You’ve probably heard about exchange-traded funds (ETFs). That’s because ETFs have become an increasingly popular option for today’s investors to invest their money.
Well, as the name might suggest, it shares characteristics of both a mutual fund and a stock. It’s an investment vehicle that trades on an exchange, just like a stock, and can hold a diversified mix of stocks, bonds, commodities, currencies, options or a blend of assets, like a mutual fund.
How do ETFs work?
ETFs offer investors an important option for simple, low-cost diversification. When you buy an ETF, you’re essentially investing in the performance of an underlying basket of securities.
For example, if you want exposure to the Canadian market, you might purchase an ETF that tracks the S&P/TSX Composite Index. What you’re getting is exposure to the underlying securities that represent that index (or a sampling of that index).
ETFs and mutual funds
ETFs and mutual funds share many common features:
- Broad and diversified approach to investing in the markets
- Access to a basket of investments that may include stocks, bonds and other securities
- Can be passively or actively managed by investment professionals
That said, there are some important structural differences. While a mutual fund is typically built and actively managed by a professional money manager, ETFs generally employ a more passive approach: they try to replicate the holdings, weightings and/or performance of a particular index.
This more passive approach leads to one of the most compelling differences between the two: ETFs are generally available at a significantly lower cost.
Here are some of the differences that you typically see between ETFs and Mutual funds:
ETFs and stocks
ETFs may also offer greater flexibility than mutual funds when it comes to buying and selling. Therein lies the similarity to stocks. Like stocks, ETFs are traded on an exchange so they can be bought and sold throughout the day between individual investors. That being said, just because you can trade an ETF regularly, doesn’t mean that you have to, or should.
In contrast, mutual funds are bought and sold between investors and the fund company. The price of a mutual fund (its NAV) is only determined at the end of each business day.
ETFs and bonds
What about bonds? How do they fit into the ETF equation? Well, much like equities, you can buy bonds individually or buy a bond ETF. The benefits of buying a bond ETF are similar to buying an equity ETF: diversification, easier to trade and better liquidity.
Commissions, management fees and expenses all may be associated with exchange traded funds (ETFs). Investment objectives, risks, fees, expenses and other important information are contained in the prospectus, please read it before investing. ETFs are not guaranteed, their values change frequently and past performance may not be repeated.
Manulife ETFs are managed by Manulife Investments, a division of Manulife Asset Management Limited.