Index Wealth Management

Exchange-traded funds (or ETFs) are units of a trust which holds a portfolio of securities that is designed to closely track the performance of a financial market index or sector. They are listed and trade on stock exchanges is the same way as shares of a publicly held company. The ETF structure allows for a diversified, low cost, low turnover index investment. The world's first ETF began trading on the Toronto Stock Exchange in 1990 and there are now hundreds of ETF units trading on major stock exchanges which track most major world equity, bond and real estate indexes.

THE CREATION AND REDEMPTION OF ETF UNITS

ETFs are created and redeemed through an "in-kind" transaction made by designated brokers and the ETF underwriters, not the individual unit-holders of the ETF. When a designated broker wants units of an ETF they assemble each security within the index that the ETF tracks (either buying from the market or gathering from their inventory) in the precise index weighting and then they deliver them to the underwriter. In exchange for the securities, the underwriter gives the designated broker units of the ETF. This process works in reverse for redemption.

BENEFITS OF EXCHANGED TRADED FUNDS

The management expense ratio of an ETF is generally much lower than that of a comparable mutual fund. There are also no redemption fees or deferred sales charges when an ETF is sold.

ETFs offer broad levels of portfolio diversification because they are comprised of all the securities that are included in a market index.

ETFs offer a high level of transparency which means that the holdings, structure, costs, distribution policy and daily trading volumes are known at all times.

ETFs are highly tax efficient since trading of securities held in the units only occurs when there are changes made to the underlying index that the ETF tracks. As a result, ETFs generally have a much lower turnover of securities in their portfolios compared to most actively managed mutual funds.

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