What is an ETF?

Exchange‑traded funds, or ETFs, can invest in a basket of assets across different asset classes, such as equities and fixed income. Similar to a stock, ETFs can be traded whenever the markets are open.

We believe ETFs are the vehicle of choice for millions of investors because they provide a simple, cost-effective way for all investors to navigate investing.

Understanding the potential characteristics of ETFs is an important step toward determining whether ETFs can be an appropriate choice for your portfolio.

Access

Providing investors a simpler, more efficient way to access the financial markets has likely helped ETFs grow in popularity – and assets under management — since the first ETFs launched in the early 1990s.¹ Today, millions of people around the world use ETFs to access the financial markets in the same way as the largest institutional investors — with the click of a button, for a known price.

The technology of ETFs has empowered investors of all types to easily and conveniently access both broad market exposures, as well as more-targeted investments in previously hard-to-reach markets.

Within a single fund, ETFs can offer access to entire markets and asset classes, such as stocks and bonds, commodities and digital assets, as well as specific exposures to sectors like information technology, various countries and regions, or different types of bonds.

Low cost

Whether it’s at the grocery store, the mall or the gas station, a penny saved is a penny earned. The same is true when it comes to your investments, where keeping costs low can help you reach your goals sooner. Even small fees can have a big impact on your portfolio.

ETFs can be purchased directly through online brokerage accounts, with some offering commission‑free trading.

In addition, there’s no investment minimum with iShares ETFs, and you can start with as little as $1 when you buy fractional shares of iShares ETFs.

When it comes to owning ETFs, a key element to consider is the Management Expense Ratio (MER), which represents the cost of holding an ETF for one year.

Diversification

The primary goal of investing is typically to generate the highest possible return for the lowest risk. Diversification might be able to help you obtain this balance. By spreading investments across asset classes, geographies and sectors, investors may lower their risks as the poor performance of one investment could be offset by stronger performance in another, and vice versa.

Index ETFs generally seek to track indexes that are comprised of many individual securities, helping to spread the risk and reduce the impact of price swings in any one security. Although this does not eliminate risk entirely, the diversified structure of ETFs has the potential to improve the risk-adjusted return of your portfolio.

Liquidity

The deep liquidity of ETFs — the speed with which they can be bought and sold — comes from the markets on which they are traded. ETFs trade on exchanges and investors can buy or sell throughout the trading day, just like stocks.

And just like stocks, you can buy and sell ETFs in a variety of ways:

• Market orders execute as soon as possible at the best price available at the time. Market orders are best used when it’s more important to make sure the trade gets executed vs. the specific price.
• Limit or stop-limit orders mitigate the impact of intraday price swings by giving you more control over the price to buy or sell. Limit orders expire if your price target isn’t met, meaning there’s no guarantee the trade will get done.
• Stop loss orders are triggered when the price of a security strikes a specific level. Stop orders can help protect your gains and limit your losses but trades may be delayed, especially in times of market stress.

ETFs’ ease of trading gives investors more control over when and how they trade. This liquidity feature is one of the key benefits of owning ETFs, particularly when compared to mutual funds. Just make sure your order type is consistent with your goals.

Transparency

Knowing exactly what you own is important information you need when making financial decisions. ETFs aim to be straightforward and transparent about their investment objectives.

In addition, information on ETFs holdings, performance and costs is published daily and available on the product page for each iShares ETF. With iShares ETFs, you’ll always be able to know what you own.

From stocks and bonds, broad asset allocation, to thematic or sector tilts, digital assets, country and regional exposures, ETFs provide investors with more choices to access more segments of more markets than ever before.

Below are a few common types of ETFs categorized by the types of investments held within the ETF.

Stock ETFs

Stock ETFs, also known as equity ETFs, invest in a basket of individual stocks. There are stock ETFs covering specific sectors, from technology and telecommunications to clean energy and consumer goods, as well as ETFs that provide exposure to international stocks, including regional, country-specific and sector-focused ETFs. In addition, there are equity ETFs that focus on size, such as large-cap or small-cap, or a particular investing style, such as value or momentum.

Bond ETFs

Bond ETFs, also known as fixed-income ETFs, can provide investors access to thousands of bonds in a single trade. As with stock ETFs, bond ETFs trade on exchanges. Trading on exchanges provides greater liquidity, and transparency in pricing and execution, which can be beneficial to investors in the more opaque, over-the-counter bond markets. Just like stock ETFs, bond ETFs come in a wide variety of flavours, or sub-sectors; these include Canadian government, U.S. Treasuries, as well as specific sectors such as investment grade and high yield corporate bonds, mortgages, and emerging market debt.

All-in-one ETFs

All-in-one ETF, also known as asset allocation ETF, offers a fully diversified portfolio mix of global stocks, bonds, and potentially other assets – all in a single fund. The single fund is typically made up of several ETFs – targeting various geographical exposures and a mix of assets or style. Our suite of iShares asset allocation ETFs in Canada ranges from conservative to more growth oriented, and investors can choose based on their investing goals and risk profiles.

Commodity ETFs

Commodity ETFs seek to track the price of physical assets such as gold and silver. Commodity prices have generally not been highly correlated to prices for stocks and bonds; moreover, commodity sectors typically have had a low correlation to each other. Commodities also tend to rise in tandem with inflation. For these reasons investors often use exposure to commodities as a way to help diversify their portfolios, and to align with their views on inflation and the economic outlook. 

International ETFs

International ETFs provide investors exposure to stocks and bonds from individual countries, like India; regions and subregions, like Europe; and specific types of economies, including developed and emerging. As with domestic ETFs, international ETFs cover a broad range of specific sectors, investing strategies, factors and styles. Investing in international stocks and bonds can help investors seek to reduce risk and potentially expose them to growth opportunities not available in Canada-only portfolios.

Sector ETFs and Thematic ETFs

Sector and thematic ETFs offer investors exposure to a basket of companies in specific industries such as technology, infrastructure, healthcare, or aerospace & defense. The ETFs could have a Canada, U.S. or global focus, providing investors an opportunity to express their views on a particular industry while limiting their exposure to the risks of owning individual stocks.

Digital assets

Digital assets ETFs enable investors to access exposure such as Bitcoin through the convenience of a traditional brokerage account. The ETF wrapper helps remove the operational, tax, and custody complexities of holding digital assets directly.