Investing Basics: How To Buy ETFs

1. Open a Brokerage Account

Before purchasing stocks or ETFs, open a brokerage account. The type of account you choose should align with your financial goals:

• Taxable Accounts: Ideal for investments with no special tax advantages. These accounts are flexible and suitable for short-term goals before reaching retirement age. There are no restrictions on selling investments, but taxes on gains apply.
• Retirement Accounts: Tax-advantaged accounts like Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs) offer benefits for retirement savings. TFSAs have a lifetime contribution limit (currently $81,500 if you turned 18 before 2009) and allow tax-free growth. RRSPs offer tax-deferred growth with annual contribution limits and tax implications on early withdrawals.
• Registered Education Savings Plan (RESP): Useful for saving for education. RESP contributions grow tax-free, and withdrawals for educational expenses are often not taxed. Funds can be transferred to a sibling’s RESP if unused.
• In-Trust Accounts: If RESP contributions are maxed out, consider an In-Trust For (ITF) account, where a parent or guardian manages the account for a child until they reach adulthood.

Choosing a Broker:

• Fees: Compare trading and maintenance fees. Many brokers now offer fee-free trading, which is beneficial since ETFs trade like stocks.
• Minimum Deposit: Some brokers require a minimum deposit, though this is often just the cost of one share. For beginners, brokers with low or no minimum deposit requirements are ideal.
• Asset Options: Ensure the broker allows trading in the assets you’re interested in, such as ETFs, and check if trading fees apply.
• Customer Service: Evaluate the quality and responsiveness of customer support. Resources like Forbes Advisor can help identify top brokers for beginners.
• Special Features: Look for additional features such as automatic tax-loss harvesting or portfolio rebalancing. Some brokers offer comprehensive tools and resources to help you meet your financial goals.

Robo-Advisors: For those who prefer a hands-off approach, robo-advisors provide automated portfolio management and rebalancing for a management fee, usually around 0.25% of assets under management. This can be convenient if you prefer not to manage your investments yourself.

2. Decide on Your ETF Investment Strategy

Once your brokerage account is set up, determine your investment strategy. Typically, a mix of conservative bond ETFs and aggressive stock ETFs is recommended:

• Bond ETFs: Provide stability with more modest returns. Suitable for risk-averse investors or those nearing their investment goal.
• Stock ETFs: Offer higher growth potential but with greater volatility. Suitable for longer-term goals where there’s time to recover from market fluctuations.

Asset Allocation by Age:

• 20s & 30s: 90% to 100% stocks, 0% to 10% bonds
• 40s: 80% to 100% stocks, 0% to 20% bonds
• 50s: 65% to 85% stocks, 15% to 35% bonds
• 60s: 45% to 65% stocks, 30% to 50% bonds, 0% to 10% cash/cash-equivalents
• 70+: 30% to 50% stocks, 40% to 60% bonds, 0% to 20% cash/cash-equivalents

Risk Tolerance: Assess your willingness to take on risk. A more conservative approach means investing less in stocks and more in bonds, requiring higher personal contributions to meet investment goals.

3. Research Your ETFs

Index Tracking: Most ETFs track indexes. Choose indexes that align with your asset allocation goals. Stock indexes include the S&P 500, NASDAQ, and Dow Jones. Bond indexes, like the FTSE TMX Canada Universe Bond Index, are suitable for conservative investments.

Fees: ETF fees are typically lower than actively managed funds. Compare expense ratios and select ETFs with the lowest fees. Ensure your chosen brokerage allows fee-free trading of these ETFs.

4. Buy the ETFs

To buy ETFs:

• Fund Your Account: Transfer cash into your brokerage account.
• Search for the ETF Ticker Symbol: Use the brokerage’s research tools or trade section to find the ETF you want.
• Enter the Number of Shares: Specify the number of shares to purchase. Note that fractional shares may not be available.
• Confirm the Order: Complete the purchase with a market order to buy at the current price.

5. Set Up a Purchase Plan

Regularly buying ETFs can help meet investment goals. Set up a purchase plan to transfer a set amount of money into your investment account regularly. This strategy, known as dollar-cost averaging, can lower the average cost per share over time.

Monitor Your Portfolio: Check your portfolio every 6 to 12 months. If your asset allocation deviates more than 5% from your target, consider rebalancing.

Robo-Advisors: For automatic management and rebalancing, consider a robo-advisor. They charge a management fee but handle portfolio adjustments for you.