Index exchange-traded funds (ETFs) are some of the best investments out there. Offering diversification, low management fees and liquidity, they beat most other funds an investor could purchase. Mutual funds are illiquid and can only be cashed out of once or twice per day. Hedge funds have high fees, typically underperform the market, and share the problems previously mentioned for mutual funds. Non-index ETFs usually charge high fees similar to hedge funds.
Compared to the other options discussed above, index ETFs offer the best of all worlds. They’re diversified. They have low management fees – sometimes as low as 0.01% per year. And finally, they are highly liquid, meaning that you can sell them whenever markets are open, typically eight hours per day Monday to Friday. It’s a pretty sweet deal.
With that being said, not all index funds are created equal. Some have higher fees than others. Some are more diversified. Some track reputable indexes, others track questionable ones. The variety is just as diverse as is found in the world of managed funds. It takes considerable research to find out which fund portfolio is right for you. In this article, I’ll explore one Canadian ETF that I’ve been buying in recent years.
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Vanguard’s emerging markets ETF
The Vanguard FTSE Emerging Markets Index ETF (TSX: VEE) is a Canadian fund of emerging market stocks. It holds 6,355 stocks, most of them issued by companies in China and India. Its portfolio P/E and price/book ratios are 15.8 and 2.3, respectively, much lower than is the norm for Western markets. The fund has a 0.26% management fee, which is relatively low.
Emerging markets have potential
One of the big reasons why I like the VEE ETF is because the markets it invests in have a lot of potential. As mentioned previously, VEE’s P/E and price/book ratios are much lower than those of North American stocks. Additionally, these stocks have plenty of growth potential, with a 14.4% average growth rate. Finally, emerging market stocks have lower market caps than North American giants, meaning they benefit from the size premium. Overall, such stocks are very much worth looking at.
Wide diversification
One of the best things about VEE is its wide diversification. The fund holds 6,355 stocks, which is more than most index funds hold. The stocks furthermore are in different industries, reducing the correlation among the holdings. Low correlation is a key distinction between true diversification and merely numerical diversification. VEE ticks both of the important boxes when it comes to diversification.
Low fees
VEE’s 0.26% management fee is relatively low. It certainly isn’t the lowest you’ll find among index funds. Big S&P 500-based funds sometimes have fees as low as 0.01%! But VEE’s fee is significantly lower than what the average active fund charges.
A respected issuer
Last but not least, VEE is issued by a respected fund management firm, Vanguard. Vanguard is one of the “big three” index fund companies, along with BlackRock and State Street. It was one of the first funds ever to offer index funds, and it has accumulated considerable expertise in running such funds over the year. It’s an issuer you can trust.
Foolish takeaway
Investing in ETFs is usually a good idea. But you need to know which funds to hold. Invest in a low quality ETF, and you could get results as poor as if you’d invested based on dodgy stock tips. Invest in high quality funds like VEE, and you’ll likely go far.
