Guidelines to follow:
For S&P 500 index funds or simple strategies, it should be no higher than 0.15% (Vanguard’s is 0.09%).
For Stock + Bond mixed or multiple country ETF’s it should be no high than 0.3% (Vanguard is usually around 0.24%)
For more niche industries or emerging countries (think AI/Robotics focused ETFs, China/India focused ETFs) try to stay under 0.5%, and sometimes the best you can find is around 0.8%. For this you have to consider the cost of paying 0.25%-or 0.7% higher than a simple S&P500 or World ETF, and if that’s worth it to you.
If you try to outperform the overall market, you’re still moving away from investing, and moving towards gambling, and history shows that it’s much more likely to underperform. If you still really want to take a bet on a niche ETF, I would recommend only having a maximum of 10% of your portfolio invested in it. For more info on that here’s my blog that discusses the 90/10 rule: Here
Even if you were able to outperform the market for the long term by 0.5% for 30 years (which is almost unheard of, and if you could, you should be on Wall St. making billions with the other rare unicorns). But lets just say you invested in an ETF with a 0.8% fee that did 0.5% better than the market you still do worse than the low fee ETF due to the fees.
After fee’s you want to understand:
The asset allocation
Country Breakdown
Industry Breakdown
Number of different stocks or bonds
Individual Companies Holdings Breakdown
Market Capitalization Breakdown
For Stocks (Large, medium or small companies)
For Bonds (Long term, medium term, and short term bonds)
Screenshots below for each of the above:
VEQT’s MER fee.
VEQT’s Asset Allocation
VEQT’s Country Breakdown (can download the full report in the bottom right button)
VEQT’s Industry or Sector Breakdown
VEQT’s Number of Stocks. Under Characteristics you can find the total number of different stocks in the fund. The other information you can disregard since we aren’t macroeconomic investors we’re passive DCA investors.
VEQT’s Company Holding’s breakdown. As you can see only 2 companies are above 2% of the overall portfolio and 5 other companies above 1%. The remaining 13,632 companies make up the remaining 88.71% of the portfolio.
One thing not to spend too much time on is the historical performance. It’s very easy to get caught up in how something has done in the past and expect it to continue into the future. However past performance is not an indication of future success. It is very common for investors to get caught up in the hype and buy after seeing how well something has done, but that is usually the worst time to buy as its most likely that other people have bought into the hype as well. This phenomenon is called chasing returns, where investors sell their investments for the new hot thing, not realizing it’s already gone up more than it’s worth, and usually will underperform until it balances out with the rest of the market. So focus on the underlying strategy of the fund, and the fee’s, instead of past performance.
Once you’ve done the proper research to understand the ETF’s fundamental information then you can make an informed choice if it aligns with your investment strategy and goals. However most of the time, once you find the right ETF for you and have set up your automated investment plan, you shouldn’t need to change it. The only time you should change your plan is if you had major life event and your situation has changed. Or if you’ve encountered new information that has changed your investment strategy. For example if you are approaching retirement age and want to invest in a more conservative ETF, or if political instability makes you want to diversify which countries you invest in. Otherwise just reduce how much you invest into your original plan, and allocate some of those funds to other areas for example saving for a wedding, or your children’s education fund. But it’s important to set prioritize your financial future so you don’t become a financial burden to your family later in life.
In conclusion it’s important to understand not only your investment strategy, but what you’re buying in your investment strategy, because this will help you stay the course during the tough times when doubts begin to creep in. So be proactive, understand your investment plan and stay the course.
