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 transparent, tax-efficient, cost-effective, and liquid investments across a variety of capital market indexes, asset classes, and sectors or themes.
Why ETFs?
Transparent
A key benefit of ETFs is that they are required to publicly disclose their securities holdings daily, allowing investors to track whether their investments remain aligned with their objectives or if “style drift” has occurred. 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 annually. ETFs typically distribute modest, if any, capital gains. This is due to limited buying and selling, as well as the in-kind redemption and distribution process available to ETFs, which helps reduce distributions and realized capital gains. These factors can help lower capital gains taxes 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 generally have lower expense ratios than actively managed mutual funds. ETFs targeting specific investment areas or market themes are also typically more cost-effective than their actively managed counterparts.
Liquid
ETFs can be bought and sold at any time during market hours at current market prices, which are based on the value of the underlying assets and supply and demand for the ETF shares. ETF prices update continuously throughout the day as the prices of the underlying securities fluctuate, allowing investors to receive transaction details quickly.
Intraday liquidity is a key advantage of ETFs over mutual funds. Greater liquidity provides more
price control and the ability to implement price protection features.
Open-end mutual fund shares, by contrast, are bought or sold directly from the fund at Net Asset Value (NAV), which is determined once daily after the market closes.
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