An ETF or exchange-traded fund attracts people with the diversification it provides for saving money. It is a group of different securities such as stock ETFs that have numerous stocks, commodity ETFs that have different commodities, and so on. You can buy and sell ETFs as you do with Mutual Funds. The question is how to invest in an ETF in Canada. Well, let us move forward to give you some clarity. In this article, we will discuss how to invest in an ETF in Canada.
ETFs, serve the purpose of fulfilling different objectives and strategies. Several ETFs also contain assets that mirror the market index. ETFs track those performances and provide you with the same benefits and returns. ETFs are not as old as the stocks and bonds that you generally invest in. They started making rounds in the Canadian investment market as a financial product in 1990. Do you know that the TIPS or Toronto Index Participation Shares was the first-ever index in the world? If you are a person who likes liquidity, low-fee status, and extensive diversification scope, ETF is a good option for you.
Types of Exchange Traded Funds
You need to know the different types of ETFs if you are learning how to invest in an ETF in Canada. An Exchange Traded Fund is like a basket of securities like stocks, bonds, foreign currencies, commodities, and other such investing alternatives. You can invest in ETFs based on the asset class they contain, size of the investment, management, their sector, etc.
Here are some of the most prominent types of ETFs.
Actively Managed ETFs
The actively managed ETF does not monitor a sole market index. They are in the running to be one step ahead of the market by scouring the market for securities that have the potential to provide better gains in the future. The fees of these ETFs are high because they need constant monitoring by an active fund manager to make sure that the performance is better than the average market performance.
Index ETFs are one of the most popular ETFs. Their sole aim is to track the performance of a broad market index and find the opportunities where it can perform well. Some examples of such indexes are S&T/TSX composite index, S&P 500. It can also be an index specific to a sector like S&P/TSX Capped Utilities Index.
Index ETF has a more passive approach towards investment. Meaning, they hold onto the security of a benchmark index and don’t chase to outperform the average market returns. They track bonds, commodities, stocks, and many more indexes.
These ETFs allow you to enter the foreign stock and bond market. They are classified into the following types: Frontier Market ETs, Global ETFs, Developed Market ETFs, Emerging Market ETFs, etc.
Some examples of this kind of ETFs are Vanguard FTSE Emerging Markets All Cap Index ETF (VEE) and XAW or iShares Core MSCI All Country World ex Canada Index ETF.
If you like to invest in an industry or a sector of your choice, this is the perfect index for you. It allows an investor to try different industry sectors. For example, Telecoms, Utilities, Real Estate, Health Care, Energy (Gas and Oil), etc.
These kinds of ETFs monitor stock indices. Examples are Horizons S&P/TSX 60 ETF (HXT), iShares Core S&P/TSX Capped Composite Index ETF (XIC), and Vanguard FTSE Canada All Cap Index ETF (VCN).
Fixed Income or Bond ETFs
This type of ETF traces the broad or sector-specific bond index and tries to imitate the performance of the same.
Examples of Fixed Income ETFs are iShares Core Canadian Universe Bond Index ETF (XBB), BMO Aggregate Bond Index (ZAG), and Vanguard Canadian Short Term Bond Index ETF (VSB).
This ETF helps you to enter the commodity market by letting you invest in physical commodities such as corn, wheat, cotton, cocoa, sugar, gold, soybeans, etc, indirectly. You can also invest in the equities of companies that conduct business for such commodities.
Some examples of commodity ETFs are, BMO Junior Oil Index ETF (ZJO), Horizons Gold ETF (HUG), and iShares S&P/TSX Global Gold Index ETF (XGD).
You can benefit from Commodity ETF by diversifying your portfolio because they move in different directions compared to the equity market.
These ETFs invest in currency indexes and provide you the benefit of investing in the Forex market indirectly. Such ETFs monitor multiple currencies or single currency indices like Horizons U.S. Dollar Currency ETF (DLR).
As the name suggests, this type of ETF moves in the opposite direction in which the index is moving. For example, if the index benchmark falls by 5%, the inverse ETF will rise 5%.
BetaPro S&P 500 Daily Reverse ETF (HIU), Horizons BetaPro S&P/TSX 60TM Daily Inverse ETF (HIX) are some of such examples.
A leveraged ETF has the goal to provide returns 3x or 5x than its original index. The tools that these ETFs use include debt and derivatives to yield you gain. They are also on the expensive side of ETFs because active management is required.
Some examples of these ETFs are Horizons BetaPro S&P/TSX 60 Bull Plus ETF (HXU), Horizons BetaPro S&P/TSX 60 Bear Plus ETF (HXD).
Benefits of Investing in an ETF in Canada
They provide the benefit of diversifying your portfolio. The reason is that instead of investing in one commodity, stock, currency, you can invest in many at the same time.
Since no constant buying and selling is involved, there are fewer trades. Hence fewer capital gains distributions and more tax efficiency.
ETFs provide great transparency of investment as you can easily know the number and type of securities that an ETF holds at your discretion.
What Do You Need to Pay for Investing in ETFs?
MER: This is the Management Expense Ratio which tells you about the management fee and operating expenses. ETFs have low MERs and hence you save money.
Commissions: Some discount brokerages are good to provide you with an ETF investment without commission. Though there are some brokers that charge commission per transaction. However, ETFs do not levy high fees like mutual funds.
Big-ask spreads: You will pay for the difference in the buy and sell price of an ETF. Meaning if you buy and sell an ETF, the difference between both the prices will be your profit minus any transaction cost. You will gain money when the profit is more than your transaction cost.
Some of the most prominent ETF providers in Canada are,
- First Trust
- Franklin Templeton
FAQs on How to Invest in an ETF in Canada!
Which One is Safer, ETFs or Stocks?
There is always a degree of risk in an investment. However, ETFs are a bit safer because they are a collection of many stocks and help diversify your portfolio while limiting the risk. Investing all your funds in just one stock can be risky.
Will You Lose Your Funds in an ETF?
You can lose money in an ETF if you sell them at a price that is less than what you paid for. Overtrading is also a factor that adds to losses as you pay a lot of fees on each transaction which lowers your total returns.
How Can You Invest in ETFs in Canada?
You can buy ETFs via online brokerages like Weatlhsimple or Questrade, or use a Robo-advisor service.
Are ETFs Lucrative for Beginners?
The answer is yes. As a beginner, you may have limited knowledge and thus by investing small amounts in ETFs, you can diversify your portfolio. You can also buy the one-fund ETF so you won’t need to rebalance it. ETFs have low fees compared to mutual funds and more potential for better returns, too.
We hope that this ETF guide helped you with how to invest in an ETF in Canada! ETFs are also taxed like mutual funds, where you will pay the tax on dividends and capital gains. These taxes will differ on the basis if you are investing in non-registered or registered funds. You can either invest via a full-service brokerage account where you are not required to make investment decisions or you can use the DIY options like discount brokerages.
It is also better to start investing early, whether it is in ETFs or fixed deposits. Also, be prudent to make your decision and research well before investing your money. All the best!