ETFs You Should Avoid Buying and Why

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At Cashflows & Portfolios, we have stated a few times over that new investors (or even established investors) may want to consider investing in broad market Exchange Traded Funds (ETFs) to build wealth.

That said, not all ETFs are created equal!

Today’s post is about some ETFs you should avoid buying and why – because they are not in your investing best interests.

To learn about the best ETFs in Canada for building wealth, you’ve come to the right place!

To learn about the ETFs you should avoid buying and why, read on too!

The Best ETFs in Canada for Building Wealth

Many sites will tout the merits of ETFs for a few reasons, many of which we agree with:

  1. ETFs can be easily purchased. You can do this via a discount brokerage or a Robo-advisor. (Further Reading: What is a Robo-Advisor? Is a Robo-Advisor right for you?)
  2. Some ETFs often have very low, or no, minimums for investment with discount brokerages.
  3. Some ETFs have very low money management fees, allowing you to keep more of your hard-earned money working for you via the power of compounding.

Are all-in-one ETFs the ones you should avoid buying?

In an answer: no.

At Cashflows & Portfolios, even though we don’t own any all-in-one ETFs yet, we believe these are excellent funds for many beginner or intermediate investors.

Here’s why:

  1. All-in-one ETFs eliminate the need for manual rebalancing.
  2. These ETFs have your personal investing risk tolerance already designed in.
  3. Such ETFs are already globally diversified, including a small portion of Canadian content depending on the fund.

There are many all-in-one fund providers (Vanguard Canada, iShares Canada, and Bank of Montreal tend to lead the pack of offerings) but there are other fund providers as well.

We’ve reviewed dozens upon dozens of low-cost ETFs so you don’t have to!

Read on to learn about our favourite ETFs to build wealth with here.

Are dividend ETFs the ones you should avoid buying?

Nope.

Buy some of those as you wish!

At Cashflows & Portfolios, even though we don’t own any dividend ETFs (we prefer owning our baskets of individual stocks), we believe these are great funds to earn both income and growth from.

These are some great U.S. dividend ETFs to consider owning.

These are the top Canadian dividend ETFs to own.

There are also some excellent international ETFs for your portfolio – to gain returns from around the world for a very small ongoing money management fee.

What are the ETFs you should avoid buying? Why?

A few come to mind!

1. ZEB

We love Bank of Montreal, we really do! As a stock, as a growing international company from Canada, as a low-cost ETF provider, and much more; there’s lots of love for BMO from us.

We are however not a fan of BMO’s ETF ZEB.

“The BMO Equal Weight Banks Index ETF (ZEB) has been designed to replicate, to the extent possible, the performance of the Solactive Equal Weight Canada Banks Index , net of expenses. The Fund invests in and holds the Constituent Securities of the Index in the same proportion as they are reflected in the Index.”

Source: BMO.

We get it.

The fund is designed to hold Canada’s big banks, in equal proportions, so you don’t have to do so individually. But pay a fee for just 6 holdings, 7 if you include cash?

Not for us.

If you’re confident enough you want to own Canadian banks in your DIY portfolio, including BMO and the other five (5) stocks, then consider unbundling ZEB and avoiding the money management fee in our opinion.

BMO ZEB ETF

2. XRE

We like iShares funds, pretty much all of them except for this one: XRE.

Mind you, XRE may be considered good by some investors for these key reasons:

  1. Exposure to Canadian Real Estate Income Trusts (REITs) – good as a different asset class than common stocks.
  2. Exposure to different types of REITs in a single fund, such as the retail, residential, office and industrial.
  3. The ability to receive monthly distributions.

That’s where the good news ends, for us.

For a hefty money management fee of 0.61%, you would have earned about 8% return by owning XRE – for the last 5 years total!

XRE ETF

Source: Google.

XRE holds 19 REITs, but considering usually the top-5 REITs run most of the Canadian REIT market, those companies would be the ones to own individually vs. paying a money management fee to do so.

If you still want to avoid buying and holding individual Canadian REITs, we suggest you look at BMO’s ZRE for higher potential long-term returns while getting paid a solid distribution in the process.

3. B.A.D.

There’s a new ETF on the block from, literally, the BAD Investment Company and it seeks to offer investments in sin stocks.

“The B.A.D. ETF (BAD) is a large cap fund designed to track the EQM BAD Index (BADIDX), which tracks price movements of a portfolio of U.S. listed companies with exposure to the following B.A.D. market segments: Betting, Alcohol, Cannabis, and Drugs (Pharmaceuticals and Biotechnology).”

Source: BAD Investment Company/BAD ETF

Essentially, B.A.D. ETF seeks to profit from alcohol, betting/gambling, and pharma companies – and while that might work long-term – we simply don’t see a need to support many of those companies directly.

Besides, what chances do you give long-term that B.A.D ETF will come even close to beating the S&P 500 index?

We don’t like the chances ourselves, with the fund’s need to rebalance quarterly and to charge investors 0.75% expense fees in the process!

B.A.D ETF

Source: BAD ETF

ETFs you should avoid buying and why summary 

One of our financial heros at Cashflows & Portfolios is Canadian billionaire and now 90-something Stephen Jarislowsky.

Throughout the investment industry, Stephen Jarislowsky needs little introduction.

Jarislowsky was the co-founder of the money management firm Jarislowsky Fraser, one of Canada’s most respected financial firms. The company was founded in 1955 as an investment research firm and in the early 1960s, the firm branched into private investment counseling.  From very modest beginnings over 50 years ago to assets under management into the tens of billions today, I guess you could say Stephen Jarislowsky is a Canadian financial icon.

Here is a famous quote from Jarislowsky that we like a lot, from his book, The Investment Zoo:

“The stock market day-to-day is like the ocean:  sometimes calm, sometimes stormy. But all you see is the surface not what goes on below.  Clearly, real underlying values don’t change that much – but the “herd’s” perception does. One year gold is all the rage; the next it is junior oil stocks or real estate empires. In the short term, the market simply mirrors greed and fear, and the perceptions emanating from these two emotions.  In the long term, however, it manifests growth “on average”, reflecting the performance of the companies that continue to grow, earn more, and pay even higher dividends.”

Jarislowsky’s bias has always been to own a number of growing Canadian companies and in many cases, blue-chip Canadian companies that pay a healthy, growing dividend too.

Dividend investing may or may not be right for you, and so even if it isn’t, we suggest you navigate the financial marketing world very carefully to avoid these three ETFs above in your portfolio (ZEB, XRE, and B.A.D.) and certainly if you decide to own any of them for speculation with a small portion of your portfolio – maybe own very little!

Any particular ETFs you think investors should avoid? Why or why not? Share away in a comment, we read and answer every reader comment and question at Cashflows & Portfolios. 

We look forward to posting more content on our site soon. Thanks for your readership.

Mark and Joe.

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