Isabela
Picture this. It's 9:30 a.m. and markets just opened. Is now a good time to buy that Global ETF I've been keeping my eye on? This ETF is really cheap.... it must be good, right? If you've ever asked yourself these questions keep listening. As we dive into various ETF myths and we separate what's real versus what's market noise. I'm joined today by Chiara and Trevor.
Welcome both of you back to the podcast. Chiara, you're now on the other side as a guest. Tell me a little bit more. What have you been up to lately?
Chiara
Thanks for the warm welcome. I'm really excited to be on the other side of this podcast. I now support investment advisors and portfolio managers at TD Private Wealth. I help them optimize portfolios that are tied to their end clients' financial goals, and it's been really rewarding.
Isabela
Awesome. Great to hear. And Trevor, how are you doing?
Trevor
Well, still doing the same old same old talking about ETFs, which I absolutely love doing. So, thanks for having us.
Isabela
Awesome. Well, let's just dive right into it. Trevor, I'm actually going to start off with you and I'm going to ask you: True or false. ETFs are always the cheapest option on the market.
Trevor
I'm going to go with false on that one. I mean you know what I would say is that on average ETFs are maybe a little less expensive than other investment options that are out there. But that's probably because the average ETF in Canada is still passively managed. If you look at actively managed ETFs, they would be more expensive than passive ETFs or ETFs that follow indices.
One thing I think I want to add, though, is that there's been some fee creep in the industry, so it's still important to pay attention to fees. There are now exchange traded funds that have higher MERs than you'd find in the mutual fund side of things. And so, it's a nice thing to have on your checklist of due diligence as you evaluate options.
Trevor
Lower is generally better.
Isabela
Gotcha. So, we also want to make sure that if that's a difference between an active ETF versus a passive ETF, active will be a little bit more expensive usually.
It's all about value for money at the end of the day. So, if you're going with something that's passive that just gives you exposure, that should be fairly low cost. If you're looking at something that's quant or factor based, you'll pay a little more. And if it is fundamental active you'll pay a little bit more than that for sure.
Trevor
But just make sure there's value for what you're paying for.
Isabela
Okay, let's move on to the next myth. Chiara: True or false? I can trade ETFs at any time of the market.
Chiara
Yeah. While it is mainly true, I would say there's a small catch to that, right. Not all hours of the trading day are created equal. Let's say you're in a farmer's market where you can purchase produce. Right. The best time to go to the farmers' market would be mid to mid-morning. And the reason is if you go during that time the vendors are more attentive,
there is more option, the vendors have restocked all the inventory. So, you have more optionality in picking that produce. And you know trading ETFs is very similar to that. I would also say that even though you can trade ETFs from 930 to 4 p.m. Eastern Standard Time, the sweet spot would be anywhere from 10 a.m. to 3 p.m.
And the reason is, there's a lot more liquidity and volume during those market hours. If you, let's say, trade outside of those market hours, there is less supply and demand that kind of make the price really competitive and predictable in the marketplace.
Isabela
And do you have any pro tips for investors when they are executing their trades?
Chiara
Yeah, I would say maybe try and put in a limit order versus a market order. A limit order allows you to set a maximum price that you're willing to pay for that ETF. And same thing, a minimum amount that you're willing to sell that ETF at. For example, let's bring back the farmers market example. If you're bringing a basket of apples, and you want to do a limit order, it's essentially saying here is $5 for this basket of apples.
Are you willing to take it? Versus if you do a market order, you're essentially going to the marketplace and saying, hey, I'm here to sell this basket of apples. How much are you going to give me that for?
Isabela
Awesome. Thank you for the pro tip.
Trevor
I think, you know, I was thinking of an analogy for this question. It's like everybody has a friend who, you know, gets up before their alarm clock goes off. It's 5:01 in the morning. You throw the runners on, they're out the door. They're off for a run. And then everyone has these other friends who, you know, set their alarm for five.
Hit the snooze button a couple times. You know, I get out of bed, fairly early, but I like that first hour where I just sit there all by myself in the house and slowly spool up and get up to speed. I think that's kind of the stock market. There are certain stocks that open right at the opening bell.
There are some stocks that don't start to trade right away. That's true of bonds as well. Some of them take a while to sort of spool up. And so, with an ETF you want to make sure that all of the underlying investments inside that ETF are trading. And so, if you can no one says you have to. But if you might want to avoid or consider avoiding that first 30 minutes or so.
While some of those late risers' kind of get out of bed and start to, start trading.
Isabela
That makes total sense. We want to make sure everyone is wide awake before we start to buy an ETF.
Trevor
Yeah.
Isabela
Okay, Trevor, another true or false question for you. ETFs don't pay dividends. True or false.
Trevor
It's kind of both I mean what I would say is that all ETFs from a regulatory standpoint are required to distribute any income earned inside of the ETF. So, if the ETF is full of investments that don't have any dividends or income streams, then the ETF in turn is not going to pay anything out. But if that ETF is full of bonds and those bonds are paying interest, then that interest must be paid out by the exchange traded fund to unitholders.
If that ETF is full of American or European or global equities and there's foreign dividends that are paid, that has to get paid out. If it's full of Canadian stocks, that has to get paid out. And I would just say there's no alchemy here. Right. So, if it's fixed income or if it's bonds that are paying interest, then the tax on that ETF would be interest income.
If it is American dividend paying stocks that would be foreign equity. If it's Canadian dividend paying stocks that might be eligible dividends. So, whatever the tax characteristic of the underlying asset class is, the ETF would by and large be the same. We also take our fee out of that income as well. So that's kind of maybe why you'd see some of a discrepancy maybe behind the yield on an investment versus what's actually received.
Isabela
And where can investors go to check whether or not an ETF will pay them a dividend?
Trevor
Your best bet is probably the ETFs website. So, if you went to our website, you would be able to see what the dividend is of the underlying portfolio. And you could look at it that way. Some other resources would be any sort of financial website. You could look at the Toronto Stock Exchanges website, for example, and it would show you if there is an income flow there as well.
Isabela
Another great pro tip. Thank you. And our final true or false question for you, Chiara: “the bigger the assets under management of an ETF, the better the ETF.”
Chiara
Yeah. So, this one is false. I would say it's not about the size of the ETF. It's about what's under the hood. Let's give an example of purchasing a vehicle. Sometimes the larger, more flashier louder engine, bigger AUM might appeal to be the best choice. When really that might not be feasible for your day-to-day commute.
Right. Similar with an ETF just because it has a really large AUM, that could be a result of lots of marketing long track records. Been around for a long time, but you really need to look at the bells and whistles of the ETF. You need to make sure you know it has the diversification exposure that you're looking at, whether it's sector, geographic exposure, market cap exposure, all these important little, features are very important in considering the ETF.
Isabela
Okay. Gotcha. So as an investor, I need to first see like what ETF what parts of that ETF align with my strategy. If that's like long term short term global exposure just within North America. And that's what's going to give me the best detail.
Chiara
And I would add in terms of liquidity, a lot of investors think the larger the ETF, the more liquid it is, when really, it's the underlying assets of the ETF. Right. So, for example, let's say you have an ETF that tracks North American large cap equities, mega-cap equities. That's going to trade the same, whether the ETF has an AUM of 1 million or above a billion. Right? Versus if the ETF has assets that are invested in international markets.
Trevor
There's kind of like a chicken and egg thing, right? If everybody, as investors say, well, I'll wait until that ETF gets bigger before I invest, it's never going to get a bigger sort of thing. Right. So, I think it's back to first principles. Just make sure the investment mandate or the ETFs exposure is exactly what you're looking for. Because look, every ETF starts small.
When it's new it's small. It doesn't mean you can't buy it or that it doesn't work for portfolios. I think it's very human to find shortcuts and it's true of life and it's true of investing. You know, one of these travel tips is, is find out which restaurants have line ups and go line up there. It's kind of like a herd mentality thing.
The flip side of that coin, though, is like the velvet rope in front of the empty nightclub. You know, it doesn't always mean that there's, something really interesting inside. So, make sure that the ETF is exactly what you're looking for. And if it's bigger, you know, that's a nice endorsement that other investors also have similar needs is you.
But it doesn't really impact whether or not that ETF is right for you.
Isabela
Absolutely okay. Well, I'm just going to do a quick summary of like our four big points that we learned today. So, what I learned was that the cost of an ETF depends on whether or not it is active or passive. Active will generally be a bit higher cost. The best time to trade an ETF is between the hours of 10 a.m. and 3 p.m., and ETFs do pay dividends as long as the underlying holdings pay dividends.
And finally, just because an ETF is bigger does not mean that it's always better. Okay, great. Well, if you've got a burning ETF question or a myth you want us to tackle, feel free to leave a comment on any of our socials. And who knows, maybe we’ll feature on our next episode. And as always, stay curious, stay informed and stay invested.
Isabela
Until next time.
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