It's often said that ETFs—or exchange-traded funds—look like mutual funds, but trade like stocks.
But what does that mean?
ETFs share many similarities with mutual funds. Both offer the opportunity to invest in a portfolio of securities, such as stocks or bonds.
Both may track an index, or they may be actively managed.
ETFs and mutual funds that track indexes might contain hundreds, even thousands, of securities providing greater diversification than individual investors could hope to achieve on their own.
Both ETFs and mutual funds can provide investors with a low-cost way to build a broadly diversified portfolio rather than buying individual securities.
However, there are key differences between ETFs and mutual funds.
ETFs are traded on stock exchanges around the world, including TSX. That offers investors the flexibility to trade units whenever the exchange is open. Unit prices vary throughout the day, moving up or down depending on changes in the prices of the underlying securities as well as supply and demand for the ETF units themselves.
In contrast, all purchases and sales of mutual fund units are executed only at the end of the trading day—at the same price for all investors.
Another difference: Investors and advisors must trade ETFs through a brokerage firm, a discount brokerage account or a platform offering brokerage services.
Mutual funds can be bought and sold directly through a fund company trying to outperform their benchmarks.
Broad diversification. Trading flexibility. Low costs.
ETFs are attracting a lot of attention from investors and advisors.
Before you invest in ETFs, make sure you consider how they'll fit into your overall financial plan.