When it comes to index investing, passive Canadian investors who’d rather “set and forget” shouldn’t be afraid to pursue an index ETF that mirrors the S&P 500 or even the TSX Index. Of course, many investors have gone down the passive investing route and have been rewarded with some pretty solid market returns in recent years.
If you don’t play the game of individual stock picking, you can’t trail the market unless, of course, you opt to buy shares of an index ETF with a hefty management expense ratio (MER). By striving to keep costs low and sticking with highly liquid, popular index ETFs, some of which might not even require you to pay any sort of commission (that depends on the brokerage you’re using), you can compound your wealth without having to invest too much time in picking stocks and researching companies.
That said, if you are a fan of conducting valuations and think a particular business has what it takes (management and industry tailwinds) to outpace the market, it’s completely worthwhile to buy an individual stock for your TFSA or non-registered portfolio, even if you’ve decided that you’re primarily an indexer. Investors can own the market indices as well as individual names.
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Index ETF investing makes sense for stock pickers, too!
Arguably, that’s the best way for new investors to get started! By making an index ETF your core foundation while adding some supporting individual names as well, you can form a unique mix of stocks that can help you slightly edge out the markets in any given year. In any case, valuing companies can be a fun (and profitable) strategy for long-term investors who can tune out the near-term noise while focusing more on the longer-term growth story.
Even seasoned stock pickers who’ve done well over the years shouldn’t ignore the potential of index funds, especially if one is out of ideas with too much excess cash and not enough places (with good valuations) to put the money. Though market averages themselves can be pricier, I still think that averaging into them can be a good idea over time, especially for the fans of automated investing. Perhaps the biggest plus of automating investing is that you take fear and market-timing out of the equation.
The VFV and VOO are great index ETFs to hold for life
Personally, I’m a fan of both individual names and index ETFs. And there’s one index ETF I always lean on whenever the stocks on my radar are a bit overheated, and there are limited names to buy. My favourite ETF has to be the Vanguard S&P 500 Index ETF (TSX: VFV), as it allows dirt-cheap exposure to the S&P 500, a tech-heavy index that allows one to bet on the big tech players in the AI race with a rock-bottom MER of 0.09%. Indeed, the VFV is a great index ETF to hold if you want to keep things in Canadian dollars.
That said, if you want to transact in U.S. dollars (say you’re managing an RRSP) or want even lower fees, the Vanguard S&P 500 ETF (NYSEMKT: VOO), with its 0.03% expense ratio, stands out as a better bet. Of course, both indices are plays on the U.S. market, which is a great place to invest if you’re out of ideas and are willing to settle for market returns. Whether you like the VFV or the VOO, both ETFs are core foundation plays that are best held for decades.
