ETFs explained

Exchange traded funds (ETFs) can track hundreds of stocks across various industries and asset types including banking, equities or property, with exchange traded commodities (ETCs) a convenient way to invest in single markets like livestock, precious metals or natural gas.

Whatever the focus, all are marketable securities, so have an associated price, and can be bought and sold during a trading day, just like a stock.

Each share within an ETF or ETC gives its investors a proportional stake in the total assets. Most are open-ended meaning there’s no limit on the number of people who can invest. The majority are passively-managed and so with no fund manager, they have much lower fees.

Whether looking to build up wealth or generate income, these exchange traded products meet a variety of investor needs and have become a popular investment choice since their introduction in the early 2000s.

Both ETFs and ETCs combine the benefit of a fund and a share in a single investment. Plus, they can be bought in areas of the world that historically have not been easy for small investors to gain access to, such as Brazil and Taiwan.

Other advantages include ease of diversification and trading flexibility as well as pricing transparency, liquidity, lower costs and tax efficiency.

ETCs enable investors to have easier and cheaper exposure to commodities. They also relieve investors from the risk of having to play the futures market or the risk of having to take delivery of the underlying commodity itself.

Because ETFs and ETCs can be traded on an exchange in the same way as an individual stock, investors can use them to make quick trading and asset allocation decisions. You can switch between different asset classes, themes or sectors, helping to diversify your portfolio and manage risk.

By tracking the performance of a benchmark index, they often have lower fees than other types of actively managed investment funds, which must cover expenses such as management fees and more frequent trading costs.

Another benefit relates to buying and selling flexibility and transparency as they have transparent portfolios, priced at frequent intervals throughout the trading day. The opportunity for daily trading means you can take advantage of price movements.

As well, ETFs can be traded using Stop and Limit Orders which means you can specify the price points at which you are willing to trade, helping to overcome behavioural and pricing risks.