Exchange-Traded Funds (ETFs) are an increasingly popular way for Canadians to invest. ETF investing provides a convenient, low-cost way to invest in stocks, bonds and other assets like commodities or foreign currencies.
Whether you’re new to investing or you’re interested in what an ETF can do for your existing portfolio, this guide is designed to help you understand what ETFs are and the role they can play in your investment strategy.
ETF Investing in Canada: How to invest in ETF in Canada
ETF investing in Canada is as simple as buying into a mutual fund or buying stocks. ETFs are easy to search and buy in a self-directed investment platform. There may be management fees involved, but they are often lower than other types of investments. [2]
Find a platform for your investment
ETFs can be bought and sold as direct investments on online trading platforms, including Scotia iTRADE. When you are looking for a platform for trading ETFs, consider what kind of funds are available and the commissions you will have to pay for transactions.
Research & choose your investments
Many online trading platforms come with screeners to help investors narrow down their options and find the ETF they’re looking for. [3] There are over $9 trillion invested in ETFs globally, with no shortage of options. [4] ETF screeners allow investors to locate the industry, sector or market they want to target while also screening for factors such as volatility, ratings and performance-based criteria. [5]
Identify the purpose of your investment
There are many types of investments available through ETFs. Before choosing one, it helps to know your own goals, timeline and the asset attributes you want to add to your portfolio. Whereas an ETF that tracks a stock exchange may be growth-oriented, it may also come with higher risks in a market crash than an ETF focused on investment-grade bonds. [6]
Choose an ETF investment strategy
Given the wealth of options you have for investing in Exchanged-Traded Funds, it helps to narrow down your investment strategy. To begin with, you have to choose between active and passive ETFs. [7] Passive ETFs are designed to track an index, sector or another asset, while active ETFs are professionally managed with the goal of beating an index or other asset’s performance. Consider risks and potential growth when you create an ETF investing strategy.
Make the trade
ETFs are traded on exchanges and can be bought and sold throughout the day. There may be a brokerage fee, but it can be done quickly on an online trading platform or with the help of your financial advisor.
Why invest in ETFs: The benefits of investing in ETFs
They diversify your portfolio
ETFs are often used as a quick and convenient way to add diversification to a portfolio. [8] Before the invention of ETFs, the cost of broad exposure to a basket of assets outside a mutual fund was a barrier for many retail investors. ETFs have removed the high minimum costs to buy certain stocks, as you don’t need to purchase a minimum of one share to gain exposure to that asset. ETFs have brought down the cost of diversification.
They are easy to purchase and sell
One of the advantages of investing in ETFs over mutual funds is their flexibility when it comes to trading. Mutual funds can usually only be traded when markets close at the end of the day. [9] It can take up to several days to make changes to a mutual fund.
ETFs on the other hand can be traded throughout the day when markets are open. ETF prices rise and fall throughout the day based on the performance of the underlying assets, and investors can quickly see the prices at which they bought and sold.
They often have lower fees
Typically, ETFs have lower fees than mutual funds. [10] The lower costs are the result of lower administrative fees, fewer transactions made within the fund, lower capital gains taxes that follow transactions and low fees charged by the brokerages where individual investors can buy ETFs.
ETF investment strategy: How to evaluate an ETF
The impact of the ETF investment market
Investments in ETFs have grown rapidly since the first one came on the market in the 1990s. [17] While the industry remains relatively young, with over $9 trillion now invested in ETFs globally, ETFs have become a widely used investment tool for both institutional and retail investors.
Although ETFs share many similarities with mutual funds, they may offer more flexibility and lower costs than traditional mutual funds. [18] The barrier to entry is often lower than mutual funds that require a minimum investment, and ETF investing can open up your portfolio to new investments and strategies.
Investing in ETFs can add diversification to your portfolio and make it more convenient and affordable to increase your exposure to new assets.
ETFs offer a style of investment that combines more personal control and flexible trading with the assurance of a professionally managed fund.
References
[1] ETFs vs. Mutual funds: Which one is right for you?
[3] ETFs: How to Invest and Best Funds to Choose.
[4] Global ETFs saw record inflows in 2021.
[5] Exchange-Traded Funds (ETFs).
[7] How to Invest in ETFs for Beginners.
[8] The Place of ETFs in Portfolio Allocation and Diversification.
[10] Benefits of ETFs.
[11] ETF fees.
[12] ETF fees.
[13] ETF Liquidity: Why It Matters.
[14] What Is the Difference Between Open-End and Closed-End Mutual Funds?
[15] How to monitor ETF performance.
[16] How to Trade ETFs.
[17] Investor Bulletin: Exchange-Traded Funds (ETFs).
[18] Here Are the Differences Between a Mutual Fund and an ETF.