Exchange-traded funds add stability

Long-term growth through exchange-traded index funds can stabilize your financial future.

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Here are two index funds offering excellent exposure to Canadian equities in a diversified portfolio.

If you’re investing for income, mutual funds may have a special place in your portfolio. We’re talking about the longest-term part of your investments. As we’ve detailed in earlier editions of Money Reporter, an income-generating portfolio should include some securities with the potential for long-term growth.

But picking growth stocks may be the most difficult task of all and they may pose the greatest risk in your portfolio. That’s because growth means looking ahead and guessing about future events such as earnings and expanding markets. Investing in high-dividend or interest-bearing securities means picking safer, blue chip stocks and bonds or GICs.

The best way to reduce the risks inherent in growth stocks is through diversification. And one way to get a diversified portfolio of stocks is through a mutual fund.

Yes, funds charge management fees. And evidence suggests these fees tilt the balance away from high fee funds towards index funds or even individually managed portfolios. But many investors prefer to have their portfolio looked after rather than do it themselves.

2 ETFs for long-term growth

Our first choice for conservative, long-term growth is the exchange-traded iShares S&P/TSX 60 Index (TSX—XIU). This fund trades on the Toronto Stock Exchange and represents units of an index fund made up of the companies that constitute the S&P/TSX 60 Index of essentially the 60 largest companies on the TSX in the proportions in which they are in the index.

If you’re concerned that one company could ever dominate the index as did Nortel Networks at the turn of the century, you can buy iShares Core S&P/TSX Capped Composite Index ETF (TSX—XIC). The relative weight of each company in this ETF is limited to 10 per cent of the index.

But the portfolio, though similar to XIU, is considerably larger and includes smaller companies. This can increase risk, but in the long term, smaller companies also offer greater growth potential.

Nonetheless, both these index funds offer excellent exposure to Canadian equities in a diversified portfolio of companies.

This is an edited version of an article that was originally published for subscribers in the June 17, 2022 issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

Money Reporter, MPL Communications Inc.
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