Exchange-Traded Funds (ETFs)

Exchange-Traded Funds (ETFs) have revolutionized investing for Canadians by offering a low-cost, flexible way to build a diversified portfolio. ETFs are similar to mutual funds in that they pool investor money to buy a basket of assets, but they trade on stock exchanges like individual stocks.

Total Canadian ETF assets reached about $534.5 billion at the end of 2024.

There are over 1,200 ETF choices listed across Canadian exchanges, covering virtually every investment need and strategy.

What are ETFs and How Do They Work?

An Exchange-Traded Fund (ETF) is an investment fund that is listed for trading on an exchange (such as the TSX). Investors can buy or sell ETF shares through a brokerage account just as they would trade stocks. Each ETF typically aims to track the performance of a specific index or asset category.

For example, an ETF might track the TSX 60 Index of top Canadian stocks, a broad global equity index, a bond index, or even the price of gold. By purchasing one share of that ETF, an investor effectively gets exposure to all the underlying assets in the fund's portfolio.

Most ETFs in Canada are passively managed, meaning they simply replicate an index rather than having a manager actively pick securities. This passive approach is a big reason ETFs tend to have ultra-low fees.

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Fee Comparison: ETFs vs. Mutual Funds

Feature

  • Average Management Fee (MER)
  • Trading
  • Minimum Investment
  • Tax Efficiency

ETF

  • ~0.3%
  • Real-time during market hours
  • Price of one share
  • Generally more tax-efficient

Mutual Funds

  • ~1.5%
  • End-of-day pricing
  • Often $500-1,000 minimum
  • May have more capital gains distributions

Real-Time Trading and Liquidity

One of the defining features of ETFs is that they can be bought and sold any time the market is open, at the current market price. This intraday trading capability offers flexibility to investors and traders.

Liquidity for major ETFs is excellent: many of the largest Canadian ETFs have tight bid-ask spreads and high trading volumes. For instance, an ETF tracking the TSX or S&P 500 may trade millions of shares per day, ensuring you can enter or exit positions with minimal transaction cost.

ETFs are very transparent – their holdings are published daily in most cases. Investors know exactly what they own, which can provide peace of mind and helps investors avoid unintended exposures.

Diversification and Range of ETF Offerings

1

All-in-One ETFs

These single ETFs hold a mix of stocks and bonds (Canadian, U.S., international) to provide a one-stop balanced portfolio. They are often labeled by risk level (Conservative, Balanced, Growth) and automatically rebalance over time.

2

Sector & Thematic ETFs

Want to invest in the booming technology sector or renewable energy? There are ETFs focusing on those specific themes, allowing you to target areas with growth potential.

3

Specialty ETFs

Canadian investors benefit from unique ETF options like covered call ETFs for income generation, currency-hedged ETFs, and commodity ETFs like gold bullion funds.

4

Global Market Access

ETFs provide easy access to international markets, emerging economies, and specialized assets that would otherwise be difficult for individual investors to access directly.

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Using ETFs in Your Investment Plan

ETFs can play many roles in a portfolio. For individual investors, a popular approach is the core-satellite strategy: use broad ETFs as the "core" which provides market returns at minimal cost, then add "satellites" to overweight areas you have conviction in.

ETFs for Different Investor Types:
For growth-oriented investors, you might overweight equity ETFs including emerging market or tech sector ETFs. Conservative investors might prefer bond ETFs, dividend stock ETFs, and low-volatility funds.

ETFs for Families and Business Owners:
Families saving for both retirement and education can use different ETFs in their RRSP and RESP accounts. Business owners can use ETFs to manage corporate investments efficiently, choosing tax-advantaged ETF structures.

Periodic Review and Rebalancing:
It's important to periodically rebalance and review your ETF portfolio because, ETFs trade easily and realigning your portfolio back to target weights is straightforward. Many all-in-one ETFs do this automatically inside the fund.

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