Exchange Traded Funds (ETFs)
An ETF is a type of investment
An ETF is a product that gives you exposure to a basket of securities.
You buy shares of an ETF on a stock exchange like the Toronto Stock Exchange. Each share you buy represents a basket of securities, such as stocks, bonds or other types of securities. The manager of the ETF is responsible for the composition of the ETF, meaning which securities it holds. Usually an ETF simply mirrors an index and fund managers don't make decisions about what to buy and sell. Since this is less work than managing an active mutual fund, ETFs have lower fees than many mutual funds.
What's to like
Easy to choose and low-maintenance
What's not to like
Trading fee to buy and sell
Generally tracks an index without downside protection
How can I use ETFs?
An ETF gives you instant, diversified exposure to the market. An ETFs can hold thousands of stocks from the around the world and it would be impossible for most people to get this kind of diversification by buying individual stocks.
Get exposure to many types of investments that you might other not be able to access, such as real estate or gold. You can even get exposure to Bitcoin using ETFs.
You can own ETFs in all kinds of accounts including RRSPs, RESPs, and TFSAs. You can buy ETFs yourself if you have a self-directed trading account, or through a financial advisor that sells ETFs. You may not be able to buy them with the person at your bank branch.
Anything else I need to know?
There is a cost to buy ETFs that you don't pay when you buy mutual funds. Online brokers charge a trading fee or commission to buy ETFs. This charge is small (about $7-$10 per trade) although a few brokers in Canada offer free ETF trades. It's a good idea to minimize how often you buy and sell ETFs to keep these fees low.
ETFs and mutual funds are similar in some ways but do have important differences. Both give you exposure to a large number of stocks or bonds and provide diversification. The main difference is that mutual funds are often actively-managed, meaning a portfolio manager and their team of analysts make decisions about what investments to buy and sell. (The exception to this is Index Funds.) ETFs are often passively-managed, meaning the fund manager doesn't make these decisions, but rather simply mirrors an index. (The exception to this is actively-managed ETFs.) This is why the fees are lower. The drawback of this approach is there is no one to sell a stock if its price is falling quickly. For more insight into passive versus active management, see here.