What is an ETF in Canada: Your Guide

May 10, 2022
What is an ETF in Canada: Your Guide

One type of investment vehicles that has received growing attention in Canada over the recent years is the Exchange traded fund, or ETF. The ETF is becoming increasingly popular due to various benefits such as built in diversification, moderate risk with a solid chance of growth, and ease of access for pretty much anyone above the age of majority.


To be honest, “increasing” in popularity is probably an understatement. Many Canadians have actually turned to ETFs as a cornerstone of their entire investment portfolio due to its nature! Why is it so popular, and what is an ETF in Canada? Let’s find out.


What is ETF in simple terms?

An ETF, or exchange traded fund, is a relatively new type of investment vehicle. Despite its young age. It has two distinct features. First of all, it is a basket, bundle, or group of shares of companies across a particular index, industry, or even a particular geographical region. For example, a S&P index ETF would be an exchange traded fund which holds shares of all the companies in the S&P 500 index. Yes, that’s right, this ETF would have 500 companies held within it! You might even see a technology ETF, which would hold many companies specifically in the technology sector. In this sense, it is quite similar to a mutual fund, which you can learn more about here.


The second feature of an ETF is the fact that they are on an exchange. What does this mean for an investor in Canada? This allows you to trade this fund during normal stock market hours. Asin, you could buy and sell the ETF multiple times a day as much as you want while the market is open. For the savvy day trader and market enthusiast, an ETF allows you the opportunity to make some quick gains, with the risk of quick losses, of course.



How does ETF work in Canada?

An ETF in Canada is fairly simple. An investment manager, an investment management team, or even a robo-manager, can create an ETF, and list it on a stock exchange. In Canada, that would be the Toronto Stock Exchange, or TSX. The manager would be responsible for selecting the kinds of shares held in their ETF, and they would of course do their best to pick the best companies, based on the tenants of that specific ETF. To continue our example, if there is an ETF focused on technology, the fund manager would want to pick the best performing stocks of that that sector for their ETF.


For index fund ETFs, there might even be a robo advisor, because it doesn’t really require any decision making. Like in our previous example, with a S&P 500 ETF, you could have a computer simply hold equal value of each of the 500 companies.


How does an ETF work when you invest into it? By investing into an ETF, you don’t own those specific companies yourself, but you do get to participate in their performance via this ETF “basket”, along with thousands of other people. An ETF in Canada, or indeed around the world, works the same way.



What is best ETF in Canada?

This is a very tough question to answer, because an ETF can vary so widely in terms of their investment goals. Therefore, depending on your investment or financial goals, the best ETF in Canada can also vary widely.


To pick the best ETF in Canada, you need to first determine what are your own financial goals? Do you want to look for a lot of growth? Or do you want to protect your capital and build a steady stream of income? Perhaps something in between? There are always pros and cons, no matter which Canadian ETF you choose to invest in.


This is also a good opportunity for you to speak to an advisor, or financial planner to determine what sorts of investments in Canada work the best for you personally.


How do I buy an ETF in Canada?

This part is easy. If you like self-directed investments, and are more of a DIY type of person, then you can buy and sell ETFs just like you would buy and sell any stock. For most people, this means opening up a trading account with their bank, or the various trading firms out there such as Questtrade, or Wealthsimple.


Types of ETFs

As mentioned before, there are many types of ETFs in Canada. The most popular type by far are index ETFs. Index ETFs follow a specific index such as the NASDAQ, Dow Jones, or S&P500, the purpose is to buy whichever companies are listed on these indexes, and that’s about it. Since the market, over a long run, moves upwards, index ETFs have become very popular in Canada.


Another type of ETF could be an industry ETF. An industry ETF means the ETF manager is specifically looking for companies of one specific industry. An example could be mining and precious metals, technology, financial sector, or textiles. There are as many ETFs as there are industries, which means that ETFs in Canada are plentiful!

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