Since launching in Canada nearly three decades ago, ETFs have been growing in popularity and gathering assets at a rapid pace. Canadian ETF assets totalled $147 billion last year, up from $113.7 billion in 2016. The industry currently has more than 700 ETFs offered in the marketplace, within a multitude of options and sectors.

Despite the record-breaking numbers, many Canadian investors remain unclear about the benefits of ETFs and the role ETFs can play in their portfolios. Tim Huver, Head of Product at Vanguard Investments Canada, notes that the right ETFs can be a critical component of an effective portfolio. Some of the benefits ETFs can bring investors include low costs, trading flexibility, portfolio diversification, and transparency.

Low costs

In helping investors save money, ETFs truly shine. They tend to be cheaper than mutual funds because they tend to follow a less expensive indexing strategy. Historically, costs have been important in forecasting returns — the lower the cost of investing in a fund, the higher the expected return for that fund.
The recent growth rates of ETFs are almost triple those of mutual funds, an indication that investors might be looking at replacing a higher-cost mutual fund with a lower-cost ETF.

Trading flexibility

Since ETFs are traded on a stock exchange, they can be bought and sold through an advisor or a brokerage at any time during the day when the markets are open, unlike traditional mutual funds, which can be traded only after the markets close. This provides greater flexibility to build a new portfolio — or restructure an existing one — following a change in goals or circumstances.

Portfolio diversification

ETFs are helpful when investors want to create a diversified portfolio that meets specific asset allocation needs. With the wide variety of sector and industry categories available, ETF shares can provide investors with exposure to a desired market segment. Broad diversification can help offset the risks associated with a single security or market segment.

ETFs are also evolving from single products that investors can use to construct a balanced portfolio to an all-in-one option suited directly to the investor. Some ETFs offer investors an option that holds several ETFs within a low-cost, balanced structure, based on their tolerance for risk.

Transparency

ETFs tend to hold the same securities as their benchmark indexes, so investors will have transparency regarding the types of stocks included in their portfolio mix. Being able to track and verify their positions on a daily basis provides many investors with peace of mind.

Although ETFs have been in Canada for nearly 30 years, many Canadian investors are still unfamiliar with their benefits. And although the multitude of ETFs offered in the marketplace has provided investors with a wide variety of product flavours to choose from, there are quite a few niche areas that may not be in the long-term interests of investors. While these types of ETFs tend to be headline-grabbing, their complexity and narrow scope may not be suitable as a large part of many investors’ portfolios.

ETFs can be a critical component of a well-diversified and effective portfolio. That’s why it’s important to learn more about their unique benefits and how they can be best utilized. Compare investment products from Canada’s leading ETF providers and determine which product best suits your investment needs by visiting Vanguard’s ETF Education Centre at vanguardcanada.ca. For more information on ETFs, contact your financial advisor.