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Image of title: Busting ETF myths



Still not sure about ETFs?

Those doubts may be rooted in some common ETF myths.

Let’s take a look at what these misperceptions are and how to dispel them.

Myth #1: ETFs are strictly passive investments.

Going back about 25 years, ETFs first began as passive funds that tracked commercial benchmarks. And, until recent years, they had traditionally remained strictly passive. So the rap on passive ETFs was that they were inherently designed to underperform the market after fees.

However, the prominence of passive ETFs has substantially declined as the ETF industry has expanded. Today, more than half the number of ETFs available implement a strategic beta (rules-based) or fully active strategy. Manulife ETFs, which benefit from a strategic beta approach backed by the esteemed research of Dimensional Fund Advisors, focus on factors that offer the potential for outperformance.

ETFs today can encompass different styles of management

Image illustrates how strategic beta benefits emerge from the divergence of passive and active strategies



Did you know?


More than half the number of ETFs available today implement a strategic beta (rules-based) or fully active strategy.

Source: Investor Economics, 4Q 2017 ETF and Index Funds Report Canada

Myth #2: ETFs are complicated

Simply described, an ETF is a mutual fund that trades on an exchange. Its complexity is much the same as a mutual fund. Similar to a mutual fund, the risk of an ETF is determined by its holdings. An ETF and a mutual fund that hold the same portfolio would have the same degree of risk. However, ETFs do feature certain efficiencies – typically having lower operating costs and increased tax efficiency – by virtue of being exchange traded.

Here are some of the differences that you typically see between ETFs and Mutual funds :

ETFs

 

Mutual funds

Lower expense ratios
Daily transparency of holdings
Trade intraday on an exchange
Underlying portfolio changes less frequently

 

Higher expense ratios
Monthly or quarterly transparency of holdings (in arrears)
Trade at market close at NAV
Underlying portfolio can change often

Myth #3: ETFs are trading strategies, not core strategies.

ETFs trade on an exchange. So similar to stocks, one of the benefits of ETFs is their intraday liquidity. However, just because you can trade an ETF regularly, doesn’t mean that you should.

The majority of today’s ETFs are intended to be longer-term strategies. Many are diversified and provide broad market exposure. While they certainly can be used for short-term exposure, ETFs can be an effective way to seek long-term growth potential, particularly when you consider the compounded benefit of lower fees.

Myth #4: The trading volume of an ETF is equal to its liquidity.

Unlike a stock, the true liquidity of an ETF is actually related to the underlying securities in the portfolio, not the number of units or volume of the specific ETF. While it may not be reflected in the secondary market volume on the exchange, if two ETFs were to invest in the same portfolio, the ETF that traded 1,000 units would have the same liquidity as the ETF that traded 100,000 units.

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