If you currently invest or are looking to invest, chances are that you’ve heard of ETFs. They are the fastest-growing segment of investment funds in Canada. There are over 600 ETFs listed in Canada, comprising over $155 billion in assets1.

But what exactly are they?

The term ETF stands for exchange traded fund. Think of an 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.

As a pooled investment, an ETF’s greatest benefit, like a mutual fund, is that it provides diversification at a low cost2. 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 what underlying assets they can invest in and how they determine holdings. What makes ETFs different is how their respective units are bought and sold.

When an investor buys units in a mutual fund, he or she is buying units from the mutual fund manager. The price of mutual fund units is determined by the net asset value (“NAV”) of the fund based on its price at the market’s closing. When an investor sells units in a mutual fund, that same process occurs in reverse, ometimes minus a penalty for selling out of the fund earlier than a specified holding period.

On the other hand, units of ETFs are traded on stock exchanges just like individual shares. There is no minimum holding period. You can buy and sell and 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 underlying securities at that point of the day, not at the time of market close. This is why ETFs can typically reflect a new market reality faster than a mutual fund.

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 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?

There are many good reasons why ETFs have outgrown mutual fund assets (in terms of the new assets collected) over the past few years.

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 on a less frequent 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
Actively managed or “active ETFs” are similar to actively managed mutual funds, but, as with all ETFs, their units
are listed on an exchange. As a result, active ETFs combine the benefits of active management with the traditional
structural advantages of ETFs, which typically results in lower2 fees, and greater liquidity and convenience.

Benchmark ETFs
More commonly known as index-tracking or passive ETFs, benchmark ETFs typically provide one times (1x) the exposure to the underlying index or commodity. For example, a U.S. equity ETF may provide exposure to the S&P 500® Index, which means if the index rises 10%, the unit price of the ETF should also rise 10%, minus applicable fees.

Total Return Index ETFsHorizons ETFs is the only ETF provider in Canada to offer passive index exposure, through an innovative investment structure known as a Total Return Swap, with our family of Total Return Index ETFs (TRI ETFs). These Index tracking ETFs offer cost and tax-efficient exposure to an index without the need for physical replication or the need for taxable distribution payouts.

Leveraged, Inverse or Leveraged Inverse ETFs
Leveraged, inverse or leveraged inverse ETFs are tactical investment solutions, primarily designed for the execution of a particular short-term investment strategy or perspective on the markets. In a leveraged ETF, you can have up to two times (2x) the direct exposure to the underlying asset class or index. In an inverse or leveraged inverse ETF, you can essentially “short” an index or asset class, where you exposure would be one (-1x) or two times (-2x). This means the ETF profits when the underlying asset or index declines.

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 May 31, 2018.
2 Relative to the typical MER of comparable, regular mutual funds.

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Horizons ETFs is a Member of Mirae Asset Global Investments. 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 values change frequently and past performance may not be repeated. The prospectus contains important detailed information about the Horizons Exchange Traded Products. Please read the relevant prospectus before investing.

The Horizons Exchange Traded Products include our BetaPro Products which consist of our 2x Daily Bull and 2x Daily Bear ETFs ("2x Daily ETFs"), Inverse ETFs ("Inverse ETFs") and our VIX ETF (defined below). The 2x Daily 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, which, where applicable, are described in their respective prospectuses. Each 2x Daily ETF seeks a return, before fees and expenses, that is either 200% or -200% of the performance of a specified underlying index, commodity or benchmark (the "Target") for a single day. Each Inverse ETF seeks a return that is -100% of the performance of a Target. Due to the compounding of daily returns, a 2x Daily ETF's or Inverse ETF's returns over periods other than one day will likely differ in amount and, for the 2x Daily ETFs, possibly direction from the performance of their respective Target(s) for the same period. The BetaPro Product whose Target is the S&P 500 VIX Short-Term Futures Index™ (the "VIX ETF"), which is a (1x) VIX 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 generally viewed as 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 ETFs' 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. Investors should monitor their holdings, as frequently as daily, to ensure that they remain consistent with their investment strategies.

*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.