Frequently asked questions
An ETF is an investment fund traded on a stock exchange, much like stocks. An ETF holds assets such as stocks, bonds, or commodities, and generally trades close to its net asset value over the course of the trading day.
Passively-managed ETFs seek to track the performance of a market benchmark (i.e. an index), before the deduction of fees and expenses. They are not actively managed by a portfolio manager on a daily basis. Instead, passive ETFs periodically rebalance their portfolios to align with the underlying index.
Active ETFs are actively managed by a portfolio management team on a daily basis. The management team has complete discretion over which securities are bought and sold and the timing of such transactions. The portfolio management team's transactions within the ETF are consistent with its stated investment objectives.
Each ETF pays a management fee and will be responsible for certain operating costs and expenses. For details, please see the ETF’s prospectus. The management fee and operating expenses make up an ETF’s management expense ratio (MER). Additionally, each ETF is subject to brokerage expenses and commissions on its portfolio transactions. Such expenses are not included in the MER of the ETF but are reported separately as a trading expense ratio (TER). Although management fees, operating expenses and brokerage expenses incurred by an ETF are not paid by investors directly, they reduce an ETF’s returns.
Since ETFs trade like stocks on an exchange, investors may be subject to transaction fees and/or commissions, payable to their brokers or dealers, when they buy or sell ETF shares.
- Liquidity - ETFs trade on stock exchanges and can be bought and sold at any time during the trading day.
- Price Transparency - Investors know intraday the price at which they can buy or sell ETF shares on a stock exchange. For conventional mutual funds, investors do not know the price at which they buy or sell securities of the fund in advance, as the fund's net asset value is calculated at the end of the trading day.
- Trading fees - Every time an investor places an order for the purchase or sale of securities of an ETF, they will pay a trading fee, just like when trading a stock.
- Bid-ask spreads - ETFs trade on the open market like equities, trading at a price generally near the ETF's net asset value (NAV). Like equity securities, ETFs trade within a bid and ask spread.
- Trade price versus NAV - ETFs trade on exchanges like equity securities and can be bought and sold on an exchange anytime during the trading day. ETFs trade intraday at a price which is likely different than their NAV posted at the end of the day. The trade price could be higher or lower than the NAV. In contrast, mutual funds are bought or sold at a specific price (net asset value per security) at the end of each trading day.
Investors who are considering adding ETFs to their portfolio should evaluate their personal investment goals, knowledge level, day-to-day involvement and time horizon, to determine whether ETFs fit their overall investment strategy.
ETFs may be suitable for investors who are:
- comfortable trading on an exchange
- seeking greater liquidity, with the ability to buy or sell intraday