DIY investing, a robo-advisor or an all-in-one ETF: which is best for you?
You’re ready to take on more of the responsibility for investing your money, and you’re excited about paying less in fees by investing in exchange-traded funds. Excellent! So how do you go about doing that? What are your options for building a simple, low-maintenance, and low-fee ETF portfolio?
Here are three ways:
1. Choose your own ETFs and hold them in your DIY account
2. Use an all-in-one ETF
3. Use a robo-advisor service
All are low-fee, simple options but with important differences. The DIY approach is the cheapest but requires the most work. Investing in an all-in-one ETF is easier with less ongoing maintenance, while the robo-advisor approach is the most hand-off of the three.
Robo-advisors make is easy
A rob advisor is a service offered by an online broker that uses mainly technology to manage your money. First, you answer a set of questions about your tolerance for risk, your investment time horizon, and your personal situation. The robo-advisor then suggests a portfolio of ETFs that it determines is appropriate for you. Once you say “yes please” to the portfolio and get your money into the account, your work is done. Your money is allocated to the funds, and the robo-advisor rebalances your portfolio regularly to keep you on track when markets move around.
All-in-one ETFs are good value
An all-in-one ETF gives you exposure to several ETFs in one product. Much like what a robo-advisor does for you, you'll get a pre-built ETF portfolio. An all-in-one ETF – also called an asset allocation ETF - is a “fund of funds”, which means exactly what it sounds like: a fund that invests in other funds. An all-in-one ETF can hold 5-10 other ETFs, giving you exposure to a crazy number of stocks and bonds across the world in one investment.
Like the robo-advisor offering, your asset allocation ETF is rebalanced for you, meaning you don’t have to fiddle around with buying and selling individual funds. Literally no work is required once you’ve bought it.
The extra work for you is two-fold. For one thing, there’s no robo-advisor telling you which asset allocation ETF to buy. You decide. Second, you have to buy it yourself, instead of just transferring your money to an account. Neither of these things is a roadblock for most people.
Buying the ETF is easy if you already have an online brokerage account like TD Direct Investing or Questrade. If you don’t have one, opening an account is simple.
With respect to choosing the ETF, you can start buying filling out an asset allocation questionnaire like this one which will give you a suggestion for how much of your portfolio should be in stocks and how much in bonds. Then, you can look at various all-in-one ETFs and choose one with the right mix. These ETFs will further break down the equities into different geographies: Canada, U.S., and International according to the ETF manager’s discretion.
What about the fees?
The more you do yourself, the less you’ll pay in fees, making the DIY approach the cheapest of the methods. However, the all-in-one ETF is a good deal: for a slightly higher fee, you’ll get a tidy, easy, pre-built product that requires no ongoing work.
Here’s how it breaks down. Let’s assume you invest $50,000 and leave it invested for 10 years. At the end of 10 years, here’s how your returns will compare.
Although there are savings to be had with the DIY approach versus all other methods, the real savings comes from moving from regular mutual funds to any of these approaches. It’s a big win.
Which is right for you?
If you are interested in investing and want to follow the performance of your investments, then a DIY approach is probably good for you. This is because you can see the individual performance of each of your ETF. (With an all-in-one ETF you see only the overall return.) DIY investing also works for people who are willing to spend a little time a few times a year to rebalance their portfolio, making sure the ETF weights remain in-line with the original objective.
A few examples
There are a number of robo-advisors in Canada, most of which are associated with a financial institution. The most well-known is Wealthsimple. Other robo-advisors include QuestWealth and RBC InvestEase. There are differences between the robo-advisors to be aware of, and you can read reviews online.
Asset allocation ETFs are offered by a number of investment companies. Here are a few examples. Note that these are not recommendations but simply examples.