My first attempts at investing in 2017 were…ineffective to say the least. I bought a motley (no pun intended) assortment of penny stocks and Canadian blue-chip dividend stocks. Some did alright, others grew quickly, but most went nowhere. A few even went bankrupt and got de-listed.
The result? I underperformed the average index fund. It turns out that stock-picking is extremely challenging. While my fellow Foolish writers have some good picks, I prefer sticking to exchange-traded funds, or ETFs. Their combination of low costs and diversification is hard to beat.
Why buy an ETF?
To stay diversified, investors should hold stocks from all 11 stock market sectors. Picks should include small, mid, and large-cap stocks, and stocks from U.S., Canadian, international developed, and international emerging markets. This is really hard to do with just $20,000 to invest.
For starters, you’ll probably have to convert currency to buy non-Canadian stocks. Then you have to decide how much of each stock belongs in your portfolio. Then you have to collect and reinvest all the dividends, and re-balance the portfolio periodically.
As you can imagine, this is a very difficult task once you start owning more than a dozen stocks. A great alternative is an ETF, which tracks a basket of stocks according to various rules. I prefer passive ETFs, which unlike active ETFs, do not attempt to beat the market.
My favourite ETF
If I had to start over with $20,000 today, I would put it all in the iShares Core Equity ETF Portfolio (TSX:XEQT). This ETF trades at less than $25 per share but provides exposure to over 9,359 stocks from U.S., Canadian, and international stock markets.
A great way to think about XEQT is as an all-in-one, globally diversified stock portfolio contained in a single ticker. It’s managed on your behalf by its fund manager and will automatically pay out dividends and re-balance the underlying portfolio.
With XEQT, all you really need to do is buy, reinvest dividends, and hold for the long-term. Holding XEQT encourages you to avoid bad investing behaviours like trying to time the market, panic selling, or chasing hot asset classes. Other benefits include:
- Extreme diversification: XEQT holds stocks from U.S., Canadian, and international markets, small, mid, and large-cap stocks, and stocks from all 11 market sectors.
- Low cost: XEQT costs a management expense ratio of 0.20%, or $20 in annual fees for a $10,000 investment.
A great investment strategy includes using XEQT as the core of your portfolio (as its name suggests), while supplementing with a few choice Canadian stock picks (and The Fool has some great recommendations for those!)
