What is an ETF? And Can It Help Boost Your Retirement Income?
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Many retirees struggle to find a balance between keeping their retirement savings safe and getting a decent rate of return.
Safer investments, like bonds, savings accounts and GICs are offering extremely low interest rates. For example, 10-year bond yields in Canada and the US have fallen below 1%.
The big challenge then, is to find an investment product that will give you enough retirement income without bringing too much risk. Investing in ETFs — or exchange traded funds — could be a possible option for you.
So, what are exchange traded funds?
ETFs are similar to mutual funds, in that they are a collection of securities, such as stocks and bonds. They’re great for giving your portfolio immediate diversification because you effectively own shares in dozens or even hundreds of companies with just one fund.
What is ETF trading? This is when an ETF is bought or sold on a stock exchange. ETFs are traded throughout the day, whereas mutual funds are bought and sold only once a day, after the markets close. Exchange traded fund prices can change throughout the day and are typically easier to sell than mutual funds. ETFs also tend to have considerably lower costs than mutual funds. This is because they often simply follow an index or industry sector, management fees are much lower, as are broker commissions. This means that you get to keep more of the money that they earn. Great, right?
You earn money from them when their stock price increases and you sell them at a profit (capital gains), from the interest earned (in the case of exchange traded funds that contain bonds) or from dividends. Dividends are payments that many companies pay out regularly to their shareholders, at a determined percentage of the value of the shares owned.
What is an ETF stock? Actually, there is no typical stock held in an exchange traded fund. The stocks held could be any traded companies, from many countries, for example a tech company in China or an oil company in Canada.
Should retirees invest in ETFs for retirement income?
If you need your investments to get better returns to provide retirement income, exchange traded funds could be a solution for you. However, there are several issues to consider before jumping in.
When investing in ETFs, it’s important to understand that there are many types of ETFs, with almost 1,000 to choose from. Some types of ETFs can hold stocks in certain countries or regions of the world and different industries. They can also hold corporate and government bonds from many countries.
Some ETFs are thematic, which means that they focus on a specific investment theme. For example, some themes could be renewable energy, artificial intelligence or emerging markets. With such a huge choice of ETFs, many Canadian retirees wonder, what ETF should I invest in?
What is an ETF that’s good for retired Canadians?
If you’re investing in ETFs for consistent revenue, dividend-paying exchange traded funds may be the best option for you. Regardless of whether the stock market is up or down, most companies that pay out dividends to their shareholders continue to do so, even during depressed markets. So, what is an ETF that’s good for your situation?
When you’re looking at what ETFs to invest in that pay out dividends, two of the things to consider are the yield (the percentage payout) and the MER (the management expense ratio – or fee). Several funds tick both those boxes. The Vanguard Canadian High Dividend Yield Index ETF has a yield of 4.18% and a management fee of just 0.22%. The BMO Canadian Dividend ETF has a higher yield, at 5.57%, but also has a higher management fee of 0.35%.
When you’re thinking of what ETF to buy, you may also want to consider REIT ETFs. REITs — or real estate investment trusts — hold shares in property, such as residential, retail, office space and industrial. They often pay out good dividends, such as the BMO Equal Weight REITs Index ETF, which pays a yield of 5.44% with a management fee of 0.55%.
When you’re looking at investing in ETFs, you should always consult your financial advisor first. They can advise you of what ETF to buy for your situation and purchase them on your behalf. Alternatively, if you prefer investing in ETFs directly, you can buy them through your financial institution or online trading companies – just make sure to do your own research ahead of time to make sure you’re selecting the right one for you.
What is an ETF’s biggest risk?
One of the main ETF risks you should know about is that, like all traded stocks, the value of ETFs can go down as well as up. In early 2020, for example, the value of companies traded on the Toronto Stock Exchange plummeted by 35% in just one month. The risk in ETFs that contain niche stocks is that they could be even more volatile.
While most stocks eventually get back to their original value, many retirees don’t have the luxury of time to recuperate large losses. This could leave a large hole in your retirement savings at a time when you need the money and mean that the risk in ETF funds is too great.
A less risky way of boosting your retirement income
If you’re a homeowner aged 55 and over, there is another, safer way of increasing your retirement income.
The CHIP Reverse Mortgage® allows you to cash in up to 55% of the equity in your home –you can receive the money in a lump payment or in monthly instalments. Unlike most mortgages, there are no regular payments to make. You only pay back what you owe when you decide to sell your home or move out, so it won’t have a negative impact on your retirement income.
Call us at 1-866-522-2447 to find out how much you could borrow for a safer way of boosting your retirement income.