What is an ETF? An Introduction to ETF Investing

Like stocks, exchange-traded funds (ETFs) are traded on exchanges around the world; however, unlike stocks ETFs contain a mix of stocks, commodities and bonds.

While most investors think ETFs got their start in America, they were actually first launched in Canada on March 9, 1990, and have since become a popular wealth management tool for investors worldwide.

The first ETF in the US was launched in 1993, and the country now holds the largest pool of ETF assets, accounting for some 71 percent. Canada comprises roughly 2.5 percent of ETF assets, while Europe holds the remaining 16 percent.

Currently there are approximately 7,500 different ETFs offered by 369 providers operating in 57 countries around the globe. The more than 7,000 ETFs are traded on 69 of the world’s stock exchanges, making them a versatile option to add to an investment portfolio.

Over the last decade, ETFs have become extremely popular for a number of reasons. Leading ETF expert Deborah Fuhr, co-founder and managing partner at ETFGI, explained at the 2018 Toronto MoneyShow why she believes ETFs have gained so much traction in the market.

Fuhr pointed towards the versatility offered by ETFs as the source of their popularity. As she noted, ETFs are essentially highly regulated mutual funds with the added benefit of being listed and traded in real time on stock exchanges. They are also low cost, transparent, customizable and give investors easy access to a wide array of asset classes and markets.

“They are the only financial product I know of where they’re actually used by pension funds, hedge funds, asset managers, financial advisors [and] buy and retail investors, and everyone has access to the exact same products at the same annual cost with a very small minimum investment size — that is highly unusual,” said Fuhr.

An additional benefit of ETFs is the varied ways they can be used. Among other things, they can be used in the short term to equitize cash, and can be used tactically to adapt to political and economic news.

One of the most widespread uses of ETFS is long-term strategic allocation. In fact, according to Fuhr, almost half of institutions hold their ETFs for more than two years, and more asset managers are turning to ETFs as well.

What is an ETF? ETF trends

One of the current trends in the ETF market is a focus on low-cost products, as opposed to high-cost items. The more affordable ETFs have been outperforming the costlier items on long-term horizons.

The proliferation of technology over the last two decades has also drastically changed the ETF space.

“When I was at Morgan Stanley (NYSE:MS), we actually helped to create what today is the iShares ETFs,” noted Fuhr. “We had a product in London and we wanted to make ETFs; in the early days those products were called WEBS (world equity benchmark shares).”

In 1999, before being rebranded as iShares, WEBS consisted of 21 ETFs comprising a US$8-billion market. Today 7,500 ETFS make up a US$7,505-trillion market.

A more recent trend in the ETF space is the emergence of cannabis ETFs, another area where Canada has been a key innovator. As more countries legalize and adapt to the changing attitudes around cannabis use, cannabis ETFs could offer real value and long-term growth potential.

What is an ETF? ETFs vs. hedge funds

Hedge funds have long be touted as a way to reap large gains with high risk, and are used by savvy investors and asset managers. Hedge funds have been around for more than six decades, making them a product investors are familiar with hearing about.

While ETFs are only three decades old, they have begun to outperform their riskier counterpart. Since 2015, the ETF industry has been larger than the hedge fund industry. Currently the ETF industry is US$1 trillion larger than the hedge fund sector, despite there being 1,000 more hedge funds.

“The reason is the average hedge funds are not beating and delivering that alpha [active return on investment]. On average they are performing below the S&P 500 (INDEXCBOE:.INX) in each of the past seven years,” says Fuhr.

What is an ETF? Why choose ETFs?

Aside from being low cost, low risk, transparent and versatile, ETFs are also known to closely echo investor sentiments, making them a good barometer for gauging market movement.

“ETFs can be a good way to help you pinpoint the exposure you want, but they’re also a good way just to invest in the market so they can be used in many different ways,” noted Fuhr.

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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.