What you need to know about ETFs

A recent survey by BMO Investments found Canadians are confused about exchange traded funds. Thank goodness for financial advisors who can help their clients make sense of these products.

But there’s a lot more to ETFs than their lower management costs. You need to know how its constructed, what its tax implications are, and keep on top of a wide array of broad and niche market offerings.

And then there’s the question of how to access ETFs if you are not IIROC licensed.

We’ve pulled together this handy resource guide which should help you answer not only your clients’ questions, but help you integrate ETFs into your practice.

The ETF outlook While the gap is starting to narrow between the $25-trillion mutual fund industry and the $1.5-trillion exchange-traded fund (ETF) market, global retail and institutional markets are still in early stages of adoption.

Adapting to changing needs ETFs are primarily associated with indexed or passive products, so the idea of combining them with active management seems as logical as U.S. Tea Party Republicans working with Democrats in Congress.

Active ETF: Not an oxymoron Active ETFs have only been on the market for six years, but that’s been enough time to cause a stir in the marketplace.

An in-depth look at commodities ETFs September 2011 brought back bad memories of Lehman Brothers’ bankruptcy. Against that backdrop, it may be premature to look positively on any asset class. And this is perhaps particularly true of commodities—especially oil.

ETFs fit the bill for fixed-income allocation Fixed-income ETFs hold significant potential for institutional investors, who are using them in increasingly sophisticated ways. The fixed-income ETF market includes diverse sectors that allow investors to enhance portfolio performance, mitigate risk and improve efficiency.

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Variety is the spice of the ETF world

• Too much of a good thing : With more than 200 ETFs in Canada, are these choices helping or harming investors?
• Finding your niche: Weighing the diversification benefits of micro-niche ETFs.
• Spice or spoiler: Are leveraged ETFs smart investments or fast ways to lose money?
• Look under the hood: Swap-based ETFs offer price and performance advantages—for a price.
• Abandoned briefcase at the airport: How dangerous are synthetic ETFs in Canada? No one knows.

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Tax

How to make accountants smile Low turnover and in-kind transfers have made ETFs popular with tax-conscious investors and their advisors. Choosing an ETF over a mutual fund generally provides immediate cost and tax savings, but there are additional ways to enhance after-tax returns using ETFs.

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Your Practice

Keeping ETFs, and clients, in-house Your client tells you he’s leaving to invest in exchange-traded funds on his own. What do you say?

Are MFDA advisors missing out on ETFs? The growth of ETFs has reinvigorated the debate over the merits of MFDA and IIROC licensing, and more specifically whether an MFDA-licensed advisor can adequately access the fast-growing sector.

ETF endgame Will ETFs continue to elude MFDA advisors?