What is an ETF?
An exchange-traded fund, or ETF, is a basket of securities that you can buy or sell through a brokerage firm on a stock exchange. ETFs are offered on virtually every asset class, from traditional investments to so-called alternative assets, such as commodities or currencies.
Exchange-traded funds offer many benefits and may be a suitable vehicle to achieve an investor’s investment goals.
How do ETFs work?
An ETF is bought and sold like a company stock during the day when the stock exchanges are open. Just like a stock, an ETF has a ticker symbol, and intraday price data can be obtained during the course of the trading day.
Unlike a company stock, an ETF can have a changing number of shares outstanding, because new shares can be created, or existing shares can be redeemed. This is what is commonly referred to as “primary liquidity.” The ability of an ETF to change the supply of shares allows the market price of the ETF to be close to the net asset value of its underlying securities.
For example, when the price of an ETF goes lower than the net asset value of its underlying securities, the supply of outstanding shares of the ETF can be reduced to allow the market price to increase toward to the net asset value of its underlying securities.
What is the difference between an ETF and a mutual fund?
ETFs and mutual funds are both pooled investment vehicles and are offered on virtually all asset classes, ranging from traditional investments to alternative assets, such as commodities or currencies. The main difference is that rather than trading once a day at Net Asset Value (NAV), like mutual fund shares, ETF shares trade throughout the trading day at market prices on a stock exchange; this is what is commonly referred to as “secondary liquidity.”
How are ETFs managed?
Passively managed ETFs are designed to track a specific index, which can range from the broad, such as the S&P/TSX Capped Composite Index, to the narrow, such as the S&P/TSX Capped Energy Index. Passive ETFs usually employ a “buy and hold” strategy but rebalance periodically.
Factor-based ETFs use alternative indices that are constructed based on the systematic analysis, selection, weighting and rebalancing of securities. These ETFs are structured to target investment factors or market inefficiencies by using a transparent rules-based approach that focuses on targeted outcomes. In essence, factor-based strategies are active in design, but passive in implementation.
Actively managed ETFs are built with the intent to outperform the broad market or an index. Fund managers use their own judgment and experience to make investment decisions. Active managers usually use fundamental, quantitative or technical research when deciding to buy or sell a security.
What is factor-based investing?
Factor-based investing refers to an enhanced indexing strategy that seeks to exploit certain performance factors in an attempt to provide a targeted outcome. In this sense, factor-based investing differs fundamentally from a traditional passive indexing strategy.
Factor-based strategies also differ from actively managed mutual funds, in which a fund manager chooses among individual stocks or sectors in an effort to outperform a benchmark index. Factor-based strategies seek to enhance returns, improve diversification or reduce risk by investing in customized indices based on one or more predetermined “factors.” They aim to outperform traditional market capitalization-weighted benchmarks.
How are ETFs bought and sold?
ETFs are traded on a stock exchange, and there are typically no restrictions on how often you can buy and sell them. You can trade any number of shares, and you can execute trades throughout the day, rather than waiting for the Net Asset Value (NAV) to be calculated at the end of the trading day, which is the case for mutual funds.
What is the difference between Net Asset Value and market price?
Unlike mutual funds, which are traded once a day at its Net Asset Value (NAV), ETFs have prices that fluctuate continuously throughout the day. These prices are displayed as the bid price and the ask price. So while ETFs have a bid-ask spread, mutual funds do not. It is also important to note that ETFs may trade at a premium or discount to the net asset value of the underlying assets.
Where can I buy Fidelity ETFs?
Fidelity Factor ETFs are traded on the Toronto Stock Exchange. Speak to your financial advisor or brokerage firm for more information.