ETFs (Exchange-traded funds) are investment products that track an index, sector, or investment model and can be bought or sold on a stock exchange just like an individual stock. They are pooled investment vehicles, similar to a mutual fund, that amalgamates small investments from large numbers of individuals to own a basket of underlying securities.
What are the different types of ETFs?
ETFs can differ in terms of management style. They can be managed passively, actively, or a combination of the two. Passively managed ETFs are constructed to replicate the performance of a benchmark by holding the same securities as an index in proportionate amounts. Hence, the goal is to track the market’s performance. In contrast, actively managed ETFs look to outperform the market through a fund manager that makes active investment decisions.
Should you invest in ETFs?
ETFs are simple and flexible products that can offer diversity to your portfolio. Unlike individual stocks, ETFs are comprised of a baskets of stocks, so you can gain exposure to multiple stocks by just buying one ETF. Although this diversification may lower your potential return, it also reduces risk and is considered safer than buying an individual stock. Similar to investing in individual stocks, you can make money through capital gains and dividends. It is also a very simple way to round out your portfolio’s asset allocation and easily gain exposure to a specific sector.
What are the pros?
Low barriers to entry: ETFs allow investors to build a diversified portfolio with less capital than one might need with other investments vehicles.
Liquidity: ETFs can be traded throughout the day just like any other stock. This flexibility allows your advisor to enter or exit investments in real time unlike mutual funds which takes the end-of-day pricing.
Low fees: In general, ETFs have lower expense ratios than mutual funds.
Diverse selection: There are ETFs available for almost any investor, from passive indexing to actively managed thematic funds.
What are the cons?
Underlying fluctuations and risks: Although ETFs are diversified, their performance and volatility still depend on its underlying companies. Large swings can still occur with an ETF.
Lack of control: An issue with ETFs is that you don’t have any say into what stocks can go into the fund. Although you can choose an ETF based on its benchmark index, you can’t add or remove individual stocks. If you’d like a specific portfolio, you’ll have to buy the stocks individually or work with your investment advisor to create a custom portfolio of stocks.
Low Volumes: ETFs that have lower trading volumes may trade with wider bid-ask spreads, making it more difficult and costly for investors to enter and exit a position.
If you would like to learn more about ETFs and how they might fit into your investment portfolio, speak to your advisor or a member of our team.