Three Things You Have Wrong About ETFs
Insight As ETFs grow within Canadian investment portfolios, CEFTA finds it important to educate people on the facts and fictions surrounding them.
Exchange-traded funds (ETFs) have become an increasingly popular choice for Canadian investors in recent years. Last year, Canada witnessed 70 percent growth in new ETF launches compared to 2016, as well as significant growth of assets under management.
Despite their rising popularity, ETFs are still a relatively new product for investors in Canada, and many misconceptions still exist amongst advisors and investors. The Canadian ETF Association (CETFA) was created in 2011 to combat these myths, and provide Canadians with greater information, education, and access to resources on ETF investing. The first association of its kind globally, CETFA currently represents 97 percent of ETF assets under management in Canada.
“We are conscious that advisors and investors may still not be fully up to speed on ETFs or the market in general,” says Pat Dunwoody, Executive Director of CETFA. “It is our responsibility to ensure they are.”
Below are three common misconceptions about ETFs that CETFA aims to demystify:
Myth 1: ETFs are just like stocks
Not exactly. Unlike a stock, which has a limited number of shares available for sale or purchase, an ETF is an open-ended fund that can create new units based on demand, like a mutual fund. “Although ETFs are traded on an exchange, market makers will continually offer new shares and will create new units when needed,” clarifies Dunwoody.
Myth 2: ETFs aren’t liquid
This is a common myth. ETF liquidity begins with the underlying portfolio, where ETFs that are based on harder to trade strategies will then have less liquidity. An ETF adds liquidity through exchange trading, and as an ETF matures, more buyers and sellers meet on the exchange and the ETF develops more liquidity than its underlying portfolio. This is particularly beneficial in narrower asset classes and fixed income areas with historical liquidity challenges.
Myth 3: ETFs are a purely passive play
While passive products continue to lead, actively managed ETFs are increasing in popularity. In fact, active ETFs now make up 20 percent of Canada’s more than $153 billion ETF market. That number is only expected to rise as more mutual fund companies look to enter the space.
The future of ETFs in Canada
ETFs have become a dominant player in the market and it doesn’t look like they’re going anywhere, anytime soon. “We believe that the growth will continue — and we are working to ensure that the industry is efficient and will be able to handle the growth,” says Dunwoody.
To find out whether an ETF is the right choice for your portfolio, speak to your advisor or visit cetfa.ca to learn more.