What is an ETF: Separating Myths from Reality

2 min read

Exchange-traded funds (ETFs) were first introduced to Canadian investors nearly 30 years ago, with traditional ETFs being passively managed, simply mirroring a particular index.

The ETF market has matured since then, offering a wide variety of options from active to passive and covering all asset classes from equity to fixed income, alternatives and portfolio solutions.

Yet, despite the growth of ETFs, they continue to be a misunderstood investment.

Here we dispel the top four myths we’ve encountered:

Myth #1 – All ETFs passively track an index

Fact: As of June 2018, 222 of the 612 ETFs offered on the Canadian market were actively managed – only 24 fewer funds than the passive, market cap-weighted index category.*

Active ETFs also ended Q2 of this year with a three-year compound annual growth rate (CAGR) of 43%. That’s brought its share of assets under management to $31 billion or 19.8% of total ETF assets (see chart).

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*Source: Strategic Insights, ETF and Index Funds Report, Canada Q2. 2018.

Myth #2 – ETFs are just for traders and not long-term investing

Fact: As the spectrum of ETFs available has evolved, so have the reasons investors are choosing them. ETFs deliver the benefits of trading like individual stocks but many ETF investors will buy-and-hold ETFs for the long-term as core holdings in a portfolio or as a satellite (tactical allocation) holding in a portfolio to complete desired asset allocation.

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Source: Greenwich Associates 2017 Cdn ETF Study.

Myth #3 – The average daily traded volume of an ETF exclusively determines its liquidity

Fact: The true liquidity of an ETF is measured by the liquidity of its underlying securities and allows for significant trade orders without having an impact on price of the ETF itself.

ETFs have three layers of liquidity:

  1. Primary markets creation & redemption process
  2. Continuous price discovery by market makers
  3. Secondary market buyers and sellers
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Myth #4 – ETFs are not for income investors since they don’t pay dividends

Fact: Many ETFs do distribute income to investors. Considering that an ETF holds a diversified basket of the individual stocks or bonds, its behaviour will follow that of its underlying holdings including the dividend or coupon payments.

ETFs have the ability to generate and distribute:

  1. Income (Dividend + Interest)
  2. Capital Gains (Primarily when a rebalance occurs)
  3. ROC (Fixed Payer ETFs)
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* At Q2 2018. Source: Strategic Insights, ETF and Index Funds Report, Canada. Q2, 2018.

To find out more, contact your financial advisor or visit AGF.com/ETF on AGF.com.

 

AGF ETFs are ETFs offered by AGF Investments Inc. ETFs are listed and traded on organized Canadian exchanges and may only be bought and sold through licensed dealers.
The information contained in this article is based on material believed to be reliable and is provided as a general source of information, based on information available as of October 16, 2018 and should not be considered any personal investment or tax advice. Every effort has been made to ensure accuracy at the time of publication, however AGF Management Ltd. and its affiliates cannot guarantee 100% accuracy of this information, and is not responsible for the development and creation of this material. It is important for investors to consult with their financial and tax advisors before making any investment or tax planning decisions. 
The commentaries contained herein are provided as a general source of information and should not be considered personal investment or tax advice. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change investment decisions arising from the use or reliance on the information contained here.

The contents of this Web site are provided for informational and educational purposes, and are not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting or tax. Please consult with your own professional advisor on your particular circumstances.

AGF Management Limited (“AGF”), a Canadian reporting issuer, is an independent firm composed of wholly owned globally diverse asset management firms. AGF’s investment management subsidiaries include AGF Investments Inc. (“AGFI”), AGF Investments America Inc. (“AGFA”), Highstreet Asset Management Inc. (“Highstreet”), AGF Investments LLC (formerly FFCM LLC) (“AGFUS”), AGF International Advisors Company Limited (“AGFIA”), Doherty & Associates Ltd. (“Doherty”) and Cypress Capital Management Ltd. (“CCM”). AGFI, Highstreet, Doherty and Cypress are registered as portfolio managers across various Canadian securities commissions, in addition to other Canadian registrations. AGFA and AGFUS are U.S. registered investment advisers. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF investment management subsidiaries manage a variety of mandates composed of equity, fixed income and balanced assets.

® The “AGF” logo and “Sound Choices” are registered trademarks of AGF Management Limited and used under licence.
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November 8, 2018 
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