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Top 3 ETF Myths

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While exchange exchange traded funds (ETFs) have enjoyed increasing popularity over the last decade, there are still a number of widely held misconceptions about this type of investment.

1 “ETFs only offer broad-market exposure”

Many ETFs offer broad-market exposure by tracking a broad market index, such as the S&P 500 Index. These broad-market ETFs were one of the first types of ETF created and still represent the majority of ETF assets. However, over the last decade, the ETF landscape has greatly evolved to include a much broader choice of ETFs, including:

  • ETFs that focus on specific asset classes (i.e., small-capital equities, high-yield bonds), sectors (i.e., real estate, energy) or geographies (i.e., emerging markets, Europe).
  • ETFs using specific factors or rules to select and weight securities, including value, growth, dividend income and volatility.
  • Actively managed ETFs where an investment team makes ongoing decisions regarding portfolio construction. These can be focused on a variety of markets and sectors and markets and deliver investment returns that do not track an index

2 “ETFs trade exactly like stocks”

ETFs and stocks are alike in that they both trade on an exchange, but they differ in some key areas.​​​​​​​

Pricing

Stock prices are driven by supply and demand between investors in the marketplace. If a particular stock is popular in the market (i.e., there are more buyers than sellers), its price rises to reflect this demand.

An ETF’s trading price is based on the value of the securities held in its portfolio. Market makers calculate an ETF’s net asset value throughout the day to determine fair bid and ask prices for the fund.

Liquidity

Stocks have a set number of shares available in the marketplace. Stock liquidity largely reflects the average volume of shares trading on the market and how easily those shares can be bought and sold without affecting their price.

ETF liquidity has several components – the volume of units traded between investors on an exchange, the liquidity provided by market makers through the units they hold in their inventory and the creation/redemption process that is unique to ETFs.

ETFs are open-ended, which means that units can be created or redeemed based on investor demand. This process is managed by market makers. How easily the market maker can deliver or sell the basket of securities that make up the ETF depends on the liquidity of individual securities in the ETF portfolio. So, even though an ETF might have low trading volume, it is still possible for investors to buy or sell a large number of units without moving the price. ​​​​​​​

3 “ETFs are all low cost”

There is a common misconception that all ETFs are low cost and passive investment vehicles. However, around 60% of Canadian-listed ETFs are not passive (i.e., smart beta, rule-based or active). With over 650 ETFs (and counting) now available in Canada, there are many different cost structures that correspond with different investment strategies. ETF management fees range from just a few basis points to almost one percentage point per year, depending on their complexity. Investors have to determine which ETFs represent the best value – the right fit for the right cost – to help them achieve their investment goals.

While cost is a factor in deciding which ETFs are the right fit for your portfolio, it should not be the only factor. In addition to costs, investors should consider other factors, such as how the ETF meets their investment objectives (i.e., income, diversification, long-term or short-term strategy) and risk tolerance.

To learn more about ETFs, speak with your financial advisor.

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RBC Global Asset Management Inc. is Canada's largest fund company by assets under management (IFIC, as of August 31, 2017). Commissions, management fees and expenses all may be associated with investments in exchange-traded funds (ETFs). Please read the prospectus or Fund Facts document before investing. ETFs are not guaranteed, their values change frequently and past performance may not be repeated. ETF units are bought and sold at market price on a stock exchange and brokerage commissions will reduce returns. RBC ETFs do not seek to return any predetermined amount at maturity. Index returns do not represent RBC ETF returns. RBC ETFs are managed by RBC Global Asset Management Inc., an indirect wholly-owned subsidiary of Royal Bank of Canada. The indicated rates of return are the historical total returns for the periods including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, commission charges or income taxes payable by any unitholder that would have reduced returns.

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This information has been provided by RBC Global Asset Management Inc. (RBC GAM) and is for informational purposes only. It is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon for providing such advice. The information contained herein is from sources believed to be reliable, but accuracy cannot be guaranteed. Commissions, management fees and expenses all may be associated with investments in exchange-traded funds (ETF). Please read the prospectus or Fund Facts document before investing. ETFs are not guaranteed, their values change frequently and past performance may not be repeated. ETF units are bought and sold at market price on a stock exchange and brokerage commissions will reduce returns. RBC ETFs do not seek to return any predetermined amount at maturity. Index returns do not represent RBC ETF returns. RBC ETFs are managed by RBC Global Asset Management Inc., an indirect wholly-owned subsidiary of Royal Bank of Canada.

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