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Exchange Traded Funds - Frequently Asked Questions
What are the features of Exchange Traded Funds?
Diversified
Exchange Traded Funds (ETFs) reflect the performance of different sectors in the market. The portfolios of Exchange Traded Funds, like index mutual funds, match portfolios of broad-based indices.
Exchange traded
Units of ETFs trade on a stock exchange in the same manner as stocks. You can buy or sell units of ETFs whenever the market is open through a brokerage account. When units of ETFs are bought and sold, the underlying portfolio is not affected, unlike the portfolios of mutual funds, which fluctuate when units of the fund are bought and sold.
Margin eligible
ETFs can be purchased on margin. You can also place limit and stop loss orders.
Can be sold short
Unlike stocks, ETFs can be sold short on a down-tick. Mutual funds are priced only once daily, making them inflexible compared with ETFs.
Transparent
ETF holdings are posted daily, giving all investors full knowledge of the fund. Mutual funds are only required to disclose their holdings twice a year.
Tax efficient
When shareholders sell units of ETFs, they trade units for individual securities with other shareholders through a swapping mechanism. This means fund managers don't have to sell shares to meet redemption requests. This minimizes distributions of capital gains to the remaining investors. If you sell mutual funds and realize a profit, you'll receive a taxable distribution.
Similar to index mutual funds, buying and selling of stocks in ETFs occurs only if the underlying benchmarks change. When the benchmarks change, the funds will distribute capital gains. However, ETFs make distributions less often than traditional mutual funds, minimizing your tax bill on capital gains.
Fully invested
ETFs don't need to hold cash in anticipation of redemptions. This means ETFs save trading costs and minimize the cash drag effect, which occurs when funds are required to hold cash and therefore are not able to maximize the total return of the fund.
Cost efficient
Unlike fully managed mutual funds, there are no front-end load or deferred sales charges with ETFs, which are bought and sold like stocks. However, brokerage commissions apply when you buy or sell ETFs.
Low management expense ratios
Similar to index mutual funds, ETFs have low management expense ratios of approximately 0.20%. For example, iUnits S&P/TSX 60 Index Participation Fund has a management expense ratio capped at 0.17%. Fully managed mutual funds have management expense ratios of up to 2.5%.
Trade at prices very close to net asset value
Closed-end mutual funds often trade at substantial discounts or premiums to their net asset values. The size of this discount can vary dramatically with changing stock market conditions. The trading value of units of ETFs is generally very close to the net asset value. This is because large blocks of shares held in ETFs, known as creation units, are continually created and sold because of investor demand and for arbitrage purposes. There is still potential for ETFs to trade at small discounts or premiums.
