A New Alternative – Exchange Traded Funds. (ETF)

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Image source: theinvestblog.com

BY: FAZAAD BACCHUS

Times are changing. The world is changing. The way we do things is also changing.

Once in 2001, I was driving to Orlando with some business colleagues, so we set out our course by studying the map we bought. We plotted our course from Miami airport to the hotel in Orlando and started our journey. Needless to say, we got lost many times along the way even within the first ten minutes of driving. Stopped at a gas station, got our bearings and quickly got lost again. A typical four-hour drive took us more than six hours to get there. When we arrived at the hotel we were tired and fatigued.

On our way back to Miami I thought of checking out the GPS system they gave us, which until that time never came out the glove compartment! I programmed it, started following the instructions and the rest is history. Today very few people if any, plot their trip using a map, no way, it’s a GPS that leads the way. At first, we were all skeptical of using it, just in case it takes us straight into the ocean or off the track altogether. But as the years have gone by, we have come to trust it more and more, it gives an exact time of arrival, tells you of traffic issues, provides alternative routes. Today you wouldn’t leave home without it.

Over the last twenty years or so, clients have invested typically using a financial advisor either at the bank or investment firm. This process involves a risk analysis and some form of goal setting before the desired investment is purchased. But the world is changing, and younger more computer savvy clients are looking for alternatives. They are looking to do their own investing with the expectation that they will make a better return by paying lower fees. ETF’s are becoming more and more popular like the GPS system and while I will not bore you with the technical details of one, it is important to have some idea of what it is.

A stock exchange trades in stocks of varying companies. There, an investor can buy the stocks of any publicly traded company on the stock exchange albeit through a trading platform. An Exchange Traded Fund trades like a common stock, it is a fund which owns underlying assets such as oil futures, foreign currency, and stocks of other companies. However, the main component is that it tracks an index and moves accordingly to the index, up or down. These price changes happen frequently and at any time during the day, quite unlike a mutual fund where the net asset value is determined at the close of the day. So, it’s much easier to trade and you can quickly realize a profit or a loss.

ETF’s are created by very large players in the market, TD being the first to develop this security. However, it was probably too early in the game and it didn’t gain rapid acceptance. Subsequently, BMO launched their own ETF’s and it’s becoming quite a hit with younger clients, mainly because of the lower fees associated with investing. It is passive investing as it tracks the index like the TSX etc, however, if you would like to do better than the index, which is quite possible, find an advisor who can guide you.

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