The next section of the Action Financial Group Orientation Series will deal with Investing and the various investment products or assets:
• Saving, banking, investing
• Cash and High Interest Savings Accounts (HISA)
• Guaranteed Investment Certificates (GIC)
• Mutual Funds
• Exchange Traded Funds (ETF)
Today we will deal with Exchange Traded Funds (ETF)
An exchange traded fund is an investment product that is created by an ETF dealer. The ETF is created by the dealer, who charges a fee, to either replicate a stock market index, or to replicate an index screened by additional criteria. Investors then buy shares of the ETF which are traded on stock exchanges in the same manner that individual stocks are traded. Values change throughout the day as the price of the underlying stocks or bonds change throughout the day. Existing shares can be traded on the stock market between individual investors, but also the dealer can create more shares if buy orders exceed sell order in the open market. If more sell orders are entered in the market than there are buyers, the dealer dissolves shares by selling the underlying stocks, and raising the cash to pay to the ETF shareholder who sold the shares. ETFs can be pure stocks, pure bonds, or a mixture, thereby giving investors the benefit of diversification that they would not have if they bought individual stocks or bonds directly.
Because an ETF can own stocks and/or bonds, it is important to understand at least generally, the underlying makeup of the ETF. An investor who is looking for more long-term growth and is willing to take on more risk might choose a pure stock ETF, whereas a conservative investor seeking more security might choose an ETF that holds mostly bonds, and only a small selection of stocks.
ETFs originally were strictly passive investments that replicated a stock market index. An example would be an ETF that replicates the TSX 60 which is the Canadian stock market index of the 60 largest Canadian companies, measured by market capitalization. In this passive ETF, there is no research or trading in stocks, the ETF simply buys and holds the 60 largest Canadian companies, whether they are growing or contracting, experiencing profits or losses. The cost of creating and operating such an ETF is lower than an actively managed alternative investment that has associated research and trading costs. More recently, active ETFs have emerged, where research or screens are used to include or exclude certain stocks, or change the weighting of the stocks relative to the index. The fees on active ETFs is more similar to the fees of comparable actively managed mutual funds.
There are some differences between mutual funds and ETFs, and therefore some advantages and disadvantages. ETFs are traded during the day and the prices reflect the stock market throughout the day, whereas mutual funds are only valued at the end of each trading day. ETFs are bought and sold like individual stocks, so there may be trading costs associated with each purchase or sale. Mutual funds are usually purchased without a trading cost, although there may be either a front end fee or a redemption fee, or neither, depending on the arrangement with the dealer. Mutual funds can be purchased or redeemed on a systematic plan weekly, biweekly, monthly, or other intervals, for a set dollar amount per transaction.
ETFs cannot be transacted this way, as they are bought or sold by whole shares. An investor wanting to buy $100/month for example would have to work out for each purchase, how many shares could they buy for their $100 based on the current market value, and place the transaction for that number of shares, which would likely change from month to month.
There are many different ETFs and they vary considerably, so choosing one or some to invest in should take into consideration the unique needs of the investor including the amount of money they have to invest, the frequency and pattern of purchases planned, and a number of other factors.
People invest in ETFs in the hopes that the value will appreciate and grow over time, and produce interest or dividend income.
We hope you will find this information valuable and will increase your financial confidence. You can always find these articles on our website anytime at www.actionfinancialgroup.com.
You have now learned all about investing and the various investment products or assets. Stay tuned for our next topic!
Karin Rimnyak, Certified Financial Planner®
David Dryburgh, Certified Financial Planner®
Ian Barrie, Certified Financial Planner®
This information has been prepared by Karin Rimnyak who is an investment Advisor for iA Private Wealth. Opinions expressed in this email are those of the Investment Advisor only and do not necessarily reflect those of iA Private Wealth. iA private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.