Here are a few key reasons why people invest in ETFs.
When you buy a share or unit of an ETF, you’re investing in a portfolio that holds a number of different stocks or other investments. This diversification may help smooth out the ups and downs of investing using just one investment. You can also spread your money among ETFs that cover different types of investments, such as bonds or commodities. This allows you to further diversify.
2. Passive management
Most ETFs are designed to track an index, such as the S&P/TSX 60 – this is called passive investing. Passive investing tends to cost the consumer less than active investing, where a portfolio manager actively buys and sells securities to try to outperform the market. While there are advantages to active strategies, passive strategies can outperform active strategies based on cost savings alone.
Most ETFs publish their holdings every day. You can find out what investments your ETF holds, their relative weighting in the fund and if the fund has changed its position in any particular investment. This transparency can help you tell if an ETF is meeting its investment objectives. And because ETFs trade on an exchange, you can easily find the current market price.
You can usually find out what investments an ETF holds and their relative weighting in the ETF on a more frequent basis than for mutual funds, which only disclose their holdings periodically.
4. Ease of buying and selling
You can buy and sell ETFs from an investment firm or online brokerage at any time when the stock exchange is open, at the current market price at the time of the transaction. Like stocks, ETFs are traded throughout the day at the current market price. You’ll usually pay a commission when you buy or sell an ETF.
Unlike a mutual fund, which is only priced at the end of the trading day, ETFs are traded throughout the day at the current market price. You can find the current market price for ETFs at any time, while mutual fund prices are usually only available once daily.
5. Low cost to own
You may pay less to own an ETF than a mutual fund, depending on the fund you buy. Index ETFs, for example, simply track an index, so the portfolio manager doesn’t actively manage the fund, which can mean a lower management expense ratio (MER).
Reasons ETFs may not be right for you
You pay commissions to buy and sell ETFs, so if you plan to trade frequently, these costs will impact your return. You will also pay management expenses regardless of how the fund performs, even if the fund has negative returns.
5 KEY POINTS
- Cost-effective diversification.
- Passive management.
- Ease of buying and selling.
- Low cost to own.