Exchange-Traded Funds (ETFs) have exploded in popularity over the last five years, with investors holding US$4.7 trillion in 6,483 different ETF products globally (as of Dec. 31, 2018). But what are ETFs – and why are they so appealing to investors?

 

Canadian solution, global phenomenon

 

First introduced in Canada in 1990, ETFs offered investors a new choice similar to mutual funds, but with some key differences (see chart). Originally, ETFs largely focused on providing exposure to broad indexes – in other words, they offered investors exposure to the returns of an underlying index like Canada’s main equity index, the S&P/TSX Composite, or the U.S.’s S&P 500 Index. Gradually, they gave investors exposure to more specific indexes like the S&P/TSX 60 Index, as well as bond composite indexes. More recently, ETFs have begun to offer different investment styles – active or passive, growth or value – and have expanded to include almost every market in the world. In short, there are few markets, asset types or investment styles that are not covered by one ETF or another. For small minimum purchase amounts and relatively low purchase prices and management fees, ETFs offer a tremendous range of choices for investors.

 

The world at your fingertips

 

The key advantages that ETFs can offer include:

 

Diversification: ETFs can be used to build a well-diversified portfolio – or complement an existing portfolio – by providing exposure to various asset classes, investing styles and geographic regions, while maintaining the investor’s risk-appropriate strategic asset allocation.

 

Global access and reach: Achieving appropriate exposure to global markets – fixed income, equity or commodity – for a Canadian-based investor through direct purchases of assets in those markets can be costly and inefficient, if

not outright impossible. ETFs can offer that exposure cheaply and efficiently, and generate investment opportunities that may otherwise be inaccessible to an individual investor.

 

Targeted exposure: Whether it is a specific industry or sector, bond maturity range or niche markets, ETFs can provide investors with specific – but still diversified – exposure relatively easily and cheaply versus trying to purchase the underlying assets individually to do the same.

 

Achieving specific portfolio goals: ETFs can offer investors “one-stop shopping” to meet specific portfolio goals – such as cash-flow generation, tax efficiency or reduced volatility.

 

With their growing popularity, ETFs may turn out to be Canada’s most successful export, while providing its investors and their portfolios with a world of choice and flexibility.