An exchange-traded fund (ETF) is an investment fund that holds a collection of investments, such as stocks or bonds owned by a group of investors and managed by a professional money manager. ETFs trade on a stock exchange and can be sold short or margined. You can also trade in futures and options on ETFs.

ETFs and mutual funds both offer similar options to spread out risk using diversification – but they’re built, bought and sold differently.

5 Reasons Why People Buy ETFS

  1. Cost-effective diversification.
  2. Passive management.
  3. Transparency.
  4. Ease of buying and selling.
  5. Low cost to own.

4 Things to Know about ETFS

  1. Risk – The level of risk and return depends on what the ETF invests in. You can lose money investing in ETFs.
  2. Past performance – How an ETF has performed in the past can’t tell you how it will perform in the future. But past performance can help you determine how volatile or risky the ETF’s returns may be.
  3. Buying and selling ETFs – You buy and sell ETFs on a stock exchange, in a similar way to buying and selling stocks.
  4. Fees – You typically pay commissions and management fees to invest in ETFs. There may also be costs to set up an investment account.

Key Point about ETFs

Like a mutual fund, an ETF holds a variety of investments. But it trades on a stock exchange like a stock.

4 Differences Between ETFs and Mutual Funds

On the surface, mutual funds and exchange-traded funds (ETFs) look alike. They both pool investments, like stocks or bonds, charge fees and offer reports, such as financial statements, quarterly, semi-annual or annual statements, but that’s generally where the similarities end.

Here are four important differences between mutual funds and ETFs:

  • Active vs Passive
  • Cost
  • Buying and Selling
  • Automatic Contributions

For more detailed information about ETFs, visit the Ontario Securities Commission website for consumers Get Smarter About Money.