Learn about
exchange-traded funds
Investor education
Exchange-traded funds are attracting ever-greater attention from investors.
They continue to grow globally, with assets of more than $4.15 trillion.1
In Canada, ETFs are becoming a low-cost investment vehicle of choice.
Canadian-listed ETF assets have more than quadrupled since 2008.
But just what is an ETF? Use this guide to learn what ETFs are, how
they work and what makes them different from other investments.
What are ETFs?
Both index and active ETFs share certain characteristics:
Like mutual funds, ETFs offer the opportunity to invest
in a portfolio of securities, such as stocks or bonds.
Low costs. ETFs generally have lower management
expense ratios (annual operating costs as a percentage of
average net assets) than actively managed mutual funds. In
many cases, they have lower MERs than index mutual
funds. Lower costs mean more of a fund’s returns go to
the investor.
One of the world’s first ETFs began trading in Canada
in 1990, and institutional investors were among the
earliest to recognize the merits of ETFs. Individual
investors and financial advisors have recognized their
appeal in recent years, helping to drive significant growth
both in the number of ETF offerings and in assets
under management.
While most mutual funds in Canada are actively managed
funds, which try to outperform the market, ETFs in
Canada are primarily passively managed index investments.
They seek to track the performance of a broad equity or
fixed income market benchmark or a specific portion of it.
Most index-based ETFs invest in all or a representative
sample of the securities of the indexes they seek to track.
Trading flexibility. ETFs are traded on a stock exchange,
so they can be bought and sold through your advisor or a
brokerage account any time the exchange is open. Investors
can use stock-trading techniques such as stop and limit
orders and short-selling, and ETFs can be bought on
margin. Like stocks, ETFs are subject to the traditional risks
and potential rewards of the markets. The value of
ETF units will rise and fall as markets fluctuate, so an
ETF can gain or lose value over short or long periods.
A financial advisor can work with you to establish an
asset mix with a risk/reward profile that suits you.
1 Total ETF/ETP assets under management in Canadian dollars. Source: Calculation by The Vanguard Group, Inc., using data from ETFGI as of December 31, 2015.
The following are characteristics of index ETFs only:
How do ETFs work?
Diversification. A broad-based index ETF might contain
hundreds or thousands of securities—more than many
actively managed funds. Keep in mind that diversification
doesn’t ensure a profit or protect against a loss in a
declining market, and that it’s not possible to invest
directly in an index.2 Vanguard index ETFs are designed
to be as diversified as the original indexes they seek
to track and can provide greater diversification than
an individual investor may achieve independently, but
any given ETF may not be a diversified investment.
Both ETFs and mutual funds gather money from many
investors and use it to acquire stocks, bonds or other
assets. In recent years, the growth rate of ETFs has
exceeded that of mutual funds.
Potential for tax efficiency. Index ETFs can provide tax
advantages relative to actively managed funds over longer
holding periods because they tend to involve less portfolio
turnover.3
Investors and their financial advisors must trade ETFs
through a brokerage firm. ETFs can be bought and sold at
the current market price whenever the stock exchange is
open. Unit prices typically reflect the approximate value of
an ETF’s underlying securities at any given point in the day.
Transparency. Index ETFs hold the same securities as,
or a representative sample of, their benchmark indexes,
so you’ll always know what you’re investing in.
Low manager risk. Index ETFs virtually eliminate exposure
to manager risk. That’s because they seek to track, not
outperform, a market index. They may underperform their
benchmarks, but typically by narrow margins once
operating costs are figured in. Active fund performance is
less predictable.
Most ETFs use an indexing approach. They’re built so that
their value can be expected to move in line with the index
they seek to track. For example, a 2% rise or fall in the
index should result in approximately a 2% rise or fall for
an ETF that tracks that index (before fees and expenses).
Basic characteristics of ETFs and mutual funds
The table on Page 3 provides a snapshot of the similarities
and differences between ETFs, index mutual funds and
actively managed mutual funds. For example, while ETFs
generally feature lower management expense ratios than
mutual funds, the ETF investor will pay certain transaction
costs that the mutual fund investor will not.
2 ETFs can be concentrated in an individual security when the security is an index heavyweight.
3Although index funds typically make fewer trades than actively managed funds, changes to the underlying index will require the index fund to buy or sell shares in accordance with changes to the
index it seeks to track.
2
Comparing Canadian ETFs and mutual funds
ETFs
Index mutual funds
Actively managed
mutual funds
Units bought and sold through an
investment advisor or platform
offering brokerage services
Units bought and sold directly
Units bought and sold directly
through the fund company or
through an advisor
through the fund company or
through an advisor
Unit prices set by the market
throughout the trading day
Net asset values determined
once per trading day, after
financial markets close
Net asset values determined
once per trading day, after
financial markets close
0.82%
1.31%
1.85%
Transaction costs
Brokerage commissions and
bid-ask spreads on each direct
purchase and sale5
None for funds that don’t have a
sales charge when purchased
or redeemed directly with the
fund. (Some funds do have
sales charges)
None for funds that don’t have a
sales charge when purchased
or redeemed directly with the
fund. (Some funds do have
sales charges)
Dividend
reinvestment
Availability depends on the fund
sponsor or your broker, who may
charge for the service
Generally available at no charge
Generally available at no charge
Client services
Provided by an advisor
Provided by the fund sponsor
or an advisor
Provided by the fund sponsor
or an advisor
Access
Pricing
Average
management
expense ratios4
Which ETFs are right for you?
Below are some of the factors you can consider as you
construct your investment portfolio.
• Your investment goals
• Your tolerance for risk
• When you’ll need your money
• How much you want to invest
• Costs, including trading costs and annual charges
4Source: Strategic Insight. Straight average management expense ratios (MERs) as of December 31, 2015, using data compiled from management reports of fund performance. The average MER
for index mutual funds includes only A-, ADV-, T-, F-, HNW- and D- series index mutual funds and excludes ETFs, funds with performance fees, money market funds, funds with management fees
charged at account level. The average MER for actively managed mutual funds includes A-, ADV-, T-, F-, HNW- and D- series mutual funds and excludes ETFs, funds with performance fees, money
market funds, funds with management fees charged at account level, hedge funds, index funds and LSVCC funds.
5 Unlike mutual funds, there are no sales loads (trailing commissions) on ETFs. Since brokerage commissions may apply, excessive trading may reduce returns.
3
Vanguard Investments Canada Inc.
Connect with Vanguard®
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Commissions, management fees, and expenses all
may be associated with investments in a Vanguard
ETF ®. Investment objectives, risks, fees, expenses,
and other important information are contained in the
prospectus; please read it before investing. ETFs are
not guaranteed, their values change frequently, and
past performance may not be repeated. Vanguard
ETFs® are managed by Vanguard Investments
Canada Inc., an indirect wholly owned subsidiary of
The Vanguard Group, Inc., and are available across
Canada through registered dealers.
Date of publication: December 2016.
While this information has been compiled from sources believed to be
reliable, Vanguard Investments Canada Inc. does not guarantee the
accuracy, completeness, timeliness or reliability of this information or
any results from its use.
This material is for informational purposes only. This material is not
intended to be relied upon as research, investment, or tax advice and
is not an implied or express recommendation, offer or solicitation
to buy or sell any security or to adopt any particular investment or
portfolio strategy. Any views and opinions expressed do not take into
account the particular investment objectives, needs, restrictions and
circumstances of a specific investor and, thus, should not be used as
the basis of any specific investment recommendation. Please consult
your financial and/or tax advisor for financial and/or tax information
applicable to your specific situation.
Information, figures and charts are summarized for illustrative
purposes only and are subject to change without notice.
This material does not constitute an offer or solicitation and may not
be treated as an offer or solicitation in any jurisdiction where such
an offer or solicitation is against the law, or to anyone to whom it is
unlawful to make such an offer or solicitation, or if the person making
the offer or solicitation is not qualified to do so.
In this material, references to “Vanguard” are provided for
convenience only and may refer to, where applicable, only The
Vanguard Group, Inc., and/or may include its affiliates, including
Vanguard Investments Canada Inc.
All investments, including those that seek to track indexes, are subject
to risk, including the possible loss of principal. Diversification does not
ensure a profit or protect against a loss in a declining market. While
ETFs are designed to be as diversified as the original indexes they
seek to track and can provide greater diversification than an individual
investor may achieve independently, any given ETF may not be a
diversified investment.
© 2016 Vanguard Investments Canada Inc.
All rights reserved.
EBBCCI_CA 122016