ETFs or Exchange Traded Funds are a booming investment vehicle in Canada. The sector has grown from a selection of a few funds tracking passive indexes to hundreds of funds with passive, active, and rules-based strategies.

In a Globe and Mail article dated November 14, 2017 tax and financial advisory partner Fabio Campanella CPA, CA, CFP, CIM provides his expert insights into the evolution of this unique investment vehicle and the developing options available to retail investors. Specifically, he addresses the following three types of Exchange Traded Funds that have now become popular:

First: passive, indexed Exchange Traded Funds. These are the more traditional ETFs that investors are accustomed to. By far, passive, indexed ETFs are the largest category of ETFs on the market when measuring asset flows. These ETFs track established stock or fixed income indexes (think S&P 500) and are usually extremely liquid and more often than not feature very low expense ratios making for an excellent, low cost option for building a core portfolio.

Second: actively managed Exchange Traded Funds. Actively managed ETFs are simply ETFs that are managed by professional portfolio managers like any other prospectus based fund in Canada (think mutual funds). The only real difference between these funds and more traditional actively managed mutual funds is the fact that the ETFs are traded on a stock exchange and offer intra-day liquidity. Investors should be aware that these ETFs are typically NOT low-cost alternatives to mutual funds and often feature MERs (Management Expense Ratios) similar to traditional mutual funds.

Third: hybrid (or sometimes called “smart-beta”) Exchange Traded Funds. Hybrid Exchange Traded Funds are a mid-point between passive indexed Exchange Traded Funds and actively managed Exchange Traded Funds . Typical hybrid Exchange Traded Funds will be “rules-based” rather than tracking an established passive index. For example, a stock-based hybrid fund may select securities out of a basket of stocks based on certain features such as dividend rate, profitability, financial ratios or any other measure that the ETF manager decides. There will not be any human interference in the selection of underlying investments and portfolio re-balancing may not be as frequent as passive ETFs. MERs tend to fall in-between passive and active Exchange Traded Funds .

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