I talk a lot about ETF investing here at Maple Money, but did you know there’s more than one way to invest in an ETF? Kornel Szrejber’s the host of the Build Wealth Canada Show who has been featured for paying off his mortgage in only six years while still in his 20s and becoming one of Canada’s youngest retirees at the age of 32. He joins us this week to explain the three types of ETF investing and how to know which one is right for you.

Welcome to the Maple Money Show, the podcast that helps Canadians improve their personal finances to create lasting financial freedom. Our sponsor, Wealthsimple, believes financial independence should be available to anyone. That’s why they have no account minimums which means you can get started investing for as little as one dollar. Don’t delay any longer. Invest online by visiting maplemoney.com/wealthsimple today. Now, let’s chat with Kornel…

Tom: Hi Kornel, welcome to the Maple Money Show.

Kornel: Thanks, Tom. Good to be here again.

Tom: When we were talking before the show you brought up an interesting idea about different investment options and how to decide which ones are right for us. The three we’re really going to look at is individual ETFs versus these newer asset allocation ETFs and robo advisors. Let’s hop in right to what you do. What do you do for your own investing?

Kornel: I buy individual ETFs. I’m a 100 percent, pure, passive index ETF investor. That might sound like a mouthful if you don’t know what that is but personally, I don’t use a robo adviser. I don’t use asset allocation ETFs but I buy individual ETFs. There are pros and cons to each approach. With buying individual ETFs I’m basically able to get the absolutely lowest fees possible. In a nutshell, that’s the main benefit and the most tax efficient. But the downside is that it is more complicated and not as automated as some of these other options like using a robo adviser, for example. It really depends on your situation and where you are in your investing journey.

Tom: I’m also using individual ETFs. It’s not that it’s too complicated for me because I’m a numbers guy. I used to enjoy things like rebalancing a portfolio but now I just find it to be one more thing to do. Let’s dive into the individual ETFs first because I think everything else really just builds on top of those. With my portfolio, I kind of have the classic “coach potato” portfolio (other than the bonds). I don’t have bonds right now. I just have a Canadian index, a U.S. index and an International index at roughly a third each. Do you recommend the coach potato approach for the ETF thing? I’ve also heard other people talk about five, six or seven ETFs. How complicated should this be for most people?

Kornel: When it comes to doing the passive index portfolio, what I have done is very similar to yours, actually. I’ll have one for the Canadian index, one for the U.S. index. Then for the International, it’s similar but I have it split into two. One of them is emerging markets and the other one is the more developed one like countries in Europe and Japan. I’ve got a bit of an allocation to emerging markets which is the smallest allocation out of out of all of them. But that way, I’ve got a little bit in there for the China’s and India’s of the world. Then if you are investing in bonds as well, you could have one bond ETF of Canadian bonds. I don’t have anything in bonds because I’m very heavily into equities. And we have a kind of retirement thing where I have some money on the side to provide us a bit of a cushion. But basic, I’m very heavily skewed towards equities as well. So basically, it’s five ETFs, if we’re including bonds.

Tom: So we’re both not using bond ETFs, but I should point out that that’s not necessarily advice. A lot of people should have bond ETFs in their portfolio. It does help reduce some of the risk. We’re both slightly on the younger side (even though I’m working my way up) but I still don’t feel the need to start converting into bonds yet. So it is a slightly riskier portfolio by all means. We’re both doing it, but that doesn’t mean it’s for everyone, so keep those bond ETFs in mind. Let’s go into a bit of what these individual ETFs are. I think most people listening to show probably realize they’re a bunch of stocks—and we’ll get into that, but the other thing I want you tell us is how the fees are different compared to, say, mutual funds. There are definitely more expensive options out there, right?

Kornel: Yes, 100 percent. I’ll give you a real-life example. For my own portfolio, the MER (management expense ratio) I pay is basically the fee paid on a portfolio for having these ETFs. That averages out to 0.104 percent. It’s very low. And then if you start moving up a little bit into the asset allocation ETFs, where you’re not buying the individual ETFs anymore, you’re buying one ETF that is like a basket that contains individual ETFs. You get certain benefits for doing that. One of the big ones is it auto-rebalances for you. The asset allocation ETFs are the next “step up” where you get the convenience of auto-rebalancing and some other benefits—but you are paying a noticeably higher fee. I’ll give you an example; one of the really popular asset allocation ETFs is from the Vanguard Company. When I looked at these today, just to get the latest rates, it was 0.25 percent. So basically, it’s 0.25 percent MER versus what I pay, which is 0.104 percent. You’re actually paying more than double in fees on a MER basis. And keep in mind, my portfolio is really optimized. I’m a giant nerd when it comes to this stuff. The average person buying ETFs isn’t going to get 0.104 percent. You definitely can… I’m not doing anything magical or secret or anything like that. But, even when I first started investing and wasn’t fully optimized, I think it was about 0.15 percent. That’s still way, way lower than these asset allocation ETFs at 0.25 percent. Then when we get to the next level, which would be robo advisors, you get the maximum level of convenience and some handholding where it’s just easier and less intimidating. There are lots of benefits to robo advisors, but with those you’re basically paying that fee—the manage expense ratio (MER) on the ETFs. You’re also paying an additional fee because they’re helping you manage all of this. From what I’ve seen—and let me know, Tom, if you’ve seen different numbers, but last time I researched this, when you look at different robo advisors, about 0.5 percent of a fee is added on top of the regular fees we pay as individual ETF investors just because you’re with a robo advisor. Has that been your experience as well?

Tom: Yes, for smaller balances. As you go up you might get 0.4 or 0.3 percent. One thing to keep in mind with robo advisors is that there’s someone you can actually talk to. Some people are only using them just for convenience but you actually can place a phone call and talk to someone for some advice. Now, compared to mutual funds, all three of these things sound way, way better. I’ve mentioned the podcast before, I was in mutual funds that were doing two percent or more for MER so any of these options are much better. We’re kind of getting into fine details here but these fine details do matter. Point one or two doesn’t sound like a big difference, but like you said, it’s literally double your fees. When you start looking at fractions of a percentage, it just doesn’t sound like that big of a deal.

Kornel: Yes, but just to put some actual numbers to it, you’re right. First off, I’m using percentages of a percent. What does that actually translate to in terms of money—

Tom: It all sounds cheap then.

Kornel: Yeah, like credit cards that charge 18 percent. But just to give an example, let’s say you have a portfolio of half a million dollars, 0.5 percent of that is the extra fee for using the robo adviser as an example, ends up being $2,500 a year in fees. Let’s compare that to what I pay on mine which is 0.104 percent. That’s $522 I pay every year that I would pay on a $500,000 portfolio. So basically, if you look at the difference between that, that’s a $2,000 difference right there. As your portfolio gets bigger, the savings get bigger. But the other important thing to mention is that if your portfolio is small, then the savings are relatively negligible. They’re really small. Maybe at that point a robo advisor is for you if you’re getting intimidated by this or want some help and need to speak to someone. On a $10,000 portfolio, you’d be paying $50 a year versus $10.44 a year. All of a sudden, you’re saving $40 a year. That’s not a lot of money but you get to talk to a real live person, get some handholding, they’re going to figure out my asset allocation for me. There is some value there, especially when the numbers are that small. But as they get bigger, that’s when you have to ask yourself, “How much value am I getting here?” because now the differences are significant.

Tom: And that’s why I like robo advisors. I should mention Wealthsimple is a sponsor of this show, but the best way to use robo advisors (in my opinion) and get started is, if you’re in your 20s and it’s a choice of using that app and quickly getting started or not doing anything, then fees don’t even enter into the equation. You need to get started. Your number started with a $500,000 balance. If you have $100,000 maybe it doesn’t matter as much. But yes, as the balance gets bigger, you do have to look at these fees because obviously everything’s multiplying more and more as you go. And with all your examples of the $500,000 balance, obviously it would be even higher at a $1 million balance. If you’re about to retire, these fees are going to matter. Just going back to individual ETFs for a second. We’ve explained each individual ETF kind of covers an index. Why does someone need an asset allocation ETF compared to that? If they’ve got, say, the four ETFs as a portfolio, what’s the benefit of moving up to an asset allocation ETF and paying money? Or is there any benefit?

Kornel: The way that I see it, if you look at in terms of progression from the index investing piece… Let’s say you’ve decided you’re not going to do these actively managed mutual funds through a financial advisor because the fees are just ridiculous. And when you look at things like the SPIVA report, you’ll see that well over 90 percent of these active funds underperformed the index. So you see that and decide you’re not going to do active management but passive index investing instead. It might appear that you’re done, but you’re not because now you have to decide whether to do robo advisor or asset allocation ETFs, or individual ETFs. I would say robo advisor is the entry point where it’s going to be the easiest for you, but you’ll pay higher fees. And the next level is these asset allocation ETFs where you’re paying less fees than the robo advisor, but still more fees than buying individual ETFs. They do some things that the individual ETF buying does not do. I don’t see why anyone would really move from individual ETF buying into asset allocation ETFs. I see more the reverse happening where maybe they started out at a robo advisor level… Maybe their balances got higher and they want to optimize their fees a little bit more so they switch to asset allocation ETFs. And once they feel comfortable with that and the portfolio is now much larger—around six figures, let’s say, now they really have a strong incentive to look into individual ETF buying because they’re going to be paying even less fees—and there are different tax optimizations they can do as well to save some money on taxes. Does that answer your question?

Tom: Yeah, it’s given me a couple extra thoughts, though. We’ve talked a lot about how we’re making these decisions based on balance. First of all, what about emotion? It seems something like a robo adviser might give you a little bit more hands off—you’re not going to quickly sell all your ETFs (like you may have wanted to back in March). Do you see benefit there? It probably depends on the person. I get that maybe we’re a little bit colder with the numbers but I’m trying to think of everybody in general. I’ve heard of some of these robo advisors (figuratively) talking people off the ledge, telling them to just hold off and wait it out. Could there be benefits there depending on the person?

Kornel: That’s actually a really good point. What I’ve been talking about so far has been from a strictly, robotic, mathematical way.

Tom: That’s the way I think too.

Kornel: Yeah, you and I think that way. But you’re 100 percent right. The emotional part is such a big thing. And if you can speak to someone who can walk you off the ledge before you do something silly, there is tremendous value with that when it comes to robo advisors. The other thing I think helps in that department is—and correct me if I’m wrong, but with robo advisors, you are able to pretty much fully automate everything, aren’t you? You can just deposit X-amount of dollars every paycheck into your bank, directly into your robo account and they will automatically invest that money. Do you know if that’s correct?

Tom: Yeah, completely.

Kornel: That’s what I thought.

Tom: The money just goes in. You’re already set in a portfolio. So it keeps that asset allocation and it’s completely hands-off. It gives a little bit of distance. I feel that if some people are managing either of the ETFs could easily freak out when they see they’re 20 or 30 percent down and sell at possibly the worst time. You can still do that with a robo advisor, by all means. But there’s just a bit more friction there.

Kornel: For sure. And then there’s also more incentive for people to try to time the market. They say, “Okay, I’ve got this cash sitting in my account. Should I do it now?” And that’s one thing to mention too; if you’re doing asset allocation ETFs or individual ETFs, you have to manually log into your account to buy these ETFs. It is not automated. When you talk about the psychological piece, I can definitely see some people saying, “Oh, I don’t know if the markets are crashing. I don’t feel comfortable putting money in.” And a lot of times people try timing the market and it’s been proven that you pretty much can’t time the market consistently and successfully. You might get lucky from time to time, but we really can’t time it—at least from all the studies I’ve seen on this. With a robo advisor, I can see there being value where it’s fully automated and you have it set up where every two weeks or every month X-amount gets taken from a bank account and sent to a robo advisor where they automatically invest it. You’re not even really thinking about it and not trying to outsmart the system. It’s set. It’s more like a “set-it-and-forget-it” kind of thing. That way it’s taken care of and you can move on with the rest of your life. Whereas, when you’re doing these fine optimizations and buying these individual ETFs, this isn’t something that’s in the background anymore. This is something you have to manage, keep an eye on and think about. You have to fight these urges to sell or to try to time the market. It was a long way to answer your question, but yes, there is value in that component as well.

Tom: The second thing I was thinking about was skill level. Now, obviously, we both have podcasts and would happily recommend everybody listen to them to build up their skills, but still, there’s a bit of knowledge needed here. And it’s certainly worth learning those skills especially about market timing and not falling victim to that but what your portfolio balance should be and how do you rebalance? Personally, I try to buy my way into rebalancing. I just buy more of the underweighted. Some people, though, may be doing the sell (the high) and buy (the low) which is fine. What do you say about skills? Is there something people should be doing other than just listening to our podcasts?

Kornel: You mean to learn how to do it themselves?

Tom: Well, skills and confidence kind of go hand-in-hand but to feel like they’re ready to sign up with a broker and really handle this themselves.

Kornel: There are a lot of resources online about how to actually buy an ETF. Even if you’re hearing about ETFs for the first time, it’s basically the same mechanics as buying a stock. If you’ve ever bought even just one share of a company through your brokerage account or bank or anything like that, it’s basically the same sort of mechanical process. It’s really not that difficult at all but it can be intimidating for some. When different banks and brokerages designed these interfaces to buy these investments, it’s wasn’t really intended for passive index investors like us. I’ve noticed a lot of them are more intended for people who are active investors where they’re trading daily because they’re trying to time the market or find opportunities, that kind of thing. That’s how a lot of these brokers make their money. They make money on the trading fees of these stocks so the platform itself isn’t really designed from the ground up to be super friendly for people like us. They try to make it friendly but they’re obviously going to focus on where they’re making the most money. I can see it can be a little bit intimidating for people. But there are lots of free resources available online. There are YouTube videos and, this is where I shamelessly plug my course…

Tom: Go ahead.

Kornel: I have an index investing course. I basically recorded me investing my own money in real life; how I do it, how I rebalance—basically the mechanics of it all. That’s one resource—a paid resource. It’s at buildweathcanada.ca/invest. And, if you have lots of time on your hands and want to scour the Internet and figure out how to do it, of course, you could still learn it yourself by reading different books and blog posts. That’s what I did because when I started investing, there was no course on it. I basically just read everything I could on the subject. I’m guessing you’re the same, right, Tom?

Tom: Yeah, exactly. I suddenly got in this mindset where I was just going to absorb all the information about investing. Over a year or two I went from pretty much knowing nothing to feeling really confident about it. So, yeah, it can certainly happen. You don’t need education in this or anything like that. There are all sorts of self-starter, investors that can do this.

Kornel: It’s not like there’s some secret formula or secret thing. It’s all learnable. Tom and I learned it, so you totally can too. You can pay for training if you want to learn it much quicker or, like us, you can spend hundreds of hours just absorbing all of it. Eventually, it starts to repeat itself because you’ve been studying it so much. Then you are ready to go out and do it. There are different options. Does that answer your question?

Tom: Yes. Various robo advisors offer different portfolios. Some will give you just a couple options. Some will give you many options. Is this another place where ETFs might come out ahead if you really want to tweak? Like you said, you had five or six ETFs. So can you kind of keep tweaking or is there a point where maybe it becomes unnecessary? I’m sure you could build portfolios have a dozen or more ETFs and maybe lower your fees by doing it, because it seems the more niched-down you are to some degree, you can get lower MERs by doing that. I can see a pro in really shaping your portfolio the way you want to but I could see a con too in maybe going a little too far.

Kornel: Yeah, because you can start tinkering and you stuff and think you can do a little bit more than just the basic core index ETF. You could start tinkering, saying, “Okay, I think technology is going to do even better so I’m going to invest in some ETF that just has technology companies.” At that point, you’re getting away from being a passive index investor and starting to actually speculate. You think, “Okay, this is going to beat the index if I focus more on technology,” so I think there is danger in doing so. The reason I split my ETFs up and don’t do the asset allocation ETFs is because you pay lower fees. But the other thing is that you get some tax optimization out of it. There are different ETFs that are more tax-efficient depending on what account you hold them in. For example, a bond ETF can be really well suited for an RSP. That’s another way you can get certain tax efficiency. Another way to think about it is by saying, “Okay, with my Canadian index ETF, which account is that most efficient?” And you put it in that one. Then you take your U.S. ETF and decide where it’s most efficient. The same for the International ETF. Each different animal is more optimal for different accounts. Some are good for multiple, but that’s just another degree you’re able to take this to. In terms of splitting them up—that and the fees are the main reason I do it. But yeah, you have to be careful not to go overboard where suddenly you’re holding 20 different ETFs and you’re a speculator when your intention was to be a passive index investor.

Tom: That’s a great point, about the different accounts. I am mostly ETFs but I do have some Canadian dividend stocks and I don’t put them in any registered account. I just keep them outside in a regular, non-registered account. I never thought of that with these all-in-one ETFs or robo advisors where you have to decide this portfolio is going to be in my RSP or putting this ETF into a TFSA where it makes more sense. I never thought about that. I’m actually going to have to look into that myself because I’ve got all three of the ETFs, I mentioned in my RSP. And I’ve got at least some of them in my TFSA. I could be rearranging this to take better advantage of those accounts.

Kornel: For sure. I’ll give you an example; one common mistake I can see someone making is buying a fixed basket of ETFs with bonds in it. A bond ETF is a horrible thing (I would argue) to have in your TFSA. Your TFSA is tax-free. Any dividends in there, you get tax-free. Any capital gains in there, you get tax-free. And yeah, any interest you get in there is tax-free as well. But because you get so much tax protection in a TFSA and you only have a limited amount of TFSA space available, you want to basically put in whatever is more likely to give you the most dividends, the most growth overall and the most capital gains. You want to put that in your TFSA. Bonds have historically underperformed if we compare them to stocks. Bonds are more for stability and not for growth. Let’s say you buy an asset allocation ETF and some of them have bonds in them and you have that in your TFSA. In my opinion, you’ve just wasted a bunch of your TFSA room because you’ve got bonds in there. Those should be in your RSP where it’s going to be much more efficient from a tax perspective than keeping it in a TFSA. It’s like saying you’d rather hold the S&P 500 (which has had stellar, long-term returns) in your TFSA rather than hold bonds where you’re going have really, really low returns, especially with the current interest rate environment. Obviously, you’d rather put something in there, like an S&P 500 ETF. So that’s a really big consideration. You only get so much space in your TFSA and RSP so you want to make sure you’re keeping the right things in there.

Tom: Yeah, I’m going to have to look at that personally. Like I said, other than knowing to keep my Canadian dividends outside completely, I haven’t really optimized that so I will be looking at that. Is there anything else we haven’t covered here? Any other big pro or con that jumps out at you that I haven’t brought up?

Kornel: Yeah, the automatic rebalancing. You touched on it a little bit, but I think that’s something that maybe intimidates a lot of people in the beginning because not everyone is a spreadsheet nerd like myself. There are tools you can use to rebalance and things like that. With a robo advisor you do get the auto rebalancing. With asset allocation ETFs, you get that as well. With individual ETFs you do not so you have to be willing to use a spreadsheet. It’s not complicated, but some people have never touched a spreadsheet and don’t want to. In those cases, maybe a robo advisor for asset allocation may be a little better of a fit for you. I would say that’s a pretty important consideration. You mentioned another important point, socially responsible investing. A lot of people want to invest in a socially responsible way. You can do that most effectively if you’re doing individual ETF buying. A friend of mine is really big on the ethical kind of investing—or I should say, socially responsible investing. There are ETFs out there that say they’re socially responsible but do their definition of socially responsible match your definition of socially responsible? While one person thinks it’s ethical or socially responsible, another one will not. We don’t all have the exact same values in terms of climate change, what’s okay and what’s not. Or medical research where some people say they’re against stem cells while others think stem cells are amazing. There are very different views on that. When you’re buying asset allocation ETFs that say they’re doing socially responsible investing, maybe that doesn’t meet your needs. If you’re doing individual ETFs, you can basically pick and choose a lot more effectively based on what you consider to be ethical because you’re buying individual ETFs as opposed to buying a basket. I think that’s another consideration that is worth considering. But like we talked about already, it’s a lot more complex to do that because now you’re buying individual ETFs. You’re rebalancing—so it really depends how big you are. But I think you’re some people have unflinching values and feel very strongly about certain areas so that’s something worth considering.

Tom: Yeah, the definition can vary widely. Are there very many different individual ETFs to choose from? This shouldn’t surprise me because it seems like there is an ETF for everything, but there’s different socially responsible ones where you can find the definition that matches yours?

Kornel: There’s quite a few different ones out there. You actually have to be careful though. You can actually go in there and look at what companies they’re actually buying. I have a friend who was really into this when he started looking deeply into an ETF that claimed it was socially responsible. One of them said they were socially responsible but they had a gigantic allocation towards gas, oil, and those kinds of things. He is a really big environmentalist kind of guy. He thought this was some sort of marketing trick because they were saying they were responsible but to them the definition meant not investing in companies doing certain medical practices they don’t agree with while completely ignoring energy-related issues, social issues—things like that. You have to actually look into these ETFs. Even when you find one, you should find out what they are actually holding. You may be unpleasantly surprised.

Tom: Even though we’re talking about the socially responsible investing, it’s a great idea for some people. But personally, I’m a cold numbers guy. I don’t think you should hurt your retirement necessarily getting into these. I had Tim Nash on the show. He did a great job of describing how these can actually outperform the index. I’m still personally torn on them. I haven’t figured out if I would base it on performance more than my personal feelings about certain companies. I’ll have to look into that and see which way I want to actually go on that. I think we’ve covered everything about the different options available to people and how it comes down to the fees against your balance. And yes, certainly on the other side, emotion and skill. If we’re all good, can you let people know where they can find you online?

Kornel: Sure. I run the Build Wealth Canada podcast. Use whatever podcast player you want and search for, Build Wealth Canada. You’ll be able to find it there. I interview lots of different experts. It’s very much Canadian-focused, sharing the best practices when it comes to investing and financial planning specifically for Canadians. And the website is buildwealthcanada.ca. Like I mentioned, there’s the investing course there as well. If you go to buildwealthcanada.ca/invest, you can check that out. And then I have a free sign up for Build Wealth Canada as well, where I share a guide to all the different tools used to optimize my investments and finances in general.

Tom: And can you tell everybody about your summit as well?

Kornel: We have the Canadian Financial Summit, which is coming up mid-October of this year. It’s an annual summit. It’s fully online. If you like Tom’s podcast, you’ll like it as well. We’re basically bringing on the top experts when it comes to personal finance and investing. They’re going to be sharing all their different best practices. Tom is going to be a guest on there as well, sharing a lot of his expertise. I’m going to be giving Tom some free tickets, so anybody that listens to this show, make sure you sign up to Tom’s list over at Maple Money. When the tickets are ready to go (around September) he’ll be able to email you free tickets to the entire event. It’s all online and all free. You’ll learn an absolute ton. And yeah, that’s pretty much it. So, definitely sign up on Tom’s list and he’ll let you know when it’s ready.

Tom: And thanks for doing that. For listeners, you can go to maplemoney.com/newletter. Thanks for being on the show.

Kornel: Awesome. Thanks, Tom. Take care.

Thank you, Kornel, for breaking down the three different ways to invest in ETFs. You can find the show notes for this episode at maplemoney.com/111. As Kornel mentioned on the show, The Canadian Financial Summit is happening in mid-October. The summit is virtual and features many of Canada’s top experts in the personal finance and investment communities, including yours truly. Closer to the date, I will be giving away free tickets to the entire summit. To qualify, sign up for my newsletter at maplemoney.com/newsletter and wait for the email sometime next month. See you back here next week when Zina Kumok joins us to discuss her past decisions on spending money or paying off student loans. See you soon.