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So, what’s an ETF?

ETFs are diversified, low-fee funds traded on exchanges. Offering variety and flexibility, they're a good fit for both new and experienced investors.

Updated

10 min. read

Exchange traded funds, or ETFs, have become one of the most popular investment vehicles for Canadians, especially those just starting their investing journey.

ETFs stand out for their simplicity, flexibility, and accessibility. They offer a way for investors to gain exposure to a wide range of assets, diversify their portfolios, and manage risk, all with relatively low fees and minimal effort. In Canada, ETFs have grown rapidly in popularity, with billions of dollars invested and hundreds of funds available to suit nearly every investment goal.

What is an exchange-traded fund (ETF)?

An exchange-traded fund, or ETF, is a type of investment fund that holds a collection of assets such as stocks, bonds, commodities, or other securities. It’s designed to track the performance of a specific index, sector, or theme, such as the S&P/TSX Composite Index, Canadian bonds, or gold.

ETFs are traded on stock exchanges throughout the day, just like individual stocks, meaning you can buy or sell shares whenever the market is open. You also have flexibility in how much you invest and which ETFs you choose. However, you don’t have direct control over the specific securities or assets within the ETF, their weightings, or trading decisions made by the fund manager.

When you invest in an ETF, you are buying shares of the fund, not the underlying assets themselves. One advantage of this is that you don’t need to manage or rebalance the holdings yourself—the fund manager takes care of that according to the fund’s strategy. You benefit from their expert oversight and research, which is ideal for investors who prefer not to spend time researching and picking individual stocks or bonds.

To invest in ETFs, you will need to open an account with a brokerage. Most Canadian banks and online brokers offer access to a wide range of ETFs.

An ETF is a fund you can buy and sell on an exchange during the trading day. It typically holds a basket of securities and aims to track the performance of an index or sector.

How do ETFs work?

ETFs are created by authorized participants, typically large financial institutions. These participants deliver a basket of securities to the ETF issuer in exchange for a large block of shares, known as a “creation unit”. The shares are then sold on the stock exchange, where investors can buy and sell them throughout the trading day.

While many ETFs hold a basket of different securities, some ETFs—such as those tracking commodities or cryptocurrencies—may hold a single asset or use derivatives to replicate the performance of that asset. For example, a crypto ETF might track the price of Bitcoin rather than holding a basket of stocks. It’s important to review the fund’s structure to understand what you’re investing in.

The price of an ETF share fluctuates in real time, based on the value of the underlying assets and market demand. This is different from mutual funds, which are priced once a day after the market closes. ETFs can be bought and sold at any time during market hours, making them a flexible investment option.

Most ETFs are designed to track the performance of an index, such as the S&P/TSX Composite Index. These are known as passive ETFs, and they aim to replicate the returns of the index as closely as possible. Some ETFs are actively managed, meaning professional managers select the assets and try to outperform the market.

ETFs can be held in registered accounts, such as Tax-Free Savings Accounts (TFSAs), and, Registered Retirement Savings Plans (RRSPs), as well as non-registered accounts. Many ETFs offer a Distribution Reinvestment Plan, or DRIP, allowing investors to automatically reinvest dividends and distributions.

Calculating ETF share value

The value of an ETF share is called the Net Asset Value Per Share, or NAVPS. This is calculated by subtracting the fund’s liabilities from the total value of its assets, then dividing by the number of shares outstanding:

For example, if an ETF holds $1,000,000 in assets, has $10,000 in liabilities, and 100,000 shares outstanding, the NAVPS would be $9.90 per share.

Actively Managed vs. Passively Managed ETFs

Most ETFs are passive, meaning they track a market index automatically. Passive ETFs typically have lower costs and offer broad diversification. For example, a passive ETF might track the S&P/TSX Composite Index, giving you exposure to hundreds of Canadian companies.

Active ETFs, on the other hand, are managed by professionals who select assets in an attempt to outperform the market. These funds may have higher costs and risk, but they offer the potential for higher returns. ETF fees vary depending on whether the fund is actively or passively managed. Passive ETFs, which track a market index, usually have lower management fees. Actively managed ETFs, where managers select assets to try to outperform the market, often come with higher fees due to increased research and trading activity. Always review the expense ratio and fee structure before investing.

When choosing between active and passive investing, consider your investment goals, risk tolerance, and time horizon. Passive ETFs are generally best for hands-off, long-term investors, while active ETFs may appeal to those who want to take a more hands-on approach.

The benefits of ETFs

ETFs offer a range of advantages that make them attractive to both new and experienced investors.

Nearly all ETFs provide diversification

One of the biggest benefits is diversification. By investing in an ETF, you gain exposure to a basket of assets, which helps spread risk and reduce the impact of any single asset’s performance on your portfolio.

Professional management options

ETFs are also professionally managed, giving you access to expert oversight without the need to pick individual stocks or bonds yourself.

Wide selection to align with your needs

The selection of ETFs is broad, allowing you to find options that align with your investment goals, risk tolerance, and time horizon.

Flexible trading when the market is open

Trading ETFs is straightforward. You can buy and sell shares whenever the market is open, and you can see the value of your holdings in real time.

Lower expense ratios and fewer brokage commissions compared to individual stocks

Fees are generally lower compared to mutual funds or individual stocks, and ETFs are designed to be tax efficient. ETFs are generally considered tax efficient because they tend to generate fewer taxable events compared to mutual funds. This is due to the way ETFs are structured and traded, which can help investors minimize capital gains distributions and manage their tax liabilities more effectively.

Tax efficiency & lower management fees to other investment funds

ETFs can be held in registered accounts, such as TFSAs and RRSPs, which offer tax advantages. Many ETFs also have lower management fees and operating costs compared to other investment funds.

With a wide range of choices, ETFs generally offer diversification, professional management, flexible trading, affordable fees, and tax efficiency.

Limitations of ETFs

While ETFs have many benefits, there are some limitations to consider. Liquidity can be an issue for certain ETFs, especially those that invest in niche markets or have low trading volumes. This can make it harder to buy or sell shares quickly at a fair price.

ETF prices fluctuate with the market, so the value of your investment can go up or down. Because ETFs are composed of fixed holdings, you cannot exclude specific companies or industries from the fund. Investors own shares of the fund rather than the underlying assets, which means you do not have voting rights or direct ownership.

Actively managed ETFs may come with higher brokerage fees, and some ETFs have management fees that can eat into your returns over time. It is important to read the fund’s prospectus and understand the fees before investing.

Who should invest in ETFs?

ETFs are suitable for a wide range of investors. They are ideal for those who are new to investing, individuals seeking diversified and low-fee portfolios, and savers with specific financial goals such as retirement, education, or major purchases.

Passive ETFs are best for hands-off, long-term investors with lower risk tolerance. These funds offer broad diversification and low fees, making them a good choice for those who want to invest for the long term without actively managing their portfolio.

Active ETFs may appeal to investors who prefer a hands-on approach and are comfortable with higher risk. These funds can offer the potential for higher returns, but they require more research and monitoring.

Types of ETFs

ETFs come in many varieties, each designed for different investment goals and strategies. They’re usually grouped by the assets they hold or how they’re managed.

Types of ETFs by asset class:

This classification sorts ETFs by the main type of investments they own. Here, the focus is on the building blocks inside the ETF, showing you exactly what your money is backing.

ETF types categorized by asset class include:

Equity ETFs: Hold stocks to provide exposure to domestic or international markets
Fixed income ETFs: Hold government or corporate bonds for regular income and low volatility
Commodity ETFs: Track physical commodities or commodity futures (e.g., gold, oil, agriculture)
Currency ETFs: Provide exposure to foreign currencies, with some specialized funds also offering cryptocurrency exposure
Real estate ETFs: Invest primarily in real estate investment trusts (REITs) and companies focused on real estate

Types of ETFs by strategy or structure:

This way of categorizing ETFs looks at how they’re built, the strategy they follow, and how they are expected to behave. This makes clear how these funds try to reach their goals and how they might react to changes in the market.

These types of ETFs include:

Index ETFs: Passively track a market index to match its performance (e.g., S&P/TSX Composite)
Asset allocation ETFs: Combine multiple asset classes to offer simple, diversified portfolios
Smart beta ETFs: Use a rules-based weighting system to target certain investing styles or factors
Leveraged ETFs: Aim to deliver amplified daily returns using financial derivatives; they’re typically used for short-term trading
Inverse ETFs: Are designed to deliver opposite daily returns of an index; these are primarily used for short-term hedging
Sector or industry ETFs: Focus on specific sectors (e.g., technology, healthcare, energy)
Thematic ETFs: Invest in long-term trends or themes (e.g., clean energy, artificial intelligence)
Specialty ETFs: Target niche goals (e.g., dividend income, high-interest savings, covered-call strategies)

Comparing ETFs, stocks, and mutual funds

ETFs, stocks, and mutual funds each have unique features. Here are some core differences that you should consider when comparing products.

ETFs and mutual funds offer diversification, while stocks represent ownership in a single company.
ETFs and stocks can be traded throughout the day at market prices, whereas mutual funds are priced at the end of the day.

Fees for ETFs are generally lower than those for mutual funds, and both ETFs and mutual funds provide access to a basket of assets.

If you are deciding between ETFs and stocks, consider that ETFs provide diversification and lower risk, while stocks can offer higher potential returns but with more risk.

ETFs are also sometimes confused with index funds. While both can track a market index, index funds are a type of mutual fund that are priced once per day and cannot be traded throughout the day. ETFs, on the other hand, can be bought and sold on the stock exchange at any time during market hours, offering greater flexibility. They also often have lower fees.

BMO offers both index funds and index ETFs, so it’s important to understand the differences when choosing an investment. In contrast to index funds, index ETFs are designed to track the performance of a specific market index and can be bought or sold throughout the trading day.

BMO offers a range of Index ETFs for investors seeking low-cost, diversified exposure to the market. For those concerned about currency risk, hedged ETFs protect against currency fluctuations, while unhedged ETFs do not.


Feature	ETFs	Stocks	Mutual Funds
Composition	Basket of assets¹	Single company	Basket of assets
Diversification	High	Low	High
Trading	Throughout day	Throughout day	End of day
Pricing	Market price	Market price	NAV
Fees	Low	Varies	Higher

¹Some ETFs may hold a single asset (such as a commodity or cryptocurrency) rather than a basket of assets.

If you’d like to compare different ETFs and mutual funds—including features, fees, and performance—BMO Global Asset Management offers an ETF/Fund Comparison Tool. This tool lets you review and compare products from BMO and other providers, helping you make informed investment decisions.

Practical tips on how to choose the right ETF

Choosing the right ETF involves aligning your selection with your financial goals and needs. Start by identifying your investment objectives, such as growth, income, or capital preservation. Consider your risk tolerance and time horizon.

Research different types and strategies and compare management styles, fees, and risk levels. Look at the fund’s holdings, performance history, and expense ratio. ETF portfolios can offer diversified solutions for investors who want a hands-off approach.

Consult a professional if you need guidance, and do not hesitate to use online resources and tools to compare ETFs.

Popular ETFs in Canada

Canada offers a wide range of ETFs to suit different investment goals and strategies. Some of the most popular ETFs include:

BMO S&P/TSX Capped Composite ETF (ZCN), provides exposure to Canadian equities with a focus on low volatility.
BMO Low Volatility Canadian Equity ETF (ZLB) targets Canadian stocks with lower volatility.
Vanguard FTSE Canada ETF, ZCN, tracks the performance of the FTSE Canada Index.
iShares MSCI Minimum Volatility Canada ETF, XMV, focuses on Canadian stocks with minimum volatility.

These ETFs are widely used by Canadian investors and offer a mix of growth, income, and stability.

Choosing the right ETF means aligning it with your financial situation, goals, and risk tolerance. It helps to compare types and fees to find an option that fits your needs.

How to invest in ETFs

You can buy or sell ETFs through a direct investing brokerage, with the help of a financial advisor, or within registered accounts like TFSAs and RRSPs. Robo-advisors are also an option for automated investing.

When you are ready to invest, open an account with your chosen brokerage, fund it, and place your order for the ETF you want. You can buy as many or as few shares as you like, and you can sell them at any time during market hours.

At BMO, there are several different ways for you to invest in ETFs. You can choose from:

ETF-based mutual funds, which allows you to invest in a diversified portfolio with the help of an investment professional.
Individual ETFs, allowing you to buy and sell ETFs online through either our self-directed platform, BMO InvestorLine Self-Directed , or our hybrid advice platform, BMO InvestorLine adviceDirect
ETF portfolios, allowing you to invest in a diversified portfolio of ETFs through BMO SmartFolio, an online platform that offers automated portfolio management.

Each option offers different levels of control, advice, and diversification, so consider your investment goals, risk tolerance, and preferred level of involvement when choosing the best approach for you.

Conclusion

ETFs are a flexible and cost-effective way to diversify your investments and pursue your financial goals. Whether you are just starting out or looking to optimize your portfolio, there is likely an ETF that fits your needs. With low fees, professional management, and a wide range of options, ETFs offer something for everyone.