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Evolution of ETFs (Exchange Traded Funds)

Date: 11/15/17

Category: Investing

ETFs or Exchange Traded Funds have increased in popularity exponentially since their inception in the 90s. The ETF sector in Canada has seen a major boom in recent years with ETF manufacturers creating products in three main categories: passive index tracking ETFs, actively managed ETFs, and hybrid ETFs.


In a Globe and Mail article dated November 14, 2017 Praetorian Wealth Advisory’s principal investment advisor, Fabio Campanella CPA, CA, CFP, CIM contributed his expert insights into the development of the ETF industry’s expanding offerings and how individual investors can benefit from these developments. Specifically, he provided insights into the following:


First: passive, indexed ETFs. When investors think of ETFs they typically envision the traditional passive, low-cost, indexed ETFs. By far, these are the most popular types of ETFs. Essentially these ETFs are liquid funds that trade on a stock exchange and simply track large, well-established stock and fixed income indexes such as the S&P TSX 60. These ETSs allow individual investors the opportunity to purchase large baskets of securities for a low cost and a low level of investment. They are an excellent and lower-risk way to build a cost-efficient core portfolio


Second: actively managed ETFs. Think a traditional mutual fund. You place your money into the fund and an active portfolio manager makes buy, sell, and hold decisions based on his or her perceptions of the market. Actively managed ETFs are very similar to traditional mutual funds in that they are managed by teams of individuals and do not simply track indexes. These funds typically feature strategies that are far different from traditional ETFs and more often than not feature Management Expense Ratios (MERs) that rival traditional mutual funds.


Third: hybrid (or sometimes called “smart-beta”) ETFs. Hybrid ETFs are balance between passive indexed ETFs and actively managed ETFs. Often, hybrid ETFs are managed based on a specific rule-set and security selection criteria will follow a set algorithm. For example, you may purchase an ETF that specifically selects for stocks that pay a dividend at or above a specific ratio combined with companies that feature specific profitability etc. Fees for such funds generally fall between active and passive ETFs.


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Praetorian Wealth Advisory is a full-service wealth management team with offices in Toronto ON and Oakville ON. The team provides non-discretionary investment management services to families with investable assets of $250,000 or higher along with retirement planning, financial planning, tax planning, and estate planning services most often on a fee-for-service basis.


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