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Insights & advice

What’s an exchange-traded fund (ETF)?

December 2022 – 15 min read

Key takeaways

  • ETFs are a type of investment that people can use as part of their investment strategy.

  • Index ETFs are one example that people use if they believe markets are efficient and they’re comfortable investing in a portfolio that aims to deliver performance similar to market index, before fees.

  • Advisors are a great resource to learn about if these funds are the right fit for you.

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Exchange-traded funds (ETFs) have become a popular option for investors looking for lower fees. They can provide diversification to your portfolio and give you more flexibility as you can buy and sell them throughout trading hours. But, what are ETFs and how do they work? We’ll explore the benefits and suggest questions you may want to consider when determining what the best investment option is for you.

What’s an ETF?

An ETF is a type of investment that typically tracks a particular index, sector, commodity, or other asset. ETFs can be purchased or sold on a stock exchange like regular stocks. They can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. There are many different types of ETFs. One type of ETF to consider investing in is an index ETF.

How does an index ETF work?

These funds imitate and track a benchmark index (for example the S&P 500) and invest as closely as possible to the index.

Active versus passive management

There are different types of management styles to consider. ETFs can be actively or passively managed and each option supports different client needs.

You may wonder about the difference between passively managed ETFs and actively managed funds like mutual funds or segregated funds. While there are some key differences there are also some similarities. 

Passively managed ETFs:

  • Traded throughout the day like stocks.
  • With no investment manager selecting the portfolio of securities, share prices fluctuate all day as the ETF is bought and sold.
  • Since there is limited manager involvement in passive ETFs, they typically result in lower fees for you. 

Actively managed funds like mutual or segregated funds:

  • Investment manager actively manages a portfolio of securities.
  • The performance of the investment portfolio is monitored, and investment managers make decisions about the assets in it (for example, buy, hold, or sell). 

Similarities:

  • Pool together money of many investors.
  • Consist of a mix of many different assets and represent a popular way for investors to diversify.

Benefits:

Investing has many benefits. Some of the benefits of investing in an ETF may include:

  • Flexibility

    You don’t have to wait until the market closes to buy or sell. You can move money throughout trading hours, giving you flexibility.

  • Diversification

    There are a lot of options for you to invest in based on your interests.

  • Transparency

    For index ETFs, you can easily monitor how the funds are doing by looking at the performance of the index. This allows you a line of sight to performance of your funds.

  • Fees and management expense ratios

    Since index ETFs track an index, they generally have lower costs when compared to mutual funds or segregated funds because they are passively managed.

The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.

Make your investment decisions wisely. A description of the key features of the segregated fund policy is contained in the information folder. Any amount allocated to a segregated fund is invested at the risk of the policyowner and may increase or decrease in value.