Consider these criteria to make the top picks when you choose investments from a Canadian ETF list

In 1990, Toronto Index Participation Shares began trading on the Toronto exchange (then called the TSE). The fund, which tracked the TSE 35 blue chip index and later the TSE 100 index, became very popular. By 1993, the United States Security and Exchange Commission allowed the sale of ETFs by U.S. exchanges.

By the turn of the new century, ETFs had captured the attention of the investment market. Today you can use a Canadian ETF list to see your investment options.

We still feel that investors will profit the most from a well-balanced portfolio of high-quality individual stocks, but ETFs can also play a role in a portfolio. Here are some tips on how to find the best performing ETFs.

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Consider these four factors when you select ETFs from a Canadian ETF list and you can create a more successful portfolio

• Know how broad the ETF is, so you can determine its volatility. The more stocks it holds and the more it’s diversified, the less volatility it may have. A sector-based ETF like one that tracks resource stocks is likely more volatile.
• Know the economic stability of countries a fund invests in when buying international ETFs. It’s also good to mention that foreign leaders may not be your ally when it comes to passing legislation that can affect your investments.
• Know the liquidity of ETFs you invest in—how many units a day it trades on average.
• Consider buying ETFs in a lump sum rather than in periodic small amounts to cut down on brokerage fees.

Choose ETFs from a Canadian ETF list that practice “passive” management for lower MERs

Note that the best Canadian ETFs generally practice “passive” fund management, in contrast to the “active” management that conventional mutual funds provide at much higher costs. Traditionally, Canadian ETFs stick with this passive management—they follow the lead of the sponsor of the index (for example, Standard & Poor’s). Sponsors of stock indexes do from time to time change the stocks that make up the index, but generally only when the market weighting of stocks change. They don’t attempt to pick and choose which stocks they think have the best prospects.

This traditional, passive style also keeps turnover very low, and that in turn keeps trading costs—and fees—for your ETF investment down.

In contrast, there are a lot of Canadian ETFs that have been created to tap into popular, but risky, themes and fads. So, you need to be very selective with your ETF holdings.

Use ETFs to open up new investment opportunities no matter what your investment goals are

• Conservative: if you want a broad base of high-quality stocks;
• Aggressive: if you’re seeking a wide choice of fast growth opportunities, you have a wide choice of ETFs;
• International: If you’re looking to profit from foreign markets;
• Savings Plans: When you put together your Tax-Free Savings Account, ETFs are a smart building block (and the same goes for your RRSP, RRIF or RESP);
• Hot Trends: If you want to own gold or silver stocks, or the best agricultural stocks, or even the stocks the world’s wealthiest investors hold, there’s an ETF for you;
• Time saving: If you don’t have a lot of extra time to spend on investing, consider ETFs for your portfolio.

Keep it simple—especially with ETFs—for more stable and profitable investing

Here’s a good general rule to follow when choosing investments: Simple is better. The easier an investment is to explain and understand, the less likely it is to harbour hidden risks and costs that can only work against you. As the old investor saying goes, “Stick with plain vanilla.”

For the investment industry, the rule works in reverse: The more complicated, the better. Each new feature provides a profit opportunity for the institution that sponsors the investment. It’s particularly important to keep this in mind with ETFs.

These investments are highly efficient mutual funds. Fees are low because investors don’t pay for active management. Instead, ETFs aim to mimic the performance of a market index, by holding the same securities in the same proportions used to calculate the market index.

This simple arrangement yields only modest profit margins on “plain-vanilla” ETFs. The top ETF sponsors try to offset their low fees with high volume. Many ETFs have assets under management in the multi-billions.

However, adding more features (sometimes referred to as “wrinkles” or “bells & whistles”) can make the ETF attractive to additional investors. Adding features also adds profit opportunities for the sponsoring institution, through higher fees.

Use our three-part Successful Investor approach to make stronger stock picks, including selections from a Canadian ETF list that hold these kinds of stocks

1. Hold mostly high-quality, dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight.

Some analysts believe there are too many ETFs in Canada and that new ETFs with under $1 billion in assets should be avoided. What are your thoughts?

What do you look for in your ETF investing?