Do You Understand ETFs?
Finance Tips Exchange-traded funds (ETFs) could be the move that gives your investment portfolio the jump-start that it needs.
As the fastest-growing investment vehicle, with broad usage amongst investors of all kinds, there is still room for education, clarity and comfort with Exchange Traded Funds (ETFs). Financial literacy month is a great time to start this process. On a basic level, ETFs incorporate the most appealing features of both mutual funds and individual stocks, and as with mutual funds, an ETF is a portfolio of bonds or stocks, combined into a single fund.
Benefits and features
ETFs are also easy to use. Investors can buy and sell them with ease like stocks, and unlike mutual funds, they can be traded at the prevailing market price on a stock exchange during regular trading hours. ETFs are also increasingly easy to access. Investors can simply buy ETFs from any brokerage account, in the same way that they buy ordinary, single stocks, or through their financial advisor. “It’s an incredibly easy way to purchase ETFs,” says Tyler Mordy, President and co-CIO at HAHN Investment Stewards & Company Inc. “The key difference, of course, is that ETFs are tracking all different types of asset classes.” Investors can also purchase and sell ETFs through any financial advisor, brokerage firm, or online broker.
Another key benefit is cost: ETFs are relatively inexpensive, tend to have lower management fees than actively managed mutual funds, and are generally more tax efficient.
Build a diversified portfolio
“The majority of ETFs are index funds, meaning they’re based on an index like the S&P/TSX 60 or a domestic bond fund,” explains Noel Archard, Managing Director and Head of BlackRock Canada. “If you buy XIU — the third largest fund across mutual funds and ETFs in Canada — with one trade you’re buying the 60 biggest stocks in the country, and you get the returns on how those stocks do over the course of the year.”
“ETFs allow investors to gain broad exposure to markets and sectors they may not feel comfortable accessing through a single security.”
ETFs allow investors to gain broad exposure to markets and sectors they may not feel comfortable accessing through a single security.
“We actually tend to see investors replacing their single stock purchases with an ETF,” says Archard. “So, instead of buying one or two energy companies, which can be a real rollercoaster, investors can buy the whole energy sector through one ETF.”
ETFs also help clients to build diversified portfolios by allowing them to invest in markets that were once difficult and expensive to gain access to. “Through ETFs, investors can add some emerging market and global bond exposure to their portfolios in a cost effective way,” says Archard.
Tyler Mordy sees an ETF as an extremely efficient investment vehicle that provides a whole host of benefits. “They have low costs, tax efficiency, and allow intra-day trading,” says Mordy. “But the biggest benefit is the way they’ve opened a variety of investment opportunities right across the world, meaning that investors can build more diversified, more global, and more robust portfolios than ever before.”
With the added benefit of transparency, ETFs publish their exact holdings on a daily basis so investors always know what they’re invested in. “When you’re constructing a portfolio, one of the biggest benefits of transparency is that, as an investor, you’re able to determine the actual exposure that you have,” explains Mordy. “Whereas, with most other investments vehicles, you don’t always know what your underlying investment class exposure is.”
As ETFs have grown in popularity over the past decade, the types of ETFs available has evolved to meet this demand. ETFs are changing the way that people invest their money, making it easier for investors to build a diversified portfolio that reaches across global and emerging markets.
“That’s part of the revolutionary process that’s underway in portfolio construction,” says Mordy. “Investors can now build better and cheaper portfolios, with the convenience of doing it straight through their normal brokerage account.”