57 – Should You Invest in ETFs With Little Money

Wayne Kay 00:04
ETFs should you invest? What are they? Well, that’s what today’s topic is on the Debt Matters podcast, where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada. 

I’m Wayne Kay, and we’re going to talk about, what is an ETF? Is it for everyone? Is it the best way to save or invest? And when is the best time to use an ETF? 

We’ll discuss this today with Derek Chase. From Derek L. Chase and Associates Licensed Insolvency Trustee with offices in Vancouver Island, Sunshine Coast and BC north coast. Derek, thanks for being here.

Derek L. Chase 00:44
Thanks, Wayne. I’m really looking forward to this.

Wayne Kay 00:46
I’m kind of excited. Yesterday, actually, I was biking with a friend of mine and all of a sudden we got into the discussion of ETFs. And this is what I’m going to be diving into today. So I guess we should start off by discussing what is an ETF?

Derek L. Chase 01:01
Well, an ETF is an acronym for an exchange traded fund. It’s just a method to invest where you can buy into pooled investment securities. So the ETF is going to hold a lot of stocks that you might not find easy to buy, otherwise they might be too expensive.

An ETF will allow you to buy shares in the ETF that allows you to participate in buying those particular types of stocks, whether it be bank stocks or technology stocks or mining stocks. It’s quite an efficient way to acquire some different niches or different areas that you might find attractive to invest in. 

But I was thinking about this as well previously, and it’s a little bit of a strange topic for an insolvency trustee to be talking about. It’s not really our expertise. 

What we really like to see happen for people is as they come through and are able to change direction in their lives financially – often during the one of the financial counselling sessions that we offer, we do dive into the future. How people should best move forward and start to invest some of the funds that they’re able to free up once they are no longer having to make monster payments on their debt. So ETFs do come up as one of the things we like to talk about in those counselling sessions.

Wayne Kay 02:37
Yes, I thought that was actually a good way of explaining why, because typically we’re talking about people who are in debt and having big financial troubles. But as you mentioned, that is part of the counseling. They learn saving and there become goals, et cetera.

 Now, as you were explaining an ETF, some people are probably thinking, well, isn’t that a mutual fund?

Derek L. Chase 02:58
It’s actually different from a mutual fund, and there are some key differences to it. And one of the things that makes an ETF attractive as compared to a mutual fund is that the management expense ratio in an ETF is often much, much lower than a mutual fund. 

And when you invest in a mutual fund, you don’t see it all the time, but there are management fees embedded in that fund that can rise 2%, 3%, 4%, whereas in an exchange traded fund, that management expense ratio is sometimes like less than half a percent. That probably doesn’t get a lot of people excited, but it should because over time, that sort of spread, interest rate spread does produce some big differences down the track. 

And it’s also another thing that we like to encourage people to do as they come through our financial counselling sessions is really shop for those sort of spreads in cost or interest rates because even though it’s not sort of eye popping right away, when you extrapolate it out for ten years or more decades, then it’s really a big number. So that’s one of the key differences between the two.

Wayne Kay 04:24
And what somebody can do right now listening is –  they can punch up a compound interest calculator online. Very simple to do because let’s say a mutual fund is making, let’s say 6%. We’re having a great year with a 6% mutual fund return, but 3% is a management fee. That means you’re only getting actually 3% compounding, correct?

Derek L. Chase 04:48
Yes, you could work with that example, but the number that they’re showing you as a return is usually after their expenses.

Wayne Kay 04:54
Is it? Okay, all right. But you can see the difference though, when you add 2% compounded for the fees, it’s like, okay, that does make a difference. Maybe not in a year or two years, but as you said, 10, 15, 20 years down the road makes a big difference, for sure.

I get excited. My wife would be like, what are you doing? I’m like, I’m just sitting here with this compound calculator and trying to figure out 25 years down the road, the kids’ money can be worth this.

Derek L. Chase 05:24
Yes. If you take control of your own investing, which is not for everybody, but for a lot of people who are inclined to it, you can find some significant savings on just management expense ratios and just handling your own decisions.

Wayne Kay 05:40
Before we got into the show, I said, well, it seems like this could be perfect for everybody. And you said, well, not necessarily. So when is the right time to start an ETF? Or how do you know if it’s right for you?

Derek L. Chase 05:53
I think sometimes, especially in our experience in the financial counseling sessions, it’s pretty easy for people to get glassy eyed when they start seeing all of the different TFSA, RSP, ETF and you can get turned around a little bit.  

I don’t think you should really be investing in an ETF until your financial house is really in order. And if you’ve managed to be in a hopefully debt free or in a debt situation that’s well under control and it’s just car loan payment or something – we would really encourage people to firstly get just sort of an initial chunk of money just saved, whether that’s two months of living expenses or some amount of capital that’s just available and in the bank. So you can deal with an emergency if it comes up right away. So I think that’s the first goal. 

And then once you’ve reached that and say you’re chipping away at getting to that goal at $100 a month or $50 a month or $200 a month or some number you’ve been saving towards getting this sort of safety blanket.

Then once you’ve reached that point, you can swing that monthly amount into more of a product like an ETF that’s going to pay you back some dividends over time. And that I think is more appropriate to take that type of approach.

Wayne Kay 07:30
And a dividend is?

Derek L. Chase 07:34
The way that a company can distribute some of its profit to its shareholders. And so, for example, the bank of Montreal might pay out 4% of your investment as a dividend back to you every three months.

So it’s a way for it to distribute its profit – probably you’re going to get a little nicer return than just having some sort of interest income. And also when you receive a dividend, the tax treatment of that is very favorable. So you pay a lesser percentage of tax on your personal tax return if you are receiving dividends.

Wayne Kay 08:14
Can you put this all under your tax free savings account?

Derek L. Chase 08:19
Yes, that’s another way to get people a little bit confused, but yes, you can. Inside your tax free savings account, you can hold all sorts of different types of investments. So within your tax free savings account, you could choose to buy or invest in an exchange traded fund, for sure.

Wayne Kay 08:36
I guess we could break it down though. Basically you could just be investing for the sake of investing, but you’d pay tax on everything you made from that tax free savings account. It means there’s a limited amount, I think it’s $6,500 a year that you can invest in there and that can grow for 10, 15, 20 years or whatever, and you will not pay tax on that. And then the RRSP, when you invest in that, I guess the breakdown is when you buy, it then brings down your income so you don’t pay as much tax.

Derek L. Chase 09:06
I look at you, Wayne, you’re becoming a financial expert there. You’re right, the RRSP contribution does give you a tax deduction and then when you withdraw from your RRSP, down the road there’s an income inclusion.

Wayne Kay 09:22
Right.

Derek L. Chase 09:23
And the hope is that you’re able to get the tax deduction at a little higher tax rate than when you pull the money out, which hopefully will be at a lower tax rate. So yes, there’s different ways to invest, different places to park that product, whether it’s inside an RRSP, a tax free savings account, or what you would just call an open investment account.

Wayne Kay 09:50
How do you go about setting this up? What’s your recommendation on that? To get yourself an ETF, how do you do that?

Derek L. Chase 09:57
There’s no shortage of different platforms that you can use to actually make the purchase of an ETF. I think most of our major banks have some sort of trading arm that you can utilize.

And again, it’s a good thing to shop for because when you actually purchase or make that investment, there’s often a commission cost to buy those shares of the ETF. And sometimes you can get certain amount of trades for free. Other times you’re paying five or eight or some sort of eight dollars or five dollara trade. So it is worth shopping for that. But there’s no shortage.

Just start with your bank and take a peek at their online trading platform. Scotia bank, for example, has got ITRADE as their platform and it’s very easy. It’s just a matter of opening an account and setting things up like you would do any type of new account.

Wayne Kay 11:03
I remember Investor Line and like all these different ones, as you said, the TD Bank has theirs and Scotia Bank has theirs and Bank Montreal has theirs and they used to have the minimums and then you’d pay a lot of fees. But I see they’ve all pretty much changed now where I think there really isn’t even a minimum.

It’s just you have to just pay whatever the fee is to buy and then to sell. Thank goodness. How do you go about choosing these? What’s your recommendation on that? I think that’s a part too – a lot of people don’t know where to park their money and what to be purchasing.

Derek L. Chase 11:39
Well, I have to tread pretty carefully there because no shape or form am I going to start offering investment advice. There’s a whole giant industry of people more than capable and trained better than I am to suggest where to invest your funds. So much of investing is about risk, though. If you’re comfortable sleeping at night, knowing your money is in a risky investment, good on you.

Some other people wouldn’t be able to sleep at night and if that money suddenly disappeared because the investment was too risky and then you can’t pay your rent next month. 

 Risk tolerance is a huge topic for investing and anybody that’s trained to help with those types of investment decisions spends the first meeting talking a lot about what your risk tolerance is and getting that sort of pinned down. And then from there you start looking at different investment products that would sort of match up with that risk tolerance. So you could probably find those online or again, talking with wherever you’re doing your banking is a place to start, I suppose.

Wayne Kay 13:03
Yes, absolutely. I thought I’d ask it because there’s so many different things –  you can buy this, you can buy that, you can buy it’s just like, wow, there’s a gazillion different ones there. I don’t know if it’s easier in the mutual fund world, which I can’t imagine, or if it’s easier in the ETF or stocks. 

I don’t have people in my circle that we discuss this stuff regularly with, and so I’ve made it a point of, okay, now it’s time to be reading books and learn about the different types of investments that are out there. And I’m going that way. And I’ve got a few different newsletters from reputable places because there’s a lot that aren’t reputable that are trying to share information.

Derek L. Chase 13:48
Well, you’re doing the right thing. It’s just like anything, if you want to learn something new, you start to gather information. You talk to people. You do some reading and research. One of the books that we like to recommend to a lot of people we talk to is The Wealthy Barber, which is a classic Canadian book.

Certainly the Globe and Mail or the Financial Post have lots of educational type articles. And eventually you just start getting comfortable talking with the different acronyms and the different types of investments, and you start to diversify. Perhaps as you grow your pool of funds that are available for investing, you start to diversify into different products that help manage that risk as well.

Wayne Kay 14:40
And the Wealthy Barber actually just put out another book. Maybe it’s like five years ago now, but it was The Wealthy Barber revisited, I think is what it’s called or something.

And I just finished that one, I don’t know, six months ago. Just kind of flipped through it again, read through it again, and it’s just good. They’re good reminders. And then I passed it off to my children and said, read this. Read this. Study it, understand it.

Derek L. Chase 15:05
It’s good to have that level of understanding, because if someone is eventually helping you with different investment choices, at least you understand what’s happening. You can have a conversation that’s beyond just a basic conversation, and you’re just taking more control of your financial matters, which I think is a good thing.

Wayne Kay 15:29
Absolutely. All right, final words of advice for ETFs?

Derek L. Chase 15:33
ETF is not something to be afraid of. It can have some great advantages with low cost investing, and it’s worthy of taking a look, but get that basic savings amount built up first.

Wayne Kay 15:46
Great advice. Thanks, Derek.

Derek L. Chase 15:48
You’re welcome.

Wayne Kay 15:49
Well, that’s it for today’s Debt Matters podcast. My guest today, Derek Chase. You can learn more or schedule a free consultation with Derek and the team. Just go to bankruptcytrusteebc.ca. 

And that is it for the show. Make sure you subscribe wherever you get your favorite podcast from. And if you know somebody who needs this information, please feel free to share it with them. You can always check out our website, debtmatters.ca. Thanks for listening.