What is an ETF?

An ETF is a fund that holds a group of investments, such as stocks, bonds, or both. ETFs are created and managed by professional investment management companies.

When you buy an ETF, you’re buying a share of that fund rather than purchasing each investment individually. Some ETFs hold hundreds — or even thousands — of investments within a single fund.

ETFs can focus on many different parts of the market. Some provide broad exposure to Canadian, U.S., or global markets, while others focus on specific sectors, regions, investment strategies or asset classes.

Some ETFs are passively managed, meaning they aim to follow an index and match its performance. Others are actively managed, where professional managers choose investments in an effort to outperform an index. 

ETFs trade on stock exchanges throughout the day, just like individual stocks. This means their prices can change as markets move.

ETFs have become popular because they can make it easy to build a diversified portfolio. 

Some of the main advantages include: 

• Diversification: A single ETF can provide exposure to many investments at once. 
• Convenience: You can build a portfolio without researching and managing dozens of individual stocks or bonds. 
• Lower costs: Many passively managed ETFs have relatively low management fees, although actively managed ETFs may have higher fees. 
• Flexibility: ETFs trade like stocks and can be bought and sold throughout the trading day. 

For many investors, ETFs can serve as a starting point for building a long-term portfolio. 

Not all ETFs work the same way. The types of ETFs can be categorized by the investments they hold, their investment strategy, or their management style — active vs. passive.  

Examples include: 

• Broad market ETFs: Track large groups of stocks, such as Canadian, U.S., or global markets. 
• Bond ETFs: Invest in different types of bonds, including government and corporate bonds. 
• Sector ETFs: Focus on industries such as technology, energy or financials. 
• Asset allocation ETFs: Combine stocks and bonds within a single ETF to create a diversified portfolio.

While ETFs can help simplify investing, they still involve risk, as with all investments. 

The value of an ETF can rise and fall depending on the investments it holds and overall market conditions. 

It’s also important to understand that not all ETFs provide the same level of diversification. Some hold hundreds of investments, while others may focus on a narrow sector, theme or strategy. 

Fees, trading costs, and performance can also vary between ETFs.