Examining the different types of investments available to Canadians
The types of investments available to Canadians used to be more restrictive, but far more investment vehicles have become available recently to change all that. Now people there can gain access to many different investment types and often at affordable rates too.
Let’s now examine the investment options available to Canadians.
Mutual funds
The modest mutual fund is an investment vehicle that was designed decades ago. It was intended to provide a simple way for investors to either access talented professional investment managers or to track a particular index like the TSX or Wilshire 5000 index.
They are priced just once a day with a new net asset value (NAV) being set. However, some funds only do so weekly or require longer periods between setting their new NAV. The fund holds a collection of securities. These are common stocks and other types, perhaps include fixed income securities as well. Despite the different prices of all the holdings within a mutual fund, investors can take little advantage of price volatility because of the slow re-pricing of the fund’s NAV, which is used for allocations.
As a point of comparison, the main difference between mutual fund and ETF investment vehicles (as pointed out in this article by affordable Robo-investment firm Wealthsimple) is that the former needs a manager and analysts to pick stocks for active management whereas an ETF usually does not. Wealthsimple offers lots of tools to help investors manage their money.
There is often a significant delay between a request to sell a fund and its completion. The distribution of net cash from a fund sale is also a slower process for people used to quick transactions. Therefore, mutual funds are best for medium to long-term investors who don’t try to trade with or time the market.
Exchange-traded funds (ETFs)
Exchange-traded funds (ETFs) are tradeable securities in the market.
ETFs are similar to mutual funds in the sense that the fund itself has many holdings of stocks and other investments within it. Therefore, the ETF’s performance will reflect that of its holdings relevant to their respective weightings, cash on account, and other factors.
Indexed or actively managed?
While some ETFs are actively managed with a professional team of managers and analysts, many are index-based that track a stock market or bond market index. It is important to be clear about whether an ETF is actively managed or passive via the indexing approach. Also, if they’re indexed, is the index newly created or one with a history and track record you can verify?
Where they starkly differ from the traditional mutual fund is their securitization as a tradeable position. Investors can purchase shares of an ETF in much the same way that they may acquire shares of a Canadian or U.S. common stock. While during market trading hours, it’s possible to purchase or sell shares of an ETF when needed. This creates far more trading opportunities than is present with mutual funds.
Live pricing benefits
Other differences include the live pricing which changes to reflect recent trades and market sentiment.
Commonly, the NAV will also be updated multiple times daily as the value of the underlying holdings changes in value. Therefore, investors can make active decisions based on current pricing. This is markedly different from selling a mutual fund and not being sure about the final price due to the delay before it happens. Investors have more control as a result.
Sectors, thematic and style ETFs
With the increasing popularity of ETFs, a far greater number have been released by a growing number of providers in Canada. Therefore, investors no longer must look over the border to the U.S. for what ETFs they can purchase. This makes their investment easier and usually less problematic too.
The multitude of new ETF options covers various sectors and sub-sectors, thematic choices to follow a hunch and style selections (value, growth, etc.) too. This allows investors to entirely use ETFs if they wish to retain the ability to trade easily and quickly.
Guaranteed Investment Certificate (GIC)
The Guaranteed Investment Certificate is specific to Canada. It’s a certificated investment that is provided by trust companies and banks predominantly for retirement plans. So, if you haven’t heard of it before, we’re not surprised!
It comes with a form of backing by the Canadian Government, although don’t expect this to necessarily hold up if there was a run on these certificates all at once (the fractional lending system doesn’t hold up well when too many people come to redeem together and the same is likely true here).
Nevertheless, the GIC is viewed as a relatively stable investment that comes with a fixed (or variable) return. As such, it’s somewhat of a cross between a deposit account at a bank and a short-term government bond. Other countries, including the UK, have something similar. So, it’s not unique.
Investors put money into these certificates for a set period. Usually a few years in total. Interest is paid on the amount invested. And the pseudo-government guarantee from the Canadian Deposit Insurance Corporation (GDIC) up to $100,000 is the kicker. Essentially, the bank makes a profit from the money in the spread between the rate they pay the GIC holder and what they get for lending via mortgages and auto loans, etc.
Canada Savings Bonds (CSB)
The Canada Savings Bonds (CSB) and the Canada Premium Bonds are both issued through the federal government. Both also come with a guarantee. While we speak primarily about the Savings Bond here, know that the Premium Bond is quite similar.
The CSB is arranged through the Payroll Savings Program, so Canadians purchase via funding from payroll deductions. As such, this is a decision that should be done carefully and in advance to plan for it. In that sense, payments initially work similarly to a company pension contribution being deducted from what’s otherwise received as a payroll payment.
Canada Savings Bonds run for three years. Interest is earned until maturity or when redeemed. New interest rates are announced by the Minister of Finance for new savings bonds purchased at a later date. These types of bonds should be considered safer than GIC detailed above because of the direct government issuance vs guaranteed via the GDIC. However, both offer excellent ways to create a low-cost, balanced investment portfolio outside of fixed income bonds, etc.
REITs
Real estate investment trusts (REITs) are a substantial investment vehicle to hold real estate as a listed security. REITs can include different real estate types – office, industrial, apartments, retail malls, etc.
The REIT status is a fairly standardized one globally with smaller differences by country. But the basic idea is that the real assets are added inside the REIT structure. Certain tax efficiencies and exclusions for tax purposes are permitted as long as a high enough annual distribution is made of the taxable income.
Here are a few of the example REIT sectors to invest in. The REITs can be purchased onto the stock market or via REIT mutual funds or ETFs too.
Residential – apartments
Canadian Apartment Properties REIT, otherwise known as CAP-REIT, owns over 30,000 townhouses and apartments in Toronto, Vancouver, and elsewhere. There are other smaller apartment REITs available too.
Retail – shopping malls & smaller retail
RioCan Real Estate Investment Trust is the largest retail REIT in Canada and presently the second-largest REIT by value. This trust owns nearly 300 properties. Many retail REITs are presently moving to a mixed-use model as a protective measure against a slowdown in retail shopping.
Offices
Allied Properties REIT and others aim to tap into the need for premium office space leased by some of the largest companies operating in Canada.
Industrial — warehouses
The growing need for warehouse rental space with more people ordering online has been pushing up this sector of the REIT market.
Diversified
There are also diversified REITs that aim to dabble in several segments within the REIT market to balance out returns. Many of their properties include a mixed-use component to reduce the potential volatility in rental income and total return on the investment to shareholders.
Other Canadian investments
Pipelines, mining, and timberland are three interesting areas that stay busy in Canada. While they don’t always have a separate investment vehicle just for them, we’d be remiss if we didn’t mention them.
Pipelines (oil and gas) and direct oil company investments remain popular. The mining industry for gold, silver, and other collectibles is robust too. Also, the occasional timberland company presented as security for investors pops up now and again. So, there is the potential to mix up investments in these separate asset classes as needed.
When creating an investment portfolio, it’s important to create something that’s reasonably diversified to avoid being overweight in specific areas. While investing in a mix of mutual funds, ETFs, certificates, and other investments is possible, consider what the underlying assets are. For instance, a mutual fund and ETF selected may have different percentages of equities and fixed income securities. Therefore, when aiming to create a balanced portfolio, be mindful of the details to get the right balance for you.