What are ETFs? 5 ETF Questions Answered

Craig Sebastiano
by Craig Sebastiano November 12, 2015 / No Comments

Exchange-traded funds (ETFs) have been around for 25 years but Canadians still don’t know much about them.

A survey by asset management firm BlackRock finds only 20% of Canadians say they’re familiar with ETFs.

There’s also a gender difference when it comes knowledge about and investing in ETFs. Twenty-seven percent of men have a greater awareness of ETFs compared to just 9% of women.

Men also seem to have a better understanding of the benefits of ETFs. Men say the top reasons for using ETFs are because they’re easy to use (37%) and they’re low cost (17%). Nearly half of women (49%) say they use ETFs because their financial advisor recommended them.

If you’re not sure what ETFs are, here’s a quick primer:

  1. What’s an ETF?

Like a mutual fund, an ETF is a fund that holds a basket of stocks or bonds and is managed by a portfolio manager. And like a stock, an ETF is traded on a stock exchange.

  1. What are the benefits of ETFs?

Buying an ETF allows you to diversify your portfolio because you hold a variety of stocks or bonds. Most ETFs track an index like the S&P/TSX Composite Index, which is a passive management approach. Most mutual funds take an active management approach and try to beat the index. This makes mutual funds more expensive to own.

  1. How much do ETFs cost?

There are two fees associated with ETFs. First, you have to pay a fee (called a trading commission) each time you buy or sell an ETF. Most discount brokerages charge about $10 a trade. Second, there’s the management expense ratio (MER), which pays for the fund’s operating expenses. According to investment research firm Morningstar, the average MER on an ETF is 0.61% while the average MER on a mutual fund is 1.86%, which means you’ll end up paying almost three times as much to own the mutual fund. BMO, Vanguard, and BlackRock’s iShares offer some ETFs with MERs as low as 0.05%.

  1. How do I buy an ETF?

In order to buy or sell an ETF, you need to open up a trading account either with a full-service investment firm or a discount brokerage. A full-service firm will advise you on what types of investments to make and you’ll pay higher fees for their services. Using a discount brokerage means you get to choose your own investments and best of all, it’ll cost less. There are even some discount brokerages that don’t charge commissions on ETF trading so it pays to do some research.

  1. Can I hold an ETF in my TFSA?

Yes, besides GICs and high-interest savings, ETFs are another one of many investment options for your TFSA. You can also hold an ETF in an RRSP or RESP.

Do you have more questions about ETFs? Let us know in the comments section below.

Flickr: Joseph Morris

categories: Deposits