An exchange-traded fund is a basket of investments that trades on a stock exchange under one ticker. Buy one share and you own a small slice of everything in the basket. This module opens the basket and shows you how it works.
Imagine wanting to own the 500 largest companies in the United States. Bought one at a time, that is 500 orders, 500 positions to track and a lot of money. An exchange-traded fund (ETF) does it for you. A fund company buys all 500, puts them in one fund, and lists the fund on the stock exchange. You buy a share of the fund.
That one share is a proportional claim on everything inside. If the fund holds 7% in one company and 0.01% in another, so does your share. When the companies pay dividends, the fund collects them and passes them on to you.
| Single stock | Mutual fund | ETF | |
|---|---|---|---|
| What you own | One company | A basket | A basket |
| When it trades | All day | Once a day, after the close | All day |
| Where you buy it | Any broker | Fund company, bank or broker | Any broker |
| Typical yearly fee | None | Often 1% to 2% for active funds | Often under 0.25% for index ETFs |
| Minimum | One share (or a fraction) | Sometimes $500 or more | One share (or a fraction) |
The big idea: an ETF gives you the diversification of a mutual fund with the convenience and low cost of a stock. Fee ranges above are typical, not universal. Module 3 shows you how to look up the real number for any fund.
Most ETFs are index ETFs. They do not try to pick winners. They follow a published list, such as the S&P 500 or the S&P/TSX Composite, and simply hold what is on it. Nobody is paid to make clever decisions, so the fee is low.
An active ETF has a manager who chooses what to buy and sell, hoping to beat an index. That costs more. Over long periods, most active funds have trailed a plain index fund after fees, which is the main reason index ETFs became so popular.
This course is mostly about index ETFs, because they are the building blocks of a simple long-term portfolio. Module 8 covers the more exotic kinds and when to be careful.
Every ETF has two values. The net asset value (NAV) is what the holdings inside are worth per share. The market price is what the ETF share trades for on the exchange.
For a large ETF these stay very close together. The reason is a behind-the-scenes process. Big trading firms can hand the fund a basket of the underlying stocks and receive new ETF shares, or hand back ETF shares and receive the stocks. If the ETF trades above what its holdings are worth, they create new shares and sell them, pushing the price down. If it trades below, they do the reverse.
You never see this happen, and you do not need to do anything. What matters is the result: for a big, heavily traded ETF, the price you pay is almost exactly what the basket is worth.
Educational purposes only; not financial advice. Any funds, tickers and figures are illustrative examples, not recommendations. Fees, tax rules and contribution limits change, so confirm current details with the fund provider and your tax authority. Worked examples use constant returns and are not forecasts. Written by Elizabeta Dimoska. Always do your own research and consult a licensed advisor.