Exchange traded funds (ETFs) are a pool of investments sold as a single product. Remember those cheesy christmas basket, filled with the standard jam jars and hot chocolate mix, your parents might have received? Those that sent it probably did not want to waste time shopping, so they bought those. ETFs are very similar to those basket, except they mainly contain securities, such as stocks and bonds, and that they actually are a good alternative to shopping around. ETFs are also similar to mutual funds, although, they tend to come with cheaper management fees. The main difference between those two kind of funds is that exchange traded funds are traded on a stock exchange (their name is very clear about that!) and mutual funds are bought as products, usually from a Mutual Fund Dealer or a stock broker.
Most ETF’s are also passively managed, which simply means they try to match the movements of the stock market or any sub-sectors. And it’s a good thing, because having a passive style of investing is what allow ETFs’ fees to be so low compared to those of actively managed mutual funds. Many ETFs are designed to generate returns similar to indexes, such as the S&P/TSX 60 Index, which is comprised of the 60 largest companies listed on the Toronto Stock Exchange. Those ETFs can also be called index funds. While both term are often used interchangeably, not all ETFs are actually index funds and some mutual funds are also index funds.
Synonyms: ETFGo back to the encyclopedia index