ETFs are a popular choice for Canadians who want to invest in the stock market while keeping costs low. They offer a simple way to build a diversified portfolio and are easy to buy and sell—just like individual stocks.
An ETF, or Exchange-Traded Fund, is a bundle of investments—such as stocks, bonds, or commodities—that you can buy and sell on a stock exchange. When you invest in an ETF, you own a small piece of everything the fund holds.
Most ETFs follow a market index, like the Toronto Stock Exchange. This means they try to match the performance of that index rather than beat it. Because they’re passively managed, ETFs usually have lower fees than mutual funds.
ETFs are designed to be flexible and cost-effective. They’re especially appealing to people who want to manage their own investments or keep fees low.
Benefits include:
Low fees: Most ETFs are passively managed, which means they cost less than actively managed funds. Typically, you’ll still pay management fees and trading commissions, but they’re usually lower than mutual fund fees.
Real-time trading: ETFs trade on the stock market throughout the day. You can buy or sell them anytime the market is open, just like a regular stock.
Diversification: Each ETF holds a mix of investments. This helps spread your risk and reduce the impact of any one investment performing poorly.
Transparency: Most ETFs publish their holdings daily, so you always know what you’re investing in.
There are many types of ETFs, each designed to meet different goals. Some are very simple and follow broad market indexes. Others are more complex and focus on specific sectors or strategies.
Common types include:
Index ETFs: These track a market index, like the S&P/TSX Composite. They’re designed to match the index’s performance and are usually low-cost.
Bond ETFs: These invest in government or corporate bonds. They offer regular interest payments and are generally less risky than stock ETFs.
Sector ETFs: These focus on specific industries, like technology, healthcare, or energy. They can be useful if you want to invest in a particular part of the economy.
International ETFs: These give you exposure to markets outside Canada. They’re a way to diversify globally.
Leveraged ETFs: These use borrowed money to try to amplify returns. They’re high-risk and meant for short-term strategies—not for beginners.
ETFs can generate income in a few ways. You might receive dividends from stocks, interest from bonds, or capital gains if the ETF sells investments for more than it paid.
Unlike mutual funds, ETFs usually do not automatically reinvest your earnings. You’ll need to tell your investment firm what to do with the money—whether to reinvest it or take it as cash.
Earnings from ETFs can be taxable. How much tax you pay depends on how you hold the ETF. If it’s in a registered account like a TFSA or RRSP, you may benefit from tax advantages. If it’s in a regular account, you’ll likely pay tax on dividends, interest, and capital gains.
Visit Canada Revenue Agency to learn more about registered savings plans.
Even though ETFs are known for low costs, it’s still important to understand the fees you’ll pay. These fees affect your returns over time.
Typical fees include:
Management fees: Charged by the fund manager to run the ETF. These are usually lower than mutual fund fees.
Trading commissions: You may pay a fee each time you buy or sell an ETF, depending on your brokerage.
Expense ratio: This is the total cost of running the ETF, expressed as a percentage of your investment.
Before you invest, ask for the ETF’s “ETF Facts” document. It explains the fund’s fees, risks, and performance in plain language.
While ETFs offer many benefits, they’re not risk-free. The value of your ETF can go up or down depending on the market. Some ETFs are more volatile than others, especially those that focus on specific sectors or use leverage.
Always read the ETF Facts and talk to a registered financial advisor before investing. They can help you understand the risks and make informed choices.