Written by Kay Ng at The Motley Fool Canada
Do you have an extra $1,000? Then you should start investing to get the money working for you. Depending on how long it’d be until you need the money, you can choose to invest it in various places, like Guaranteed Investment Certificates (GICs), exchange-traded funds (ETFs), or individual stocks.
GICs for your short-term needs
If you need the money soon, you can consider putting it in short-term GICs and get predictable interest income while securing your principal. Short-term GICs can mature in a month to a year. Typically, the longer the duration, the more interest income you get. Currently, the best one-year GIC rate is about 4.75%.
Remember that interest income is taxed like ordinary income. So, if you have room in your Tax-Free Savings Account (TFSA), you should earn interest income in there to pay zero taxes on that income.
What if you don’t need the $1,000 for a long time?
If you don’t need the $1,000 for a long time, as in at least five years, you can consider parking it in broad market ETFs like SPDR S&P 500 ETF Trust (ASX:SPY) and iShares S&P/TSX 60 Index ETF (TSX:XIU) for exposure to the U.S. and Canadian stock markets, respectively.
Investors should note that SPY has a heavier exposure to the technology sector, which makes up close to 25% of the fund. It also has about 14% exposure each to the healthcare and financial services sectors. As well, it has about 10% in consumer discretionary, 8% each in industrials and communication services, and 7% in consumer staples.
The XIU ETF is more heavily weighed towards the financial services sector, which makes up approximately 36% of the fund, followed by 18% in energy, 12% in industrials, and 10% in basic materials. In comparison, the SPY is more diversified than XIU.
There are also ETFs to provide exposure to specific sectors, bonds, and global equity.
Do you have periodic savings available to invest?
If you can an extra $1,000 available to invest monthly, every few months, or yearly, you can consider building a diversified investment portfolio using ETFs that focus on different areas. Your strategy may be to buy pockets of the market that are discounted.
For example, right now, there’s a global banking crisis going on. So, the banking sector may be an area you can explore for potential long-term investing. Even the big Canadian bank stocks have taken a beating. BMO Equal Weight Banks Index ETF (TSX:ZEB), which serves as a proxy for the industry, is down about 20% from its 52-week high. The ZEB ETF consists of a rough equal weighting in each of the Big Six Canadian bank stocks. The ETF currently yields about 4.1%.
You could get a higher yield from investing selectively in individual big Canadian bank stocks that have a long history of paying dividends. For example, Canadian Imperial Bank of Commerce has paid dividends since 1868! Currently, the dividend stock yields roughly 5.9%.
Investing in individual stocks is riskier than investing in ETFs that provide greater diversification. However, the former provides investors the flexibility to manage their portfolios with granularity.
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Fool contributor Kay Ng has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.