Exchange Traded Funds

What are exchange traded funds?

Exchange traded funds (ETFs) are one of the fastest growing investment products in the world, offering investors an alternative solution to enhance portfolio diversification, flexibility and liquidity.

ETFs can be bought and sold on an exchange like individual stocks. They can contain a portfolio of securities designed to track a specific index, market sector or even cover the broad market. This flexibility means investors can use ETFs to gain the exposure and diversification they want, quickly and simply.

Features of ETFs

  • Diversification: By aiming to replicate a specific basket of securities, such as an index, an ETF aims to incorporate all, or a representative sample of, the securities that make up that basket. This may reduce the impact that volatile markets may have on the portfolio from rising and falling prices, especially when compared to the group of individual securities.
  • Liquidity: ETF shares trade like common stocks on the stock exchange. As such, they are an ideal solution for investors who wish to get into and out of investment positions with minimum risk and expense.
  • Flexibility: Similar to stocks, ETFs can be bought and sold throughout the trading day on a stock exchange at market determined prices. This offers the ability to act on information quickly and efficiently.

Types of ETFs

As the popularity of ETFs has grown, so has their complexity.

Passive (Beta) Smart Beta Active (Alpha)
  • Classic Beta (S&P 500 S&P/TSX 60)
  • Style Beta (Russell 2000 S&P 500 Value)
  • Single Factor (Dividend, Low Volatility)
  • Multi-Factor/ Alternatively Weight (Fundamentals)
  • Access (Commodity, Sr. Loans)
  • Alpha (PM Managed)
  • Alpha (Quantitative)
Passive ETFs track a corresponding index. They do not try to outperform that index, but simply replicate its performance. Unlike actively managed ETFs, passive ETFs are not managed by a fund manager on a daily basis. Smart beta defines a set of investment strategies that emphasize the use of alternative index construction rules to traditional market capitalization based indices. Smart beta emphasizes capturing investment factors or market inefficiencies in a rules-based and transparent way. Active ETFs have a manager or investment team making decisions on the underlying portfolio allocation – they do not follow a passive investment strategy. Active ETFs do attempt to outperform a benchmark and/or manage volatility and portfolio risk.