Narrator:
In 1990, the first ETF fund launched in Canada, marking the inception of the world's first ETF. Fast forward to today, and ETFs are celebrating over 30 years of offering low fee, diversified investment options to Canadians.
Since day one, the popularity of ETFs has only grown. Let's start by discussing what is an ETF. ETF stands for exchange-traded fund. It is an investment vehicle that pools the money of many individual investors with similar investment goals and uses it to buy a variety of investments, which are combined in a portfolio. However, unlike mutual funds, which are bought and sold at the end of the day based on an end of day net asset value through a mutual fund dealer, ETFs are bought and sold on a stock exchange, the same way stocks are.
They can be either passive or active. Passive ETFs hold a basket of securities similar to the benchmark index it's attempting to replicate. Actively managed ETFs hold securities based on the fund's investment objective and the manager's research and strategies. For example, an active ETF may hold a basket of securities that is different from an index in an attempt to outperform it, or lower volatility. Some exchange-traded funds may provide exposure to commodities such as oil, gold, or natural gas, or use more specialized investments like derivatives.
Why use ETFs? The core benefits of ETFs include diversification, transparency, trading flexibility, and lower fees. ETFs offer access to a diversified portfolio of securities that the average investor would have a difficult time recreating due to the costs and time involved in doing so. ETFs that track broad market indices usually have hundreds or even thousands of securities. Through a single exchange-traded fund, investors can gain instant diversification to a portfolio of different securities.
ETF portfolio holdings are published daily on the issuing company's website. This allows investors to know which underlying securities they own when they purchase one. Since ETFs trade on stock exchanges, investors have the flexibility of buying and selling them throughout the day whenever the stock market is open. Compared to other investment funds such as traditional mutual funds, they tend to have lower management fees and operating costs. The limitations of ETFs include transaction costs and rebalancing costs. As ETFs are bought and sold on an exchange, investors are usually charged a commission fee per buy and sell transaction.
Rebalancing costs are associated with periodically buying or selling ETFs to maintain a desired level of asset allocation. How to buy and sell ETFs. To purchase, sell, or hold exchange-traded funds, investors will either need to have a full-service brokerage or a discount brokerage account. Remember, tax consequences for holding ETFs will vary depending on the type of account they are held in.
At TD Asset Management, we recognize the important role that ETFs can play from offering exposure to different asset classes, industry sectors, geographic regions, and low cost diversification. We are also committed to providing one of the broadest offerings of investment solutions in Canada and the essential building blocks needed to help you construct a well-thought-out portfolio to help you reach your investment goals. For more information on TD's suite of ETF solutions, please visit our ETF Resource Centre.
