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What are exchange-traded funds (ETFs)?

Exchange-traded funds (ETFs) are pools of investments that trade on a stock exchange. Some are very risky, some are not so risky. An ETF holds a mix of securities that track the performance of a particular index, like the S&P/TSX 60 or more narrow indices. ETFs are attractive to retail investors because of their low cost, diversification, and share-like features. You can generally find a copy of an ETF's prospectus, along with specific, detailed, and up-to-date information about each ETF, on the fund company's website. 

What risks do they have?

Basic indexed ETFs are lower risk. Other ETFs are higher risk. Actively managed ETFs usually have higher management fees, do not follow an index, and lack transparency. If you are considering an ‘inverse’ or 'leveraged' ETF beware: these are very high-risk products.

An ETF can invest in equities, bonds, or commodities, and may specialize by industry, sector, or country. Each ETF has a different level of risk depending on its investment mix.

Because ETFs trade on an exchange, they are subject to many of the same risks as the investments they carry. ETFs that track a risky sector or specific country will be higher risk than one that tracks a well diversified index.

Tracking errors can occur when an ETF misses or is slow to follow index changes. Also, although ETFs have a mechanism to keep their trading price close to their net asset value (NAV), market conditions can interfere, causing you to pay more for the fund than the value of its underlying assets. See Understand market information, to learn about indices.

Can you sell them easily?

Probably. You trade ETFs on a stock exchange like shares. ETFs can be bought or sold at any point during market hours, like a stock and trade at market price. Poor market conditions can mean fewer buyers, making it difficult to sell your shares.

Some ETFs do not trade frequently and may invest in market sectors where the underlying companies do not trade frequently. These types of ETFs may be difficult to sell. You may need to wait, or reduce your price, to sell these ETFs.

What are the costs?

Brokerage fees apply to buying or selling ETFs, just like buying and selling shares. The management expense ratio (MER) for an ETF is usually lower than an indexed mutual fund, or actively managed mutual fund. This is because the fund manager follows an index and does not have to make as many investment decisions or trades.

What are typical returns?

When you sell your units, you will either get capital gains, if the market price has increased, or capital losses, if the market price has decreased.

ETFs may also pay cash distributions from interest, dividends, or capital gains. You sometimes have the option of directly reinvesting your distributions.