Jun 10, 2022
What is an ETF?
An exchange-traded fund (ETF) is a basket of investments (e.g., stocks, bonds, commodities, etc.) that trades just like a stock on the stock market.
ETFs are designed to provide an easy way to invest in different assets and markets, and there is a wide variety of ETFs available to investors. While some ETFs are made up of a basket of stocks, others hold fixed-income assets like bonds. Commodity funds track a specific commodity like oil or gold. Index ETFs track the performance of a market index like the TSX (Toronto Stock Exchange). There are also themed ETFs that allow you to invest in sectors like healthcare, the metaverse, or cryptocurrency, and even ETFs of other ETFs.
What’s the difference between ETFs and mutual funds?
You might be thinking that an ETF sounds a lot like a mutual fund, and you’re right!
Mutual funds and ETFs do share a few common features. For instance, both allow you to purchase a basket of securities all at once. Both can be used to manage risk by diversifying investment portfolios across asset classes, geographic regions, and sectors. Instead of picking individual stocks, an ETF or mutual fund provides access to a bigger slice of the market.
There are also several important differences between an ETF and a mutual fund. The largest difference is in how they are traded. An ETF is traded on an exchange throughout the day, like a regular stock. You can expect the price of an ETF to fluctuate over the course the day based on how much a buyer is willing to pay. In this case, someone who buys an ETF at 9 am will likely pay a different price than a buyer who makes a purchase at 2 pm.
On the other hand, a mutual fund can only be bought or sold at the end of the trading day. Like an ETF, the price of the assets in a mutual fund can rise and fall through the day, but you can only buy at the end of the day. So, you’re stuck paying whatever the price is when the markets close.
Another difference between ETFs and mutual funds is cost. ETFs usually cost less than a typical mutual fund. This is because the administrative costs associated with managing an ETF are lower. ETFs also tend to have lower investment minimums than mutual funds. Where minimums for mutual funds can start in the thousands, the minimum investment for an ETF is typically the cost of the one share plus any associated fees or commissions.
What are the benefits of ETFs?
Adding ETFs to investment portfolios can provide several benefits including:
- Flexibility. ETFs are traded on an exchange just like a stock. Unlike a mutual fund, there’s no waiting until the end of the day to make a purchase.
- Versatile. ETFs can be used for long-term or short-term investment strategies. How you use an ETF depends on your specific investment objective.
- Diversification. Adding ETFs to portfolios can provide instant diversification. A single ETF can provide exposure to different sectors, geographic regions, and asset classes.
- Cost. ETFs typically have lower management expense ratios (MERs) than mutual funds.
- Low barrier to entry. Most ETFs have really low minimums to get started – typically just the cost of a single share making it easy to start investing with less money.
The growth of ETFs in Canada
The first ETF in the world, the Toronto 35 Index Participation Units (TIPs) was created in 1990 in Canada and listed on the Toronto Stock Exchange2. Since then, ETFs have become one of the most popular investment vehicles in the industry with over 1,000 Canadian ETFs accounting for over $352 billion in net assets1. And, there’s still room to grow.
With over three decades of history, ETFs have become a fundamental tool in the investor’s toolkit. A combination of investor demand and technological improvements has made ETFs easier to buy and sell.
How do we use ETFs at CI Direct Investing?
At CI Direct Investing, we handpick brand name ETFs to deliver the best overall value. We use ETFs as building blocks to create low-cost diversified portfolios for different risk levels.
How do we select our ETFs?
- Tracking error minimization to mirror the index
- Select higher trading volume ETFs for best pricing
- Prioritize funds with higher assets under management
- All else equal, we choose the ETF with the lower share price
- Consider country of origin to reduce currency exchange charges
- Verify successful performance history
- Find the lowest MER possible
Diversify your portfolio with ETFs
Adding ETFs is a great way to further diversify your investment portfolio. Combining a mix of ETF strategies can help you to further diversify and manage risk. If you have questions about ETFs or want to learn more about the ETFs and portfolios we offer, talk to a CI Direct Investing portfolio manager.
1 Source: Investor Economics. “ETF and Index Funds Report – Canada (Q1 2022).”
2 Source: CI Global Management. “Introduction to ETFs: Embracing a vital portfolio building block.”