We recently conducted a survey to, amongst other things, gauge the level of awareness of people about Exchange Traded Funds (ETFs). The results were surprising.
Exchange Traded Funds have been around for more than two decades and have been getting plenty of coverage in the financial media lately. Yet, 42% of our respondents said they don’t know what Exchange Traded Funds are, and 14% said they did not know enough to consider investing in them.
So, what are Exchange Traded Funds?
An Exchange Traded Fund is an investment fund that trades on an exchange. Each ETF has a unique ticker symbol and can be bought and sold just like stocks.
Exchange Traded Funds are usually used to invest in a diversified basket of securities such as stocks, bonds, or commodities. An investor that buys units of an Exchange Traded Fund, indirectly owns a proportional share of all the underlying assets.
The majority of Exchange Traded Funds follow a passive investment philosophy, meaning the decision to include or exclude a security in the basket is not made by a person (a.k.a the portfolio manager). Rather, a set of rules determine what is held inside the Exchange Traded Fund. This helps keep management costs low and eliminates uncertainties about changes in the portfolio management team.
Benefits of Exchange Traded Funds for investors
Diversification |
Efficient & cost-effective way to invest in a basket of securities |
Liquidity |
ETFs can be bought and sold, and even sold short like any stock during trading hours |
Low Fees |
ETFs usually have much lower management fees than mutual funds |
Transparency |
Most ETFs disclose their holdings every day as opposed to mutual funds that usually do quarterly disclosures |
Tax Efficiency |
ETFs are more tax-efficient than mutual funds because there is less buying and selling of securities inside an ETF. Also ETFs are structured in a way that selling units by a unitholder does not trigger tax liabilities for other unitholders. |
In Canada, the major Exchange Traded Fund providers are: iShares by BlackRock, Horizons, Vanguard, BMO, First Asset, and Power Shares. Each of these major providers have a list of their Exchange Traded Funds and a wealth of educational material on their websites.
Today, because of the broad array of Exchange Traded Funds available, almost any mutual fund can be replaced by a low-cost Exchange Traded Fund. The cost savings of may not be apparent in a single year. However, in the long run, the lower cost of Exchange Traded Funds can significantly improve the performance of any portfolio. See how much less you could be being by using our ETF pricing calculator.
