Never Be Ashamed of Buying a Broad Market Index Like This ETF

Getting nervous about speculative sectors, like pot stocks? It may be time to broaden the portfolio with instant diversification with BMO Low Volatility Canadian Equity ETF (TSX:ZLB).

| More on:

A diverse portfolio can stand up to many financial storms, and the current market conditions are providing an important stress test. If watching speculative stocks tumble is too hard to stomach, it could be the market’s way of telling you to buy passive investments that offer instant diversification.

Despite humble beginnings in the 90s, and another decade of being neglected, exchange-traded funds (ETFs) — passive index investments — now account for trillions of investment dollars. Can you guess which age demographic is the most enthusiastic ETF buyer? You guessed it: savvy and self-sufficient millennials, according to a Charles Schwab survey in the United States.

In selecting an ETF, my advice is to think of a tree and start with a solid foundation. The most consistent and widely used market index is the S&P 500, which Canadian investors can access through iShares Core S&P 500 ETF. The couch-potato approach is to buy broad market funds on a scheduled basis (dollar-cost averaging) and forget about it.

The problem is that some ETFs are destined to underperform. They may be tied too closely to one sector or try to double or triple returns, with terms like “2X” and “3X” in the name, which, in my opinion, should not be the first ETFs to own.

Peter Hodson wrote about this topic for the Financial Post, concluding that “not all ETFs are created equal” and encouraging investors to look up the details on fees, tracking error, liquidity, and sector concentration.

How about a simple question? Are you looking to beat the S&P 500? Yes or no? It’s okay to say no…

It’s a good segue into the BMO Low Volatility Canadian Equity ETF (TSX:ZLB), which is a basket of 45 TSX holdings, many of which are utilities that move slowly and pay dividends. Low price fluctuation makes for a low beta score. An ideal investment will have a low beta and a high return (called alpha). In practice it’s hard to find this combination.

Over five years ZLB is up 43%. Include the 2.68% yield and you are looking at a pretty respectable return of ~57% over that time frame. As I pointed out in March, ZLB has the dubious distinction of a beta (volatility) level that continues to creep up (graph is below). The beta is higher than another TSX ETF that attempts to track the S&P 500. I’ll be watching this and wondering whether the fund managers will swap out holdings to bring the beta down.

ETF volatility

A fellow Fool contributor is bullish on ZLB, concluding this ETF could make your TFSA account “unshakeable.” I do think that ZLB can root a portfolio. The wacky October we’re experiencing has made ZLB ripe for the picking (I’m getting good use out of the tree analogy!). Trading near $28.38 per share, a bedrock of foundation in the form of the 200-week moving average means now is a buying opportunity.

The bottom line is that you shouldn’t take any flak from your investing buddies for buying a broad ETF during this market pullback, or ever, really. It’s not a sexy story, but time will be on your side.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Brad Macintosh has no position in any of the stocks mentioned.

More on Stocks for Beginners

clock time
Stocks for Beginners

3 Stocks to Start Investing Today

Looking for a set of stocks to start investing today? Here are some great options that offer growth and income…

Read more »

Chalk outline of two arrows pointing in opposite directions
Stocks for Beginners

How to Save Thousands Per Year With Your RRSP

If you can hit your RRSP contribution limit each year, you could save thousands in taxes that could help boost…

Read more »

Portrait of woman having fun in the street.
Stocks for Beginners

New Investors: 3 Dividend Stocks to Buy Soon

Are there too many stocks to choose from? New investors can start their research in these solid dividend stocks!

Read more »

edit Sale sign, value, discount
Stocks for Beginners

5 Amazing Stocks That Are on Sale Today

After the recent stock market correction, tonnes of top-quality stocks are on sale today. Here are five amazing stocks to…

Read more »

stock analysis
Stocks for Beginners

2 Simple Strategies That Canadian Investors Can Use to Start Investing in Stocks

Here are two of the simplest and best investing strategies for Canadians to start investing in stocks today.

Read more »

Target. Stand out from the crowd
Stocks for Beginners

Top 2 Dividend Stocks for Beginners

Dividend stocks like BCE (TSX:BCE)(NYSE:BCE) are ideal for beginners.

Read more »

Stocks for Beginners

Starting an Investment Portfolio? Buy These 3 Stocks!

Interested in getting a start in the stock market? Buy these three stocks today!

Read more »

TFSA and coins
Stocks for Beginners

TFSA Investors: 3 Stocks You Should Buy Today

Are you looking for stocks to add to your TFSA? Here are three top stocks to buy today!

Read more »