• Shahn Khan

Know more about Exchange-Traded Funds (ETFs)

Exchange-Traded Funds (ETFs) are investments that can provide you with access to a diversified portfolio of stocks or bonds in a single investment that trades just like a stock.

Unlike mutual funds, ETFs are bought and sold on a stock exchange. This means their pricing changes throughout the day. In contrast, mutual fund prices are determined daily after the close of the stock market. Additionally, mutual fund purchases and sales are processed by the fund company.

ETFs make it easy to invest in a wide array of markets. Whether broad like the S&P TSX, in niche sectors, or targeted to a specific goal

ETFs are managed actively or passively

With actively-managed ETFs, the Portfolio Manager picks securities based on their research and strategies. They seek to own a basket of securities that is different from an index in an attempt to outperform the index.

For passively managed ETFs, the Portfolio Manager seeks to hold a basket of securities similar to the benchmark index it's attempting to replicate. For example, the ETF would seek to hold a similar basket of securities as the S&P/ TSX Composite Index or the Dow Jones Industrial Average Index.

Advantages of ETF

Easy to trade You can buy and sell any time of the day, unlike most mutual funds that trade at the end of the day

Transparency - Many ETFs are indexed based; index-based ETFs are required to publish their holdings daily

More tax-efficient ETFs typically generate a lower level of capital gain distributions relative to actively managed mutual funds

Trading transactions - Because they are traded like stocks, investors can place a variety of order types (e.g., limit orders or stop-loss orders) that can't be made with mutual funds

Drawbacks of ETF

Trading costs: If you invest small amounts frequently, there may be lower-cost alternatives investing directly with a fund company in a no-load fund

Illiquidity: Some thinly traded ETFs have wide bid/ask spreads, which means you’ll be buying at the high price of the spread and selling at the low price of the spread

Tracking error: While ETFs generally track their underlying index fairly well, technical issues can create discrepancies

Settlement dates: ETF sales are not settled for 2 days following a transaction; that means as the seller, your funds from an ETF sale aren't technically available to reinvest for 2 days.

ETFs, give you the flexibility to be any kind of investor that you want to be. and also ETFs can be used to gain exposure to virtually any market in the world or any industry sector

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