Twitter Facebook LinkedIn YouTube

TD ETF's - Sean Millington - Rickerby Wealth Group

Video Platform Video Management Video Solutions Video Player

In this, our 7th video in this series, Sean Millington will discuss Exchange Traded Funds, or ETFs as they are commonly known.

Additional Information:

Company: Rickerby Wealth Group
Date Published: Jan 18, 2013
Transcript: Available

Video Transcript:

I’m Sean Millington (etc) – In this, our 7th video in this series, we will discuss Exchange Traded Funds, or ETFs as they are commonly known.

An ETF is a unique investment vehicle that combines some of the features of mutual funds, along with features of individual stocks.

Like a mutual fund, each unit of an ETF represents a partial ownership in an underlying portfolio of securities, structured in order to achieve a particular investment objective.

Like mutual funds, ETFs represent diversified portfolios of securities that track specific industry sectors, geographic regions, commodities, currencies, bonds or other indexes.

However, similar to stocks, ETFs are listed for trading on various exchanges so they can be bought and sold in your account throughout the trading day. By way of contrast, mutual funds are priced only once daily, at the close of the market, and all purchases and sales are executed at that price.

The majority of ETFs are designed to track a particular market index, and to accomplish this they purchase the securities that make up the respective index, either in identical proportions as the index, or using a sampled subset of the index.

The creation of the modern ETF has roots on the Toronto Stock Exchange with a security called TIPS; short for Toronto 35 Index Participation Units.

This investment product allowed investors to participate in the performance of the TSE 35 Composite Index without having to buy shares of each constituent company in the index.

The early ETFs have since been replaced by a wide variety of ETFs offered by a number of providers.

In recent years ETF growth has exploded, with more than 1,400 ETFs in the United States, and close to 250 ETFs in Canada.

Although an ETF is open-ended, much like a mutual fund, there is a significant difference in the procedure followed to create and redeem ETFs.

New ETFs are created when designated brokers buy the basket of securities underlying the index and exchange them with the ETF provider for newly created ETF shares or creation units, which usually consists of 100,000 or 200,000 shares per unit.

iShares and Horizons are two of the more commonly known ETF providers.

The designated broker will then break up the creation units into individual ETF shares which trade on a stock exchange.

The reverse process occurs when the designated broker redeems a creation unit. The broker purchases ETF shares on the open market to form the quantity needed for one creation unit, and then turns the shares over to the ETF provider in exchange for the individual securities underlying the ETF.

Let’s look at a few of the benefits of owning ETFs.

Low Cost

ETFs can have an immediate positive impact on an investor’s portfolio due to their low fees.

ETFs are less expensive than traditional mutual funds because most ETFs are index funds, and index tracking is inherently less expensive than the active management practices of mutual funds.

Diversification

ETFs are designed to track market indexes that may contain hundreds or even thousands of securities.

ETFs invest in every major index, equity style, international region and investable country.

ETFs also provide comprehensive access to sub-sectors, fixed-income, and commodities. Unlike stocks or mutual funds, ETFs also provide efficient means to invest in major economies through currency ETFs.

Flexibility

ETF providers are constantly creating special ETFs.

Inverse ETFs are designed to produce the opposite return of their underlying indexes, whereas the objective of leveraged ETFs is to outperform its index by 2X, 3X and some even offer 4X.

The ETF providers claim they can create an ETF solution to cover any possible scenario an investor may want.

Many of the special ETFs have their prices reset daily and are typically unsuitable for retail investors who plan to hold them for longer than one trading session.

Tax Efficiency

ETFs are renowned for having low portfolio turnover, which is good for investors, because it reduces the possibility of tax gain distributions.

With traditional mutual funds, the buying and selling activities of some shareholders can trigger capital gains distributions for all of the fund’s shareholders.

For example when the fund must sell securities to raise cash in order to meet redemptions, any related capital gains are distributed to all remaining investors in the fund.

As ETF trading occurs on an exchange in the same manner as stocks, there is no fund company ‘middle-man’.

Therefore ETF investors are generally more in control of their own tax situation, which is usually only affected when they decide to unwind their original transaction.

Transparency

ETFs are highly transparent, as their holdings are disclosed on a daily basis.

Liquidity

ETFs draw upon two sources of liquidity: the liquidity of the secondary market where they trade throughout the day at their prevailing market price, as well as the liquidity of the primary market in which more shares can be created or redeemed at the fund’s net asset value.

(your special summary)
That wraps up this segment. Please come back and watch our other segments.
I’m Sean Millington an investment advisor with the Rickerby Wealth Group at TD Waterhouse.

For more information please call us at 604-482-5127, or email me at sean.millington@td.com
To view our website please enter “Rickerby Wealth Group” in your browser.