Exchange Traded Fund
An Exchange-Traded Fund (ETF) is a security that trades on a stock exchange and that, in sufficient quantity, is exchangeable with a defined basket of securities. An ETF often can be found that has a lower expense ratio than similar mutual funds. However, the number of ETFs available in the Canadian market is significantly lower than the total available in the much larger US market, so Canadian investors seeking certain categories or styles may find that no Canadian ETF is available.
Investors seeking to buy or sell positions in the less-traded ETFs may also find that there may be poor liquidity and/or large bid-ask spreads. Additionally, many of the sector ETFs contain only a small number of stocks. Purchasers are encouraged to check the data provided on the vendor's website carefully before making a decision.
The creation of the modern ETF has roots on Toronto Stock Exchange with a security called TIPS; short for Toronto 35 Index Participation Units. This investment product allowed investors to participate in the performance of the TSE 35 Composite Index without having to buy shares of each constituent company in the index. Toronto 35 Index Participation units (TIPs) were first listed on Toronto Stock Exchange in March 1990.
ETF shares are created when an “authorized participant” (typically a large institutional investor) deposits a daily “creation basket” (or cash) with the ETF and the ETF issues to the authorized participant a “creation unit,” a large block of ETF shares (generally 25,000 to 200,000 shares). The redemption process works in reserve, an authorized participant presents the specified number of ETF shares to the ETF in exchange for a “redemption basket” of securities, cash, or both, which typically mirrors the creation basket.
The creation and redemption of units helps to keep the trading price of the EFT near the net asset value (NAV) of the ETF holdings. Deviations between an ETF’s market price and its underlying value create opportunities for arbitrage for authorized participants. The ability of authorized participants to create and redeem ETF shares helps the ETF to trade at a price that approximates its underlying value.
There are a number of ETF providers in Canada. The ETF providers can be distinguished by the differences in the philosophy, style and underlying indices used for their offerings.
|BlackRock Canadian-based iShares||link|
|BMO Exchange Traded Funds||link|
|First Asset Exchange Traded Funds||link|
|Horizons Exchange Traded Funds||link|
|RBC Global Asset Management (GAM)||link|
|Vanguard Investments Canada Inc.||link|
|XTF Capital’s eXchange Traded Funds||link|
|Year||New ETFs||All ETFs||Closed ETFs||Assets ($ mil.)|
All of the 2012 ETF closures in Canada were from Horizons' ETF offerings. The common thread is poor trading volumes and assets under management of less that $5M each.
- Assets as of September 12, 2012.
New and Closed ETFs as of December 7, 2012.
Closed ETFs do not include ones slated to be shuttered.
- Wikipedia, Exchange Traded Fund, viewed Feb. 21, 2009.
- TMXmoney, Exchange Traded Funds - How ETFs are Created, viewed July 30, 2012.
- News Release | TMX Group - Toronto Stock Exchange celebrates 20 years of listing and trading Exchange Traded Funds, viewed July 30, 2012
- ETF Basics: The Creation and Redemption Process and Why It Matters, viewed September 15, 2012.
- ETF Providers in Canada, viewed December 15, 2011
- Record number of ETFs shutting down - The Globe and Mail, viewed September 13, 2012.
- The year of the ETF closure|Morningstar, viewed December 8, 2012.