investing
ETF investing basics
November 22, 2018

An ETF (Exchange-Traded Fund) is a type of investment product that owns and manages an underlying basket of assets (equities, bonds, commodities, derivatives, etc.) and divides the ownership of those assets into individual shares. When you buy shares of an ETF, you’re participating in the gains or losses of the underlying assets that are held within the ETF. If those assets overall increase in value, individual shares will typically rise as well, and investors will earn a profit. On the other hand, if the assets within the fund overall decrease in value, individual units will typically drop as well and investors will incur a loss.

Let's use an example:

Paul is looking to invest in the U.S financial sector as he’s confident that this sector will outperform the market, but he’s not interested in composing and managing his own portfolio of securities due to time and knowledge constraints. After reviewing his options, Paul decided to purchase shares in a professionally managed ETF that tracks the U.S financial sector. The ETF he selected consists of 70 stocks of different financial institutions operating in America. If after a couple of years, the overall value of the 70 shares owned within the ETF rises in value, his individual units will increase in value as well and he will earn a profit. However, on the other hand, if the U.S financial sector underperforms and the 70 underlying stocks held within the ETF overall decrease in value, his individual shares of the ETF will drop in value as well and he will incur a loss.

  • Common ETF types

    There are multiple types of ETFs in the market, some are constructed to track certain stock indexes, sectors, bonds, commodities, currencies, regions. Here are some of the common types:
    1. Index ETFs: majority of ETFs are index funds as they attempt to replicate a specific index of securities such as stocks, bonds, currencies, and commodities, etc
    2. Stock ETFs: the most actively traded ETFs are stock ETFs. Many of the stock ETFs track certain indexes or sectors
    3. Bond ETFs: is a type of ETF that exclusively invests in different kind bonds based on the funds objective
    4. Commodity ETFs: refers to funds that invest in commodities such as precious metals and agricultural products
    5. Currency ETFs: are constructed to track the performance of currencies
    6. Actively managed ETFs: most of the ETFs in the market today are passively managed as their task is to replicate a certain index or sector. However, with actively managed ETFs, the fund manager is able to make changes to the fund based on current market conditions.
    7. Inverse ETFs: are designed with the use of derivatives to earn profit from declining markets
    8. Leveraged ETF: use debt and derivatives to increase the performance of a certain index, sector or asset class

  • Questrade Trading

    To place an ETF trade on Questrade Trading:
    1. Log in to Questrade Trading
    2. In the top right corner, click Buy/Sell to open the order entry tab
    3. Enter the symbol or name of the ETF you’re looking to trade
    4. Enter the details of your trade (See explanation below)
    5. Click Buy or Sell
    6. Depending on your order entry preferences, an order confirmation window will appear
    7. Review your order and when you’re ready click Send Order
     
    User-added image
     
    Breakdown of the order entry tab:
    ColumnDescription
    SymbolLookup the symbol or the name of the company you would like to trade and tap the Circular arrow to get quotes in real-time (applies to certain exchanges only)
    Quantity Enter the number of shares you want to trade
    Order typeSelect the type of order you want to use. To learn more about the different order types, click here
    DurationSelect a duration to specify how long the order should remain active. For more information om durations, click here

  • IQ Edge

    To place an ETF trade on IQ Edge:
    1. Log in to IQ Edge
    2. In the left corner, click Order entry to place an order
    3. Enter the symbol or name of the ETF you're looking to trade
    4. Enter the details of your trade (See explanation below)
    5. Click Buy or Sell
    6. Depending on your order entry preferences, an order confirmation window may appear
    7. Review your order and when you’re ready click Send Order
     
    User-added image

    Breakdown of the order entry tab:
    ColumnDescription
    SymbolLookup the symbol or the name of the company you would like to trade and tap the Circular arrow to get quotes in real-time (applies to certain exchanges only)
    Quantity Enter the number of shares you want to trade
    Order typeSelect the type of order you want to use. To learn more about the different order types, click here
    DurationSelect a duration to specify how long the order should remain active. For more information om durations, click here

  • Important to know

    Here are some important things to know about ETFs:
    • Unlike mutual funds, ETFs trade on a stock exchange, much like a regular stock and its management fees are typically much lower than those of a comparable mutual fund
    • ETFs can be bought on margin
    • Investors can short ETFs
    • ETFs are known for their lower management fees in comparison to mutual funds
    • ETFs are free to buy with Questrade

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