What is an ETF?
An Exchange Traded Fund (ETF) is a pooled investment vehicle consisting of stocks, bonds, or other securities.
Similar to mutual funds, ETFs offer diversified exposure to the market in a single investment but unlike mutual funds, investors can buy and sell ETFs on the stock exchange throughout the day. ETFs also generally involve lower costs, more transparency, and better tax efficiency than mutual funds.
What’s the difference between ETFs and mutual funds?
The main difference between ETFs and mutual funds are the way both are traded.
Shares of an ETF can be bought and sold anytime that a stock exchange is open; however, mutual funds trade only once a day after the stock market closes. An investor may use various trading strategies with ETFs that cannot be otherwise achieved with mutual funds, such as shorting, using margin or placing limit orders.
Why are ETF fees lower than mutual fund fees?
Both mutual funds and ETFs charge fees to cover the costs of management and operating expenses. This fee is referred to as the Management Expense Ratio (MER).
ETFs usually have lower MERs than mutual funds because most mutual funds are actively managed and generate more transaction fees compared to ETFs, which are generally passive and have fewer transactions. Even active ETFs typically charge lower fees than active mutual funds as mutual fund companies usually have higher administrative costs.
Why are ETFs tax efficient?
ETFs are treated the same as conventional open-end mutual funds for regulatory and tax purposes.
Investors generally pay taxes on income and capital gains distributions during the investment life, as well as on any capital gains generated in selling the fund.
ETFs have a tax advantage relative to actively managed products, such as mutual funds, as there are typically fewer portfolio transactions involved in the management of an ETF and therefore lower turnover of securities. Lower turnover means fewer capital gains distributions to investors, thereby minimizing any tax implications.
How do you buy an ETF?
ETFs are be purchased similar to stocks through your investment advisor or online brokerage account. They can be held in both non-registered and registered investment accounts, including RRSPs, TFSAs and RESPs.
How is the price of an ETF determined?
The value of an ETF is determined by the prices of the underlying securities. This is called the Net Asset Value (NAV). The market price should be similar to the NAV and is affected by the supply and demand of the ETF. When the price of an ETF is trading above its NAV, it is said to be trading at a premium, and when the price of an ETF is trading below its NAV, it is said to be trading at a discount.
How can you use ETFs in your portfolios?
One of the benefits of ETFs is the ability to provide exposure to multiple securities within one product. Our ETFs can be used to diversify and complement any portfolio as our products provide exposure to a variety of sectors and geographic regions.
Learn more about ETFs in our podcast episode with Eric Balchunas, Senior ETF Analyst for Bloomberg Intelligence: → Click here to listen