When it comes to investing, picking and choosing the right investments can be incredibly overwhelming. The goal is to make money and create passive income, but doing all that research can feel very unpassive.
While I certainly don’t recommend ignoring the research part of your portfolio creation, there is another option in the meantime. So you don’t miss out on growth, a strong option is investing in an index fund.
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What is an index fund?
First off, let’s look at what exactly is an index fund. These are a type of investment that seeks to replicate the performance of a specific financial market index. The funds aim to track the performance of a particular benchmark index. These can be anything from the S&P 500 to the MSCI World Index.
These index funds do this by holding a portfolio of securities that closely mirror the composition of the index. What investors get are multiple benefits. The funds are passively managed, allowing for lower management fees. Prices are also lower per share, and they’re highly liquid.
Furthermore, index funds provide immense diversification across a range of securities within the index they track. You can also view these securities at any time to make sure they align with your own goals. Given all this, funds are an incredibly safe, lucrative, and easy way to put your cash aside.
How to choose?
If you’re a Canadian investor that’s already been investing for a while, it’s likely you already have a lot of investments in Canada. This can lead to a lack of diversification, even if you’re invested in multiple sectors and areas of the market.
The issue is that you’re lacking global diversification. And that’s a huge problem. If the Canadian economy isn’t doing well, then you’re missing out on the potential of protection from other countries that are doing well.
What’s more, there are many emerging markets out there that can also provide Canadians with immense growth in the years to come. And by purchasing an index fund that focuses on this, you can hold it forever without worrying about the need to rebalance your portfolio. Instead, managers will do it for you!
An index fund to consider
If you’re looking to get more global exposure with just $500 on hand, I would certainly consider the iShares Core MSCI All Country World ex Canada Index (TSX: XAW). This fund seeks to replicate the performance of the MSCI ACWI ex Canada IMI Index. This represents a broad selection of stocks from developed and emerging markets around the world, except for Canada.
By picking up the XAW exchange traded fund (ETF), you immediately have global exposure, and again that includes from emerging markets. In fact, it covers about 99% of the global equity market capitalization! Providing you with exposure to both large- and small-cap stocks.
The ETF is also low cost, with a 1.59% dividend yield as well. As for share performance, it has been immense. Shares are up 22% in the last year, and 95% since coming on the market in 2015. Overall, this ETF is a strong option for those who have a bit of cash, need diversification, and certainly want long-term growth.
