Exchange-traded fund

An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value (NAV) over the course of the trading day. Most ETFs track an index, such as a stock index or bond index. ETFs may be attractive as investments because of their low costs and tax efficiency.

An ETF combines the valuation feature of a mutual fund or unit investment trust, which can be bought or sold at the end of each trading day for its net asset value, with the tradability feature of a closed-end fund, which trades throughout the trading day at prices that may be more or less than its net asset value. Closed-end funds are not considered to be "ETFs", even though they are funds and are traded on an exchange.

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 actively 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.

Towards the end of 2020, ETF providers in Canada were managing $250 billion in assets.

ETF providers
As of late 2020, there are 39 ETF providers in Canada.

The ETF providers can be distinguished by the differences in the philosophy, style and underlying indices used for their offerings. The following table lists the top-five providers by assets under management:

TMXMoney maintains a list of all Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs) that are publicly traded, sorted alphabetically by symbol and a glossary of ETF terms.

Selecting plain-vanilla ETFs
ETFs are excellent building blocks for simple index portfolios or more complex passively managed portfolios. But with over 800 ETFs now listed on the TSX (see the table above) and thousands more on US exchanges, how does an index investor choose the right ETF for each asset class? Most index investors will opt for ETFs that follow the broadest possible indices using market capitalisation weights; these are also known as “plain-vanilla” ETFs. Examples of those are listed under Canadian equities, US equities, International equities and emerging markets. For plain-vanilla Canadian bond ETFs see conventional bonds.

Additional criteria listed by Investopedia are :
 * assets under management at least $10 million (to make sure the ETF will still exist next year)
 * good liquidity and low bid-ask spreads (see also and )
 * minimal tracking error (see also and )

Another aspect to examine, especially for global stocks, is whether the ETF holds stocks directly, instead of holding shares of a US-listed ETF, as this can have tax consequences (see Tax-efficient investing). Currency hedging may or may not be desirable feature (see US equities and Foreign bonds for example).

If two ETFs under consideration are traded on the same exchange and fit the criteria above, then the one with the smaller management fee can be picked, although differences of a few basis points are totally insignificant compared to, say, picking the appropriate asset allocation or asset location (see ).

Canadian vs US-listed ETFs
ETFs covering Canadian asset classes will typically be purchased on Canadian exchanges. But ETFs covering asset classes such as foreign stocks, foreign bonds or gold can be bought either on the TSX or on US exchanges.

ETFs listed in Canada have the following advantages:
 * A wide range of products is now available
 * You buy them with Canadian dollars (CAD), avoiding currency conversion costs (some funds are also available in US dollar versions if the investor already has USD available)
 * Some ETFs are hedged to CAD, which can be a desirable feature, especially for foreign bonds (see Currency hedging)
 * ETFs listed in Canada do not increase your potential US estate tax exposure (see Death and taxes: US estate tax exposure), even for ETFs covering US, international developed or emerging market stocks
 * All-in-one asset allocation ETFs customized for Canadian investors are available

US-listed ETFs have the following advantages:
 * They can provide an even wider selection of products, although those only available on US exchanges now tend to be niche offerings
 * They may have lower MERs
 * They are sometimes more tax-efficient, in some accounts, although this is a complex issue

If the investor buys US-listed ETFs with Canadian dollars, there will be currency conversion fees which can be high at some brokerages. Norbert's Gambit is one available option that can be utilized to minimize the currency conversion costs when buying or selling US-listed ETFs. Where possible, using a discount brokerage sub-account that matches the currency of the ETF helps to minimize currency conversion costs when distributions are received.

Asset allocation ETFs
An alternative to selecting one ETF per asset class is to buy a single asset allocation ETF. These are complete portfolios with low fees and global diversification. Different stock/bond splits are available.

ETF trading tips
Long-term investors can use the following tips when buying or selling ETFs in their discount brokerage account:
 * Place orders only within market hours (typically 9.30 A.M.-4.00 P.M. Eastern Time in Toronto and New York), not before or after
 * Furthermore, avoid trading during the first and last 30 mins of the session (during which markets are the most volatile and spreads can be higher)
 * Use limit orders

ETF history
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.

Market price versus NAV
Unlike mutual funds which are priced at the close at their net asset value (NAV), the price of an ETF is determined by the market and the bid and ask prices. ETFs often trade and have a closing price at a slight premium or discount to their underlying NAV. Theoretically this price difference should be arbitraged away by the authorized participants as explained below.

Creation and redemption of ETF shares
Only authorized participants, which are large broker-dealers that have entered into agreements with the ETF's distributor, actually buy or sell shares of an ETF directly from or to the ETF, and then only in creation units, which are large blocks of tens of thousands of ETF shares, usually exchanged in-kind with baskets of the underlying securities. Authorized participants may wish to invest in the ETF shares for the long-term, but they usually act as market makers on the open market, using their ability to exchange creation units with their underlying securities to provide liquidity of the ETF shares and help ensure that their intraday market price approximates the net asset value of the underlying assets. Other investors, such as individuals using a discount broker, trade ETF shares on the secondary market.

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 reverse, 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 ETF 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.

ETF trends
The following tables show the growth of ETFs in the Canadian market and the US market (for comparison purposes).
 * Sources: Morningstar Inc. and Canadian ETF Association (CETFA)

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.