Got $500 to start your investing journey? You might be tempted to dive into stock picking, possibly using fractional shares to spread your investment across a few different companies.
However, this approach often lacks true diversification, especially if you’re limited to a small number of stocks. Moreover, if you’re considering international stocks beyond Canadian borders, you’ll have to grapple with the additional hassle of currency conversion.
Instead of navigating these complexities with just $500, I recommend turning to a more straightforward and efficient investment solution: an index fund, particularly a low-cost exchange-traded fund (ETF).
Investing in an ETF allows you to achieve broad market exposure, ensuring your investment is both diversified and manageable. Here’s why this strategy makes sense and my top pick for where to place your $500 for optimal growth potential.
You gain maximum diversification
Diversification isn’t merely about owning a handful of different stocks—it’s about creating a robust portfolio that can withstand market fluctuations and capitalize on growth opportunities across various sectors and regions.
True diversification means your investments include
- Stocks from all 11 market sectors, ensuring you’re not overly exposed to the ups and downs of any single industry;
- A mix of small-, mid-, and large-cap stocks, which allows you to benefit from the growth potential of smaller companies and the stability of larger, established corporations; and
- International exposure, with stocks from countries around the globe, to take advantage of global economic growth and mitigate risks that may affect individual markets.
With just $500, achieving this level of diversification through individual stock selection isn’t just challenging—it’s practically impossible.
However, an index fund can provide this broad exposure with a single purchase, simplifying your investment strategy while maximizing potential growth.
The index fund to buy
I recommend iShares MSCI World Index ETF (TSX: XWD) for those looking to invest $500 effectively.
By investing in XWD, you’re buying into over 1,300 stocks, with about 70% of these from the U.S. and the remaining 30% spread across other developed markets like Japan, the U.K., France, Switzerland, and Canada.
Purchasing one share of XWD, which currently costs around $88, allows your investment to be spread across all these different stocks, providing you with immediate and extensive diversification.
Moreover, XWD offers a cost advantage over actively managed mutual funds; it passively tracks an index and charges a management expense ratio of only 0.48%.
