It’s a major dilemma facing many new Canadian investors who want to build a large nest egg over time. On the one hand, ETFs (Exchange-Traded Funds) provide a low-cost way to expose yourself to a very wide range of asset classes, from stocks, bonds, REITs, and even money market funds. Indeed, you can keep it as simple as buying a diversified ETF that bets on the broad equity market (at home and abroad) with the iShares Core Equity ETF Portfolio (TSX: XEQT) and call it a day. Indeed, there’s a devoted fanbase that just buys that one ETF for their equity exposure.
For those looking for greater fine-tuning, betting on the Canadian stock market, like the Vanguard FTSE Canada All Cap Index ETF (TSX: VCN), as well as other regions (most notably the U.S. market with something like the Vanguard S&P 500 Index ETF or even the CI Invesco Nasdaq 100 Index ETF (TSX: QQC) for a growthier mix) can be the move that’s right for you.
There’s really no right answer when it comes to constructing your portfolio. By ensuring your bases are covered (geographic and sector diversification) while minimizing costs, the average investor, even those with limited experience with investing, can do quite well over time.
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ETFs or single stocks? Both could make sense
At the same time, though, stock-picking is a fun way to help investors further their knowledge, as they seek to achieve better than the average over time. Of course, the benefit of sticking with the market averages is that you’re less likely to underperform the averages considerably. But you also won’t outperform by a wide margin as you could with individual stocks. In my view, there’s nothing stopping a new investor from going down the route of a passive ETF investor and a DIY stock picker. In fact, I think it’s best to be both.
Personally, I think there’s ample value in having a stock-picking portfolio and one of the ETFs (of simple S&P 500 and TSX Index funds) as you look to compare the performance between the two. For new investors, simplicity and cost reduction should be top of mind.
And ETFs fit the bill as a great way to cover your bases with a smaller amount. For investors who want to analyze businesses and own pieces of companies that produce great products and earnings over time, it can make sense to own the shares of the individual company as well.
For initial amounts, ETFs look like the better way to go
You don’t need to subscribe to a single camp for the long haul. In fact, I think ETFs, especially index ETFs, are a stellar complement to a portfolio of individual names, rather than a replacement. Any way you look at it, new investors should focus on getting bang for their buck, whether that’s backing up the truck on a severely undervalued individual stock or minimizing costs (commissions) when building a portfolio with a limited sum such as $1,000.
As for the first $1,000, I think going down the ETF route first makes the most sense. Own a piece of the broad basket first and go from there. When you consider how much the trading commissions could add up as you attempt to diversify with 10–15 single names, I think it makes less sense to be a stock picker right from the get-go. In due time, you can supplement your ETF holdings with stocks once you’ve got more significant capital and, most importantly, the box checked on diversification.
So, what would a new investor portfolio look like with that first $1,000? I’d say maybe something comprehensive like the XEQT makes the most sense, or perhaps a mix of the VCN and VFV for the perfect mix of U.S.-Canada equity exposure. Perhaps some bond and money market funds could make sense in due time, but for a beginner, I think equities are the way to go with that first $1,000.
If you’re not the biggest fan of the exposure you’ll get with index ETFs, you can pick and choose your own individual names later on to find a mix that’s right for you! And that’s the beauty of portfolio construction in a nutshell!
