Exchange Traded Funds, known as ETFs, are a popular investment choice for investors because they are typically easy to use and simple to understand.  Whether you’re new to investing or have been at it for years, there is likely an ETF that’s right for your portfolio.

What is an ETF

An ETF is an exchange traded fund.  It’s an investment product that is sometimes compared to a mutual fund because both products offer instant diversification, but how they are managed and used in a portfolio can vary. 

An index ETF holds a basket of stocks, bonds, or securities that track an underlying index.  The securities held within an index ETF reflect the makeup of the index it is tracking.  For example, the most popular index in Canada is the S&P TSX 60.  Any ETF tied to this index will hold or provide exposure to the same proportion of the stocks that make up that index. This transparency is one of the greatest features of an index ETF because it is easy for an investor to optimally diversify when they know exactly what they are getting exposure to within the ETF.

Since ETFs are cost-effective and easy to trade, they are used by the largest institutions and pension fund managers in the world and are quickly becoming a popular choice for everyday investors.  In July 2020, there were over 800 ETFs for Canadians to choose from, with over $217 billion in assets managed (Source: CETFA Monthly Report, June 2020)

How do ETFs work?

Most ETFs are passively managed, which means they aim to match the performance of a certain index, but do not try to outperform it.  Mutual funds, on the other hand, are typically actively managed and try to beat the market. They require a large team of analysts to research the securities and actively buy and sell to attempt to deliver gains for the fund.

A passive investment strategy means that the ETF will perform the same way the index performs.  As a result, passive ETFs don’t typically require as much trading and management as a mutual fund, which keeps costs low.

While it may appear that trying to outperform the market would be a better choice for investors (who wouldn’t want to outperform the market?) the truth is, it can be difficult to do this.  Over a long period of time, the stock market has trended up, and therefore, a passive investment strategy could potentially follow that upward movement.

Another key difference is that ETFs trade on the stock exchange, whereas a mutual fund is bought and sold directly through the mutual fund company at the present day’s closing price.  By trading on the stock exchange, ETFs offer investors flexibility to trade throughout the day, with trading commissions comparable to stocks.  What’s more, investors don’t need to concern themselves with individual stock selection, because the ETFs typically have diversification baked into the product.

Benefits of ETFs

ETFs have several other attractive features that may make them appealing to any type of investor:

Low risk: They are not risk free, but may be less risky than single stocks
Access to any asset class: the versatility of ETFs is endless
Diversification: You can build a complete portfolio with a just a few ETFs
Easy to trade: Any discount broker or robo-advice platform sells ETFs
Transparent: You can typically see exactly what is held in the ETF at anytime
Simple to understand: Most ETFs do not employ complex management strategies
Accessible: Anyone can invest in an ETF with just a few dollars

There are new ETF products being made available to Canadian investors every day as the ETF market continues to grow.  Innovative features like no fee funds and single-ticket portfolios have only increased the appeal of these products.

If you haven’t yet included ETFs in your portfolio, it’s worth considering them now.

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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.