Buying Stocks within an Index Tracking ETF

BMO’s Canadian Banks Index

S&P/TSX Capped Telecommunication Services Index

When it comes to deciding between purchasing the whole index or just stock picking within an index, there are ETFs that contain a couple of companies.  Therefore, if an investor has the money, he/she can save the MER (fees) and just buy all the companies within an index using the percentages provided in the ETF prospectus.

ZEB.TO shown above has an MER of 0.62%/year.  There are 6 banks in the index.  Therefore, it is better to save the fees and just buy an equal amount in dollars or shares of the 6 banks in Canada.

The S&P/TSX Capped Telecommunication Services Index has 3 companies.  If there is an ETF that tracks this index, I prefer just to buy an equal amount in dollars or shares of each telecommunication company.

As for rebalancing the holdings within an ETF, an ETF can rebalance the holdings up to once a year.  Therefore, it is good to check back monthly to see if an ETF rebalanced its holdings since the list of holdings is public.

Actively managed ETFs can rebalance every 3 months or more often, so a sharp drop in a stock price can mean that the ETF dropped the stock from its portfolio.

ETF Rebalancing: An Issue Not To Be Overlooked (KOL, PBJ, ANR, PEP)

 

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