A Comprehensive Guide to Understanding ETFs

What are ETFs?

Exchange-traded funds, commonly known as ETFs, are investment funds traded on stock exchanges. An ETF holds a collection of assets, such as stocks, bonds, or other securities, that can be bought in one purchase. ETFs offer investors a way to diversify their portfolios without having to buy individual assets. This diversification can reduce risk, as the performance of the ETF is less likely to be affected by the poor performance of a single asset. ETFs have become increasingly popular among investors due to their flexibility, low costs, and accessibility. 

Are you aware of the major investment product types in ETFs?

There are around 8,800 ETFs worldwide and the number has been growing because of the investor demand and modifications in technology that have made trading easier. This article only aims to discuss the most common types of ETFs that are available in the market.

• Stock ETFs: Stock ETFs invest in stocks and typically track a specific index, such as the S&P 500. They offer exposure to a broad range of companies within a market or sector. The investors can choose ETFs from any specific country.
• Bond/Fixed Income ETFs: These ETFs focus on various types of bonds such as government, corporate, or municipal bonds. They are often used to generate income or to diversify a portfolio.
• Commodity ETFs: Commodity ETFs invest in physical commodities like gold, silver, oil, or agricultural products. They provide a way to invest in commodities without owning the physical assets, hence a good choice to diversify the portfolio and risk.
• International ETFs: International ETFs invest in assets outside of the investor’s home country, offering exposure to foreign markets. They can focus on specific regions, such as Europe or Asia, developed or emerging markets.
• Currency ETFs: Currency ETFs invest in foreign currencies or track the performance of a currency index. They allow investors to gain exposure to movements in currency exchange rates. These ETFs can be used for hedging against currency risk in international investments and invest in either a single currency, like the US dollar, or a mix of currencies.

There are certainly other kinds of ETFs also available on the market. To learn about them, visit ‘What is an ETF? The Ultimate Guide’ by Wealthsimple. 

What is the difference between ETFs and Mutual Funds?

While both ETFs and mutual funds allow investors to pool their money into a diversified portfolio, there are some key differences:

• Trading Flexibility: ETFs are traded on stock exchanges that allow investors to buy and sell shares throughout the day at market prices. Mutual funds, on the other hand, are only traded once per day after the market closes, based on the net asset value of the fund.
• Cost Structure: ETFs generally have lower expense ratios compared to mutual funds. This is partly because ETFs are passively managed, and they track an index. Mutual funds often have higher fees due to the cost of active management.
• Minimum Investment: ETFs are often considered a budget-friendly investing tool because they tend to be much cheaper than mutual funds. They can be purchased in any quantity which makes them accessible to investors with smaller budgets. Mutual funds may require a minimum investment amount, which could be a barrier for some investors.
• Tax Efficiency: ETFs are generally more tax-efficient than mutual funds. This is because ETF investors only pay capital gains taxes when they sell their shares, whereas mutual fund investors may incur capital gains taxes due to the fund manager's buying and selling activities within the fund.

To read more about the pros and cons of ETFs and Index Funds (such as Mutual Funds) over each other, visit ETF vs Index Fund: Which to Choose. This article also explains what to choose based on different factors. 

What benefits can you get from investing in ETFs? Do they help in retirement planning too?

ETFs offer several advantages that make them an attractive option for investors. It is also a good choice for retirement planning due to their diversification, low costs, and usability. Let’s take a deeper look.

• Diversification: By investing in an ETF, investors can gain exposure to a broad range of assets, thus reducing overall risk. This is particularly valuable for investors who may not have the time or resources to build a diversified portfolio on their own. This is particularly important for retirement planning, as you want to minimize the chances of significant losses during the retirement age.
• Liquidity: ETFs are traded on stock exchanges, so they can be bought and sold throughout the whole trading day. This provides investors with the flexibility to adapt quickly to market changes.
• Cost-Effective: ETFs generally have lower expense ratios compared to other index funds. Also, there are fewer costs associated with managing the fund which can significantly enhance your retirement savings.
• Income Generation: Some ETFs focus on income-producing assets, such as dividend-paying stocks or bonds. These can provide a steady income even during retirement, which is crucial to supplement their income.
• Wide Variety: There are ETFs available for every asset class, sector, and investment strategy. Whether you’re looking to invest in stocks, bonds, commodities, or even alternative assets, there’s likely an ETF that fits your needs. Due to the wide variety of ETFs, their demand has been increasing among investors.

How to buy ETFs?

Buying ETFs is a straightforward process, and it can be done through most brokerage accounts. Here’s a step-by-step guide:

1. Open an Account: If you don’t already have one, you’ll need to open a brokerage account. Many online brokers offer accounts with no minimum balance requirements and low fees.
2. Research ETFs: It’s always important to do your research before buying. Consider factors such as the ETF’s expense ratio, the index or sector it tracks, and its historical performance to make the best choice.
3. Place an Order: Once you’ve chosen an ETF, you can place an order through your brokerage account. You can build your portfolio using ETFs, stocks, options, mutual funds, GICs and more. #
4. Monitor Your Investment: After purchasing, it’s a good idea to regularly monitor your ETF to ensure it aligns with your investment goals. There could be adjustments made to the account if needed as per your investment goals.

Do you want to learn more about how to select the best ETF and what factors to consider in your research? You can also read: How to select the best ETFs for your needs to help you choose the best ETF for your investment needs.

Also, make sure to watch this video by Ricky Gutierrez as he explains the process of trading ETFs as a complete beginner. By understanding how to buy and trade ETFs effectively, you can make informed decisions that align with your financial goals and enhance your overall investment strategy.