If you currently invest or are looking to invest, chances are that you’ve heard of ETFs. They are the fastestgrowing segment of investment funds in Canada. 

But what exactly are they?

Think of an exchange traded fund or “ETF” as providing the best of both worlds when it comes to mutual funds and stocks. Like mutual funds, ETFs are pooled investment vehicles that give investors exposure to an underlying asset class, such as a group of stocks, bonds or commodities. There are approximately 800 ETFs listed in Canada, comprising over $164 billion in assets under management1 .

As a pooled investment, an ETF’s greatest benefit, like a mutual fund, is that it typically provides diversification (overall or within a sector). This is an especially important feature for investors who don’t have the time, resources or expertise to create a custom portfolio of securities.

Mutual funds and ETFs are governed by the same set of securities regulations regarding the underlying assets in which they can invest. What makes ETFs different is how their respective units are bought and sold.

When an investor buys units of a mutual fund, he or she is buying those units from the mutual fund manager. The price of mutual fund units is determined by the total net asset value (“NAV”) of the fund based on the value of its assets, less liabilities, at the market’s closing. When an investor sells units of a mutual fund, that same process occurs in reverse, sometimes minus a penalty for selling out of the fund within a specified, required holding period (assuming there is a hold).

On the other hand, units of ETFs are traded on stock exchanges just like individual stocks. There is no minimum holding period – you can buy and sell ETFs throughout normal trading hours (9:30 a.m. to 4:00 p.m.). The price of each ETF unit is based on the NAV of the ETF at that point of the day, not at the time of market close. This can be appealing to investors who prefer real-time trading data. 

How do ETFs Work?

Investors buy and sell ETF units through a stock exchange. Frequently, they are buying from (or selling to) a market maker, which typically is a large institution that holds an inventory of ETF units to facilitate their trading. The lead market maker acts to ensure the unit price at which the investor can buy or sell their ETF units, is close to the NAV of the ETF. 


What Makes ETFs so Popular?

In 2018, ETFs outsold mutual funds for the first time in a decade. There are many good reasons why.

Instant diversification
An ETF provides you with exposure to a basket of investments in just about anything – stocks, bonds, currencies and commodities like gold or silver. Often, that basket of investments is based on a benchmark index. For example, if you want exposure to Canadian equities, you could consider buying units in an ETF that tracks the performance of the S&P TSX 60TM Index. 

Many ETF holdings are published on a daily basis; whereas the holdings of mutual funds are disclosed less frequently basis, such as monthly or quarterly. 

ETFs typically charge less2 than mutual funds for the same level of investment management expertise. 

ETFs can be bought and sold on a stock exchange throughout the trading day. 

Types of ETFs

Active ETFs
The first and one of the largest families of actively managed ETFs in Canada. Active ETFs combine portfolio management with low fees2 to seek to generate better risk-adjusted returns. Our actively managed ETFs trade like stocks, but with lower management fees than standard mutual funds, and provide the intra-day liquidity of an ETF. 

Benchmark ETFs
ETFs designed to efficiently track the performance of indices, currencies or commodities.

BetaPro: Leveraged and Inverse ETFs
Horizons is the only provider of leveraged ETFs in Canada. Leveraged ETFs are designed to provide double the daily exposure (either long or short) to a commodity, benchmark or index. They seek to deliver 2X the daily return (either on the upside or downside) before fees and expenses of that commodity, benchmark or index. Inverse ETFs aim to achieve -1X the daily performance of their respective underlying benchmark before fees and expenses.

Where Can I Learn More About ETFs?

At Horizons ETFs, we are happy to answer your questions about how ETFs work or how our individual ETFs can meet your needs. Contact us for assistance.


1 Source: CETFA, as at January 31, 2019.
2 Relative to the typical management fee of regular mutual funds. In Canada, the average management fee for F class mutual funds is 0.81% and 0.49% for ETFs, source: Morningstar Direct, as at January 2019.

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Commissions, management fees and expenses all may be associated with an investment in exchange traded products managed by Horizons ETFs Management (Canada) Inc. (the "Horizons Exchange Traded Products"). The Horizons Exchange Traded Products are not guaranteed, their value changes frequently and past performance may not be repeated. Certain ETFs may have exposure to leveraged investment techniques that magnify gains and losses and which may result in greater volatility in value and could be subject to aggressive investment risk and price volatility risk. Such risks are described in the prospectus. The prospectus contains important detailed information about the ETF. Please read the relevant prospectus before investing.

The Horizons Exchange Traded Products include our BetaPro products (the “BetaPro Products”). The BetaPro Products are alternative mutual funds within the meaning of National Instrument 81-102 Investment Funds, and are permitted to use strategies generally prohibited by conventional mutual funds: the ability to invest more than 10% of their net asset value in securities of a single issuer, to employ leverage, and engage in short selling to a greater extent than is permitted in conventional mutual funds. While these strategies will only be used in accordance with the investment objectives and strategies of the BetaPro Products, during certain market conditions they may accelerate the risk that an investment in shares of a BetaPro Product decreases in value. The BetaPro Products consist of our Daily Bull and Daily Bear ETFs (“Leveraged and Inverse Leveraged ETFs”), Inverse ETFs (“Inverse ETFs”) and our BetaPro S&P 500 VIX Short-Term Futures™ ETF (the “VIX ETF”). Included in the Leveraged and Inverse Leveraged ETFs and the Inverse ETFs are the BetaPro Marijuana Companies 2x Daily Bull ETF (“HMJU”) and BetaPro Marijuana Companies Inverse ETF (“HMJI”), which track the North American MOC Marijuana Index (NTR) and North American MOC Marijuana Index (TR), respectively. The Leveraged and Inverse Leveraged ETFs and certain other BetaPro Products use leveraged investment techniques that can magnify gains and losses and may result in greater volatility of returns. These BetaPro Products are subject to leverage risk and may be subject to aggressive investment risk and price volatility risk, among other risks, which are described in their respective prospectuses. Each Leveraged and Inverse Leveraged ETF seeks a return, before fees and expenses, that is either up to, or equal to, either 200% or –200% of the performance of a specified underlying index, commodity futures index or benchmark (the “Target”) for a single day. Each Inverse ETF seeks a return that is –100% of the performance of its Target. Due to the compounding of daily returns a Leveraged and Inverse Leveraged ETF’s or Inverse ETF’s returns over periods other than one day will likely differ in amount and, particularly in the case of the Leveraged and Inverse Leveraged ETFs, possibly direction from the performance of their respective Target(s) for the same period. For certain Leveraged and Inverse Leveraged ETFs that seek up to 200% or up to or -200% leveraged exposure, the Manager anticipates, under normal market conditions, managing the leverage ratio as close to two times (200%) as practicable however, the Manager may, at its sole discretion, change the leverage ratio based on its assessment of the current market conditions and negotiations with the respective ETF’s counterparties at that time. Hedging costs charged to BetaPro Products reduce the value of the forward price payable to that ETF. Due to the high cost of borrowing the securities of marijuana companies in particular, the hedging costs charged to HMJI are expected to be material and are expected to materially reduce the returns of HMJI to unitholders and materially impair the ability of HMJI to meet its investment objectives. Currently, the manager expects the hedging costs to be charged to HMJI and borne by unitholders will be between 10.00% and 45.00% per annum of the aggregate notional exposure of HMJI’s forward documents. The hedging costs may increase above this range. The manager publishes on its website, the updated monthly fixed hedging cost for HMJI for the upcoming month as negotiated with the counterparty to the forward documents, based on the then current market conditions. The VIX ETF, which is a 1x ETF, as described in the prospectus, is a speculative investment tool that is not a conventional investment. The VIX ETF’s Target is highly volatile. As a result, the VIX ETF is not intended as a stand-alone long-term investment. Historically, the VIX ETF’s Target has tended to revert to a historical mean. As a result, the performance of the VIX ETF’s Target is expected to be negative over the longer term and neither the VIX ETF nor its target is expected to have positive long-term performance. BetaPro Bitcoin ETF (“HBIT”), and BetaPro Inverse Bitcoin ETF (“BITI”), which are a 1X ETF, and an up to -1X ETF, respectively, as described in the prospectus, are speculative investment tools that are not conventional investments. Their Target, an index which replicates exposure to rolling Bitcoin Futures and not the spot price of Bitcoin, is highly volatile. As a result, neither ETF is intended as a stand-alone investment. There are inherent risks associated with products linked to crypto-assets, including Bitcoin Futures. While Bitcoin Futures are traded on a regulated exchange and cleared by regulated central counterparties, direct or indirect exposure to the high level of risk of Bitcoin Futures will not be suitable for all types of investors. An investment in any of the BetaPro Products is not intended as a complete investment program and is appropriate only for investors who have the capacity to absorb a loss of some or all of their investment. Please read the full risk disclosure in the prospectus before investing. Investors should monitor their holdings in BetaPro Products and their performance at least as frequently as daily to ensure such investment(s) remain consistent with their investment strategies.

Horizons Total Return Index ETFs (“Horizons TRI ETFs”) are generally index-tracking ETFs that use an innovative investment structure known as a Total Return Swap to deliver index returns in a low-cost and tax-efficient manner. Unlike a physical replication ETF that typically purchases the securities found in the relevant index in the same proportions as the index, most Horizons TRI ETFs use a synthetic structure that never buys the securities of an index directly. Instead, the ETF receives the total return of the index through entering into a Total Return Swap agreement with one or more counterparties, typically large financial institutions, which will provide the ETF with the total return of the index in exchange for the interest earned on the cash held by the ETF. Any distributions which are paid by the index constituents are reflected automatically in the net asset value (NAV) of the ETF. As a result, the Horizons TRI ETF receives the total return of the index (before fees), which is reflected in the ETF’s share price, and investors are not expected to receive any taxable distributions. Certain Horizons TRI ETFs (Horizons Nasdaq-100 ® Index ETF and Horizons US Large Cap Index ETF) use physical replication instead of a total return swap. The Horizons Cash Maximizer ETF and Horizons USD Cash Maximizer ETF use cash accounts and do not track an index but rather a compounding rate of interest paid on the cash deposits that can change over time.

*The indicated rates of return are the historical annual compounded total returns including changes in per unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. The rates of return shown in the table are not intended to reflect future values of the ETF or returns on investment in the ETF. Only the returns for periods of one year or greater are annualized returns.