When you buy a shareShare A piece of ownership in a company. A share does not give you direct control over the company’s daily operations. But it does let you get a share of profits if the company pays dividends.+ read full definition or unitUnit What you buy when you invest in mutual fund. Similar to a share of a stock. For example, you could buy 100 units in a mutual fund.+ read full definition of an ETF, you’re investing in a portfolioPortfolio All the different investments that an individual or organization holds. May include stocks, bonds and mutual funds.+ read full definition that holds a number of different stocks or other investments. This diversification may help smooth out the ups and downs of investing using just one investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition. You can also spread your money among ETFs that cover different types of investments, such as bonds or commodities. This allows you to further diversify.
2. Passive management
Most ETFs are designed to track an indexIndex A benchmark or yardstick that lets you measure the performance of a stock market, part of a stock market or a single investment. Examples: S&P/TSX, S&P/TSX Canadian Bond Index.+ read full definition, such as the S&P/TSX 60 – this is called passive investing. Passive investing tends to cost the consumer less than active investing, where a portfolio managerPortfolio manager An investment professional who manages your investment portfolio. For example, they buy, sell and monitor investments that fit their clients goals and tolerance for risk.+ read full definition actively buys and sells securities to try to outperform the market. While there are advantages to active strategies, passive strategies can outperform active strategies based on cost savings alone.
Most ETFs publish their holdingsHoldings Shares or other interests in a business. Also refers to investments in a portfolio.+ read full definition every day. You can find out what investments your ETF holds, their relative weighting in the fund and if the fund has changed its position in any particular investment. This transparency can help you tell if an ETF is meeting its investment objectives. And because ETFs tradeTrade The process where one person or party buys an investment from another.+ read full definition on an exchange, you can easily find the current market priceMarket price The amount you must pay to buy one unit or one share of an investment. The market price can change from day to day or even minute to minute.+ read full definition.
You can usually find out what investments an ETF holds and their relative weighting in the ETF on a more frequent basis than for mutual funds, which only disclose their holdings periodically.
4. Ease of buying and selling
You can buy and sell ETFs from an investment firm or online brokerageOnline brokerage A brokerage firm that lets you make your own investment choices and carry them out over the internet. You pay lower fees than if you used a full-service broker.+ read full definition at any time when the stock exchangeStock exchange A market in which securities are bought and sold.+ read full definition is open, at the current market price at the time of the transactionTransaction The process where one person or party buys goods or services from another for money. Examples include taking money out of an account, buying something with a credit card or taking out a loan.+ read full definition. Like stocks, ETFs are traded throughout the day at the current market price. You’ll usually pay a commission when you buy or sell an ETF.
Unlike a mutual fundMutual fund An investment that pools money from many people and invests it in a mix of investments such as stocks and bonds. A professional manager chooses investments that match the funds goals for risk and return. You can redeem your fund units at any time.+ read full definition, which is only priced at the end of the trading day, ETFs are traded throughout the day at the current market price. You can find the current market price for ETFs at any time, while mutual fund prices are usually only available once daily.
5. Low cost to own
You may pay less to own an ETF than a mutual fund, depending on the fund you buy. Index ETFs, for example, simply track an index, so the portfolio manager doesn’t actively manage the fund, which can mean a lower management expense ratio (MER).
Reasons ETFs may not be right for you
You pay commissions to buy and sell ETFs, so if you plan to trade frequently, these costs will impact your return. You will also pay management expenses regardless of how the fund performs, even if the fund has negative returns.
5 key points
- Cost-effective diversificationDiversification A way of spreading investment risk by by choosing a mix of investments. The idea is that some investments will do well at times when others are not.+ read full definition.
- Passive managementPassive management An investing strategy that generally involves a portfolio of securities that tracks the performance of a benchmark or investment model. The holdings of a fund that is passively managed are only adjusted if there is a change in the benchmark or investment model.+ read full definition.
- Ease of buying and selling.
- Low cost to own.