The TMX Market Centre in Toronto was photographed on Wednesday, September 11, 2024. (Photo credit: Paige Taylor White / The Canadian Press)
Exchange-traded funds, or ETFs, have seen a massive rise in popularity, especially among individual investors looking for simple and low-cost ways to grow their money. But is it wise to build your entire portfolio around ETFs? Financial experts believe it’s possible—as long as you know what you’re doing.
Jonathan Rivard, a general principal at Edward Jones, points out that putting 100% of your investments into ETFs can be a solid plan. The key is to truly understand what each ETF contains and how it fits into your overall strategy.
“Some ETFs are balanced with a mix of stocks and bonds. Others focus only on specific industries,” said Rivard. “The real question is: What are you actually holding? And if you own several ETFs, how do they work together?”
Too often, investors assume that owning multiple ETFs guarantees diversification. But without a closer look, you could end up with too much of the same thing, just in different wrappers.
Prerna Mathews, vice-president of ETF product strategy at Mackenzie Investments, agrees. She recommends looking beyond just Canadian and U.S. exposure. “Think broader,” she said. “Include global markets, different asset classes like fixed income or real assets, and even thematic or alternative ETFs.”
Mathews also suggests mixing different investing styles. While index-based ETFs are common, pairing them with actively managed or low-volatility ETFs can give your portfolio more balance and smoother returns over time.
Time matters, too. Younger investors with longer timelines might lean toward growth-heavy ETFs that carry more risk but also offer higher potential returns. For those closer to retirement, more conservative options with steady income may be better.
When it comes to bonds and fixed income, Mathews explains that not all ETFs are the same. Some focus on short-term yields, while others take a long-term approach. Short-term bonds, for instance, can offer strong returns with less risk than long-term ones.
“If you’re aiming for stability, short-term fixed income ETFs are worth looking into,” she said. “But over the long run, broader bond ETFs still have their place in most portfolios.”
For those looking to simplify, asset allocation ETFs are gaining traction. These bundle several ETFs into one, offering exposure to various markets and asset classes. They’re often favoured by investors who prefer a hands-off approach.
However, Mathews warns against going too far in the name of diversification. Owning too many ETFs—or overlapping ones—can create hidden risks. For example, buying a Canadian equity ETF and an asset allocation ETF with a large Canadian portion might lead to heavier local exposure than intended.
And since financials make up nearly 30% of Canada’s TSX index, combining a TSX-based ETF with another focused on Canadian banks could overload your portfolio with similar holdings.
“The problem isn’t just owning a lot,” Mathews said. “It’s owning too much of the same thing without realizing it.”
