The Ins and Outs of ETFs
Investment funds, like exchange-traded funds (ETFs), can be a simple way to diversify your portfolio, especially for relatively small investment portfolios. ETFs are pools of investments that trade on a stock exchange. ETFs are attractive to retail investors because of their low cost, diversification, and share-like features.
What Risks do ETFs Have?
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 a higher risk than one that tracks a well-diversified index.
How do you Sell ETFs?
You trade ETFs on a stock exchange like shares. ETFs can be bought or sold at any point during market hours like a stock.
Some ETFs do not trade frequently and may invest in market sectors where the underlying holdings do not trade frequently. These types of ETFs may be difficult to sell. Poor market conditions may also make it 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 an actively managed mutual fund. This is because the fund manager usually follows an index and does not have to make as many investment decisions or trades. Most ETFs do not pay a trailer commission – another reason for ETFs’ low MER.
In recent years, fund companies have launched actively managed ETFs that do not follow an index. These actively managed ETFs tend to have a higher MER compared to passive ETFs that follow an index, but generally have a lower MER compared to actively managed mutual funds.
What are the Typical Returns?
When you sell your units, you will realize either 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.
Regulators are working toward implementing ETF Facts, similar to the Fund Facts document you would receive with the purchase of a mutual fund. The ETF Facts will provide a summary of key information associated with purchasing an ETF, including the risks and costs.
To find out more about ETFs, talk to your registered investment advisor.
If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Inquiries at 604-899-6854 or 1-800-373-6393, or through e-mail at [email protected]. You can also file a complaint or submit a tip anonymously using BCSC’s online complaint form.
InvestRight.org is the British Columbia Securities Commission’s investor education website.