SI 20: Passive vs. Active Management for Canadians
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As many investors shift to a self-directed investment portfolio, passive index investing is becoming more and more popular when compared to active management. As a Canadian, passive investing is great for gaining international stock market exposure for a rock-bottom low Management Expense Ratio (MER). Kornel Szrejber, from Build Wealth Canada, joins us on episode 20 of The Stratosphere Investing Podcast to discuss this topic in depth and create a list of actionable steps to take to avoid high fee management.
Active management is not a bad thing. In fact, I do actively seek individual companies on the Toronto Stock Exchange that I like for their undervalued dividend growth. The problem with active management is the high fee structure that typically comes with it. High fee management can cost Canadians over $300K in their portfolio with the over 2% expense ratio seen in mutual funds that the big banks will typically funnel you into. Flat fee management with a discount brokerage service is a much more cost efficient and transparent process and that is why I created Stratosphere Premium for Canadian investors. I go into detail with my stock picking strategy on The Investing for Beginners Podcast.
ETF Index Funds Discussed in the Show
To learn how to buy these Canadian index funds exactly step-by-step, you may be interested in learning How to Start Investing with $1000.
VCN - All Canada Stock Market Index
This Vanguard fund has a MER of 0.05% and will provide broad exposure to all market capitalizations in Canada.
XUU - US Total Stock Market Index
This iShares fund has a MER of 0.07% and will provide the entire US Stock Market traded in Canadian dollars. Pretty hard to go wrong here.
XEF - International Developed Countries Total Stock Market Index
This iShares fund has a MER of 0.2% and will provide companies internationally from Japan, Europe, Australia and more.
VEE - Emerging Markets Index
This Vanguard fund will provide exposure to Chinese and other emerging markets at a MER of 0.23%.
When comparing active and passive management, there are pros and cons to both. If you are in active management paying expense ratios every year, just make sure that your manager is not secretly closet indexing. Closet indexing is when a manager will charge their high fees, but actually just hold index funds for their clients. I see it all the time in Canadian investment portfolios. I hold international broad-based index funds (US, Europe, Emerging Markets) for the cheapest fee possible for 30% of the portfolio for Premium subscribers and proud of it. The difference is transparency and fee structure.
The Bottom Line
There are many things you cannot control as an investor like the macro economic environment and the investor sentiment that swings through bull and bear markets. However, you can control how much of your portfolio is getting eaten up by high percentage (MER) fee management.