What Are ETFs?
Exchange Traded Funds (ETFs) are pooled investments in stocks, bonds and other assets designed to pursue a range of investment objectives, including capital appreciation, risk mitigation through diversification, as well as dividend and interest income.
ETFs offer investors access to a transparent, tax-efficient, cost-effective and liquid investment in a variety of capital market indexes, asset classes and sectors/themes.
Why ETFs?
Transparent
A key benefit of ETFs is that they are required to publicly disclose securities holdings daily, allowing investors to track if their investments remain true to their objective or if “style drift” has taken place. In comparison, open-end mutual funds are required to disclose holdings quarterly. Furthermore, ETFs, like open-end mutual funds are subject to securities laws and regulations designed to protect investors from various risks. ETFs are overseen by a fund Board of Directors.
Tax-efficient
ETFs and mutual funds distribute income and realized capital gains yearly. ETFs distribute modest, if any, capital gains. This is because limited buying and selling, as well as an in-kind redemption/distribution process available to ETFs, result in reduced distributions and realized capital gains. These factors help keep ETF capital gains taxes lower when an investor sells ETF shares.
Cost-effective
Many ETFs are passively managed and designed to track the performance of a specific market index. Passive ETFs’ expense ratios are generally lower than those of actively managed mutual funds. ETFs targeting specific investment areas or market themes are also typically less expensive than their actively managed counterparts.
Liquid
You can buy and sell ETFs at any time during market hours at the current price, which is based on the underlying assets such as stocks, and the supply and demand of the ETF share. ETF shares are priced continuously throughout the day as security prices within the fund fluctuate. Investors receive information on the specifics of their transactions very quickly.
Intraday liquidity is an advantage of ETFs over mutual funds. Greater liquidity allows for more price control and the ability to put in price protection features.
Open-end mutual fund shares are bought or sold directly from the fund at Net Asset Value (NAV) which is determined once daily after the market’s close.
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