{"id":7027,"date":"2022-06-09T12:56:54","date_gmt":"2022-06-09T19:56:54","guid":{"rendered":"https:\/\/www.nerdwallet.com\/ca\/?page_id=7027"},"modified":"2025-02-18T12:16:58","modified_gmt":"2025-02-18T20:16:58","slug":"what-is-an-etf-in-investing","status":"publish","type":"page","link":"https:\/\/www.nerdwallet.com\/ca\/investing\/what-is-an-etf-in-investing","title":{"rendered":"What is an ETF (Exchange Traded Fund)?"},"content":{"rendered":"\n

Exchange-traded funds, or ETFs, are a type of investment that has increased in popularity in recent years. Not only do ETFs allow you to own a variety of investments such as stocks and bonds, but they typically have low management fees.<\/p>\n\n\n\n

Benefits of investing in EFTs include portfolio diversification, convenience and a flexible management style, but understanding how ETFs work and how they fit into your portfolio is paramount before you purchase them.<\/p>\n\n\n\n

What is an ETF?<\/h2>\n\n\n\n

ETFs are investment funds that allow you to purchase a \u201cbasket\u201d of products such as stocks<\/a>, bonds and guaranteed investment certificates (GICs). They\u2019re similar to mutual funds, but there are a few key differences.<\/p>\n\n\n\n

With mutual funds<\/a>, portfolio managers use a strategy known as active management, in which they actively trade stocks in and out of the fund in an attempt to maximize gains.<\/p>\n\n\n\n

In contrast, most ETFs use a passive management approach. Algorithms handle the trading, and the goal of most ETFs is to simply track an index or sector.<\/p>\n\n\n\n

Since ETFs don’t have human managers, their overhead costs are significantly lower than those of mutual funds. Those savings are passed on to investors in the form of a lower management expense ratio, or MER.<\/p>\n\n\n\n

How ETFs work<\/h2>\n\n\n\n

With ETF investing, fund providers such as Vanguard, iShares and the Bank of Montreal own the underlying assets<\/a>.<\/p>\n\n\n\n

As an investor, you buy into the ETF portfolio. Your share of the ETF gives you access to dozens or even hundreds of stocks and bonds, though you don\u2019t own each one individually.<\/p>\n\n\n\n

ETFs are appealing, especially to beginner investors<\/a>, since they allow you to own a diversified portfolio with a single investment product. Most ETFs are designed to track a specific sector or index, such as the S&P 500 or TSX Composite Index.<\/p>\n\n\n\n

Some ETFs pay out any dividends or interest from individually held investment products. ETF dividends are typically paid quarterly. ETF owners can take the dividends in cash, or ask their brokerage or advisor to automatically reinvest them.<\/p>\n\n\n\n

Types of ETFs<\/h3>\n\n\n\n

If you\u2019re interested in ETF investing, you\u2019ll want to become familiar with the different types of ETFs available, including:<\/p>\n\n\n\n