With more than $3-trillion in exchange-traded funds (ETFs) assets under management around the world (and nearly $85-billion in Canada alone), it's not as if ETFs are unknown. Yet myths about ETFs still abound, says Warren Collier, managing director and head of iShares Canada at BlackRock Asset Management Canada Limited.
"There's a list of misconceptions I consistently hear over the years," he says.
Here are some of the most common myths about ETFs — and the reality behind those misconceptions:
Myth 1: ETFs are just a fad
"I often hear this — that ETFs are not going to be a long-lasting and growing part of the investment world," says Mr. Collier.
"In fact, the value proposition of ETFs — their low cost, transparency and access to markets, that's just becoming more and more important every day," he says. "What you're seeing globally and in Canada is increasing growth."
There are more than 300 Canadian-listed ETFs with $84.7-billion in assets (as of June 30, 2015), according to the Canadian ETF Association. The EY Global ETF Survey 2015 reported that by the end of last year's third quarter, 225 providers were managing assets of US$2.6-trillion (C$3.4 trillion) in 5,463 ETFs or related products listed on 61 different exchanges.
"ETFs are 25 years old. Saying they're a fad is a bit like saying the iPhone is a fad," says Yves Rebetez, managing director and editor of ETF Insight, a Toronto-based online information source about ETFs.
"The reality is that ETFs are a very elegant technology in terms of delivering investment solutions. They're effective, which is why they keep growing at a fast pace."
Myth 2: ETFs are passive investment vehicles, not actively managed
"People who engage in that debate are really thinking of stock picking," Mr. Collier says.
ETFs can be managed, but not in that way. For every ETF, there is a portfolio manager who buys and sells securities in order to track a particular index as best as possible. This is true for ETFs that try to match the performance of broad-based benchmarks like the S&P 500 as well as those that attempt to outperform markets by using pre-determined factors or constraints to deviate from a given index.
"It takes a lot of work to ensure that you're doing a good job tracking the indices that you're aiming to replicate, ensuring that you do have the tax efficiency and the tight relationship of net asset value to market prices," Mr. Rebetez says.
Mr. Collier also notes that the vast majority of active investment returns don't come from picking individual stocks, but from asset allocation. "There are decades of studies that prove this," he says.
ETFs are particularly beneficial on the diversification front because they provide low cost access to multiple asset classes, sectors and geographic regions around the world.
"All those investors making investment decisions are making active decisions, using ETFs as a low-cost way of implementing their portfolios," says Mr. Collier. "If you're an individual investor or an advisor, your decision about where you're going to allocate is a much more important, active decision than an investment manager's individual stock picking."
Myth 3: All ETFs are the same
Mr. Collier says that he frequently hears people claim that the provider doesn't matter when it comes to ETFs because buyers simply get low-cost exposure to indexes.
"That's really not true," he says. "There is a lot of value in having a knowledgeable, risk-aware provider who understands how indexes work and implements this as effectively as possible. You have to understand the exposure you're getting in the product. You can't just look at the name."
He suggests that investors try to understand the product structures for different ETFs. "The majority of ETFs have physical portfolios that hold the underlying securities, but there are some that are synthetic – they gain their exposure through derivatives."
With synthetic exposures, further due diligence may be required to assess any potential counterparty risk and exposures that may exist, he explains.
Myth 4: ETFs are risky
"That's like saying that cars are risky. It's very broad. Are we talking about cars being driven at 50 kilometres an hour or a Formula One racer?" says Mr. Rebetez.
"ETFs are a mechanism to deliver exposure to an index. So really, risk is a function of what you put inside them."
Mr. Rebetez gives this example: "If you tell an investor that an ETF is not risky and he or she pulls out a chart that includes energy or materials and you look at the past year, that individual will say it is risky. Fair enough. On the flip side, if you look at the S&P 500 since the global crash [of 2008], it's a pretty nice upward-looking chart."
In fact, ETFs can reduce risk "in terms of providing a decent way of getting broad diversification at low cost," he adds.
Myth 5: It's hard to tell what's inside an ETF and how it's really performing
"That's just fundamentally wrong," says Mr. Collier. "ETFs provide a greater transparency into what you hold than other investment vehicles out there."
At any time during the trading day, investors in exchange traded funds are able to see what securities the fund holds, how it's performing and any related costs associated with it.
Though investors may think that there are fewer eyes on an ETF portfolio than other portfolios, "they're just looking at things in a different way," adds Mr. Collier.
"You have a lot of really knowledgeable, well-educated people managing those portfolios in a risk-managed way."
iShares ETFs are managed by BlackRock Asset Management Canada Limited. Commissions, trailing commissions, management fees and expenses all may be associated with investing in iShares ETFs. Please read the relevant prospectus before investing. The funds are not guaranteed, their values change frequently and past performance may not be repeated. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional.
iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. Used with permission. iSC-1958-1015
This content was produced by The Globe and Mail's advertising department, in consultation with BlackRock Asset Management Canada Limited. The Globe's editorial department was not involved in its creation.