ETFs Explained

What exactly is an ETF (Exchange Traded Fund) and how does it work? In this video, we explain the ins and outs of ETFs and define some key terms, such as fund manager, prospectus, NAVPS (Net Asset Value Per Share), MER (Management Expense Ratio), and DRIP (Distribution Re-Investment Plan).

Key Takeaways

  • An Exchange -Traded Fund (ETF) is a type of investment fund that trades on an exchange, just like a stock.
  • The true value of a share of the ETF is called the NAVPS or Net Asset Value Per Share.
  • NAVPS = Net Value of all Securities -Liabilities / Number of Shares
  • Like a mutual fund, ETFs pay management fees and operating expenses.
  • Many ETFs are eligible for a Distribution Re-investment Plan or DRIP, which allows you to automatically re-invest your distributions to buy more shares of the ETF at no cost.

ETFs are like a basket that contains many other securities, like stocks, bonds, or commodities. 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. However, there are also associated transaction costs and rebalancing costs, which must not be ignored. ETFs pay management fees and operating expenses, which is calculated by grouping together the costs associated with the operation of a fund on an annual basis, and then expressing it as a percentage of the total value of the fund.

If you want to buy, sell or hold ETFs, you will need to open an account with a discount brokerage. You can hold ETFs in registered or non-registered accounts. It's important to note that the tax implications of holding ETFs will vary depending upon the type of account they are held in.

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