An exchange-traded fund (ETF) is an investment fund that holds a collection of investments, such as stocks or bonds. It trades like a stock on a stock exchange. Here are 4 key reasons why people invest in ETFs.
1. Cost-effective diversification
When you buy a share or unit of an ETF, you’re investing in a portfolio that holds a number of different stocks or other investments. This diversification may help smooth out the ups and downs of investing in just 1 investment. The cost of an ETF is much lower than if you were to buy each stock individually. You can also spread your money among ETFs that cover different types of investments. This allows you to further diversify.
Most ETFs publish their holdings every day. You can find out what investments your ETF holds, their relative weighting in the fund and if the fund has changed its position in any particular investment. This transparency can help you tell if an ETF is meeting its investment objectives. And because ETFs trade on an exchange, you can easily find the current market price.
You can find out exactly what investments an ETF holds and their relative weighting in the fund on a daily basis. This is not the case with mutual funds, which only disclose their holdings every quarter.
3. Ease of buying and selling
You can buy and sell ETFs from an investment firm or online brokerage at any time when the stock exchange is open. Like stocks, ETFs are traded throughout the day at the current market price. You’ll usually pay a commission when you buy or sell an ETF.
Unlike a mutual fund, which is only priced at the end of the trading day, ETFs are traded throughout the day at the current market price.
4. Low cost to own
You may pay less to own an index ETF than a mutual fund. These ETFs simply track an index, so the portfolio manager doesn’t have to do a lot of research on which investments to buy. The value is reset based on the underlying index. This doesn’t happen very often, so there isn’t a lot of buying and selling. This can mean a lower management expense ratio (MER).
Content in this section is provided in partnership with Investor Education Fund, a non-profit organization founded and supported by the Ontario Securities Commission that provides unbiased and independent financial tools to help Canadians make better money decisions. To find out more, go to: GetSmarterAboutMoney.ca
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