Before we begin, a quick disclosure: I am a Certified Financial Planner who does not sell financial products, so I have no commercial interest in the recommendations here. This commentary is intended to be objective and practical.
One encouraging trend in the investment industry has been a gradual increase in transparency. There’s still progress to be made and many areas where consumers remain at a disadvantage, but overall we are moving toward clearer pricing and product structures.
That said, self-directed investing is not the right choice for everyone. While managing a portfolio can be straightforward for some, many people prefer not to press the buy and sell buttons themselves. Investment professionals often serve clients better when those clients do not want to micromanage their holdings. At the same time, investors who do want control now have abundant tools and products to build efficient portfolios. Below I look at two innovations from the past decade—exchange-traded funds (ETFs) and robo-advisors—that have helped lower the cost and complexity of investing for retail investors.
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How ETFs changed the game
Mutual funds have been around in Canada since 1932, and they became the dominant retail vehicle over the last several decades. Over the past ten years, however, investor demand has shifted noticeably toward exchange-traded funds (ETFs). Despite their rapid growth, ETFs still represent a smaller share of Canadian retail assets than mutual funds: mutual funds remain roughly five times larger (about $2 trillion versus about $400 billion in ETFs).
ETFs make it relatively easy to build diversified portfolios. Investors can combine a Canadian stock ETF, a U.S. stock ETF, a global stock ETF and a bond ETF, or add sector ETFs and individual stocks for a tailored mix. There are over 1,100 ETFs available in Canada from roughly 40 fund sponsors, plus easy access to thousands of U.S.-listed ETFs.
The breadth of choice can be overwhelming, which is why many investors still work with advisors to select the right blend of funds. At the same time, new ETF structures—particularly single, diversified funds—can simplify investing for those who prefer a hands-off approach.
How to invest using all-in-one ETFs
All-in-one ETFs (also called asset-allocation or one-click ETFs) package multiple asset classes into a single product. The concept is simple: choose one ETF that provides exposure to equities, bonds and sometimes other asset classes in a single, rebalanced vehicle.
These funds remove the need to manage several separate ETFs and reduce the monitoring required by investors. They are especially useful for smaller accounts—such as a registered education savings plan (RESP)—or for investors who want a straightforward, diversified core holding without frequent oversight.
All-in-one ETFs suit investors who want a simple, low-maintenance portfolio. For people who do not wish to trade or rebalance often, these funds provide an efficient, single-ticket solution.
How to invest using robo-advisors
Robo-advisors are online portfolio managers that use technology to construct, monitor and maintain ETF-based portfolios. For a modest fee, they offer automated oversight and rebalancing that can be more hands-off than managing ETFs directly.
During onboarding, a robo-advisor typically assesses an investor’s objectives and risk tolerance to recommend an appropriate ETF mix. While customer service is usually lighter than what you’d receive from a full-service advisor, the key trade-off is lower fees.
Typical fee structures might include a portfolio management fee in the neighborhood of 0.5% plus underlying ETF management expense ratios (MERs) around 0.25%, resulting in an effective cost near 0.75%. For many retail investors, that is substantially cheaper than traditional full-service advisory fees, and robo platforms often have much lower account minimums.
Robo-advisors usually focus strictly on investment management and do not provide the broader financial planning or advice services that some full-service advisors offer.
How to choose between robo-advisors and all-in-one ETFs
There’s no universal right or wrong choice between buying all-in-one ETFs and using a robo-advisor. The best option depends on your personal circumstances, preferences and comfort level with managing investments.
If you want to learn ETF investing but aren’t ready to commit, a robo-advisor can be a useful bridge. You can start with automated management, gain experience with ETFs, and later transfer the holdings in kind to a self-directed account if you decide to take full control. Others may prefer to stay with a robo-advisor for the convenience and oversight, accepting the modest ongoing fee in exchange for the service.
Over time, continued competition and technological improvements may drive fees lower for both ETFs and robo platforms, making cost comparisons even more favorable for retail investors.
More about investing:
- What to do if you overcontributed to your RRSP
- The MoneySense ETF Screener
- Best robo-advisors in Canada for 2024
- Best ETFs in Canada for 2024