These ETFs are built to closely follow a benchmark (for example, the TSX/S&P 60).These are passive investments – they aim to closely track an index, less ETF fees and expenses. These ETFs do not attempt to outperform the benchmark. The fund’s holdings are only adjusted if there is an adjustment in the components of the index.
Not all index ETFs follow stock market indices. Fixed income ETFs, for example, follow indices that track bonds. Index ETFs can also track a specific commodity like oil or gold, or single countries or regions.
The specific index that the ETF tracks is important because it determines how investments are weighted in the ETF. Two indices that hold the same investments in different proportions will provide very different returns.
Index ETF vs index mutual funds
Index ETFs aren’t the only investment product that tracks an index. Index mutual funds do the same thing, but you buy and sell them through a mutual fund dealer – usually your bank or mutual fund company. With Index ETFs you have to open a trading account because you buy and sell ETFs on an exchange like stocks.
Risks of index ETFs
Index ETFs have risks similar to the investments that make up the index they track. For example, an ETF that follows an equity index has risks similar to stocks. An ETF that follows a fixed income index has risks similar to bonds.
An index ETF may not achieve the same return as the index or sector it tracks. That’s because the weighting of investments in the ETF may not be exactly the same as those in the 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, and fees and expenses lower the ETF return.
- closely follow a benchmarkBenchmark A yardstick that you can use to measure the performance of an investment. Example: a stock market index may be a benchmark you can use to compare how well your own stocks are doing.+ read full definition.
- are passive investments.
- can follow a variety of investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition indices.
- may not achieve the same return as the index or sectorSector A part of the economy where businesses provide the same or related products or services. May also refer to a group.+ read full definition they track.
Learn more about the risks of ETFs.