Exchange Traded Funds (ETFs)

1. Exchange Traded Funds (ETFs) Financial Securities (IDC4U1) Mr. M. Goldberg, Martingrove C.I., 2010

2. Table of Contents Index ETF Advantages of ETFs Disadvantages of ETFs How Do I Make an ETF Investment? Couch Potato – A Simple ETF Strategy

3. 1. Index • What’s an Index? • A benchmark or yardstick that lets you measure the performance of a stock market, part of a stock market or a single investment. • Examples: S&P/TSX, S&P/TSX Canadian Bond Index. • (Source: Investor Education Fund Glossary) • Note that index numbers are based on the number 100.0, a starting or “benchmark” number, based on an original year • Charles Dow created the first index, the Dow Jones Industrial Average in 1896, which tracks the New York Stock Exchange • Today there are thousands of indices!

4. 2. ETF • Exchange Traded Fund definition: • A fund that chooses investments based on a market index or sector. ETFs trade on a stock exchange. They are not actively managed, so costs tend to be lower than regular mutual funds. • (Source: Investor Education Fund Glossary) • ETFs often follow one particular index. • Example: The iShares “LargeCap 60 Index Fund” follows the S&P/TSX 60 index (basically the 60 top companies, by market capitalization on the TSX) trading on the TSX with the stock symbol XIU

5. 3. Advantages of ETFs • Trade on a stock exchange – ease of purchase • You don’t have to beat the index, you’re buying the index (eg. S&P/TSX 60) • Low cost - MERs, management expense ratios, are usually under 0.8% for ETFs. Mutual Fund MERs are usually between 2.0%-3.0% to compare. • Diversification – lots of choice • Stocks, bonds, commodities, international, industrial sectors, etc. • Canadian content – you can get global exposure purchasing Canadian funds • Don’t have to worry about a fund manager (who may leave the fund eventually)

6. 4. Disadvantages of ETFs • Trade on a stock exchange • You have to pay trading fees every time you buy and sell • You have to purchase board lots (ie. Minimum of 100 shares) • High start-up cost – (mutual funds can start with as little as $100.00) • Diversification – maybe too much choice!

7. 5. How Do I Make An ETF Investment? • You need an account with a broker (eg. iTrade, Questtrade, major bank, etc.) • Brokers usually need $1000.00 as an initial investment • You need to be 18 • Once you’ve satisfied the above, you would buy and sell ETFs like a stock

8. 6. Couch Potato – A Simple ETF Strategy • Developed and promoted by MoneySense magazine • Pick a few ETFs and target asset mix • Diversify according to your asset mix, and personal tastes. • Couch Potato Examples • “Classic” • 33.3% Canadian Equity • 33.3% American Equity • 33.3% Candian Bond • “Global” • 20% Canadian Equity • 20% American Equity • 20% European/Asian Equity • 40% Canadian Bond • See MoneySense’s Buyer’s Guide to ETFs for more examples

9. Works Cited • Bortolotti, Dan, “The Complete Couch Potato Roadmap”, MoneySense (November 2009), http://www.moneysense.ca/2009/12/17/the-complete-couch-potato-roadmap/, February 16, 2010 • Gerlsbeck, Rob, “Buyer’s guide to ETFs”, MoneySense (November 2009), http://www.moneysense.ca/2009/11/01/ready-to-build-your-own-portfolio/ • http://www.getsmarteraboutmoney.ca/tools_and_calculators/glossary/definition/Pages/index.aspx, February 2, 2010 • http://www.getsmarteraboutmoney.ca/tools_and_calculators/glossary/definition/Pages/exchange-traded-fund-etf.aspx, February 16, 2010 • http://ca.finance.yahoo.com/etf/glossary, February 16, 2010 • http://ca.finance.yahoo.com/etf/education/02, February 16, 2010 • http://ca.finance.yahoo.com/etf/education, February 16, 2010 • http://ca.ishares.com/product_info/fund_overview.do?ticker=XIU, February 16, 2010 • I created the artwork with “Wordle,” an application on wordle.net. (February 16, 2010)