CA-EN Advisors

ETF Investing Basics

Using exchange traded funds as an investing tool

ETF Tools and Resources

Use this section to easily identify the right products.

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ETF Dashboard

Your leading source for ETF industry trends and insights.

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ETF Investing Strategies

Strategies to help you efficiently implement your investment views and maximize portfolio performance.

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Efficient Exposure

Investors get access to both core ETFs that track broad indices such as the S&P 500 and more focused ETFs that track market sectors and industries.

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Liquidity

ETFs provide intraday liquidity through buying and selling during the trading hours of the stock exchange.

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Diversification

ETFs offer potentially lower risk than individual securities.

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Portfolio Transparency

Investors have access to the price of an ETF and the portfolio composition at any time during regular market trading hours.

Cost Effective

Generally management fees for ETFs are lower than many other investment solutions. This means more of your money is working for you over the long term.

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Tax Efficient

ETFs provide the potential for relatively lower capital gains tax liabilities than other investment products.

How they work?

ETFs can be bought and sold at any point throughout the trading day through your advisor or trading platform.

Market Tracking

The purpose of an indexed ETF is to track as closely as possible the return of a specific market benchmark or index. Deviation from the benchmark return, known as a tracking error, can occur for several reasons:

  • Trading Costs. However, since the underwriters deliver, or take possession of, the underlying securities during subscriptions and redemptions, ETFs lessen the need for the Fund Manager to trade securities on the exchange. Therefore, trading and commission costs are kept to a minimum.
  • Cash drag is the result of an un-invested portion of a portfolio’s net assets. ETFs will seek to minimize cash drag by reinvesting the proceeds or providing income distributions to investors

Understanding Liquidity and Building Equity

The liquidity of an individual security is directly related to the traded volume of that security, the same correlation however does not apply to ETFs.

Instead, the liquidity of an ETF is best measured by the underlying securities which it holds. If the individual securities that compose the ETF have a high traded volume, and are therefore very liquid, then the ETF that holds them will have the same degree of liquidity. Similarly, if the underlying securities of the ETF have a low traded volume, or are illiquid, the ETF will have a low degree of liquidity as well. BMO ETFs have been constructed to have liquid portfolios by establishing traded volume requirements for each security held within the portfolios.

How does the ETF liquidity mechanism work?

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First level of liquidity – On the exchange

The interaction between buyers and sellers creates the first level of liquidity for an ETF. This natural liquidity is established when a sell order from an existing unit holder is matched with a buy order from a purchaser on the exchange. Popular and established ETFs with high transaction volumes can develop even greater liquidity than their underlying holdings.

Second level of liquidity – Market maker activity

Market makers are responsible for posting bid and ask offers on the exchange. This enhances liquidity and allows a buyer or seller to transact with minimal trading costs. Market Makers continually post units at a price which reflects the spread of the underlying portfolio.

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Third level of liquidity – Unit creation based on underlying securities

Market makers can offset an increase in demand by creating more units. On the other hand, when the demand for the units decreases, the market maker redeems units to tighten supply. When a large buy order occurs, the market maker will buy the basket of securities and initiate a creation order with the ETF provider.
When evaluating ETFs, the underlying liquidity is what matters. The true liquidity of an ETF is best measured by the liquidity of its underlying securities and allows for significant trade orders without having an impact on the price of the ETF itself.

ETF FAQs

Included below are the answers to most of the commonly asked questions on BMO ETFs. If you have an additional question or comment, please contact us.

Individual investors and financial advisors can contact our client services department at 1-800-361-1392 or [email protected].

Financial advisors can also contact their BMO Mutual Funds wholesaler.

ETFs

What are the ETFs?
What are the benefits of investing in ETFs?

Trading ETFs

How do I buy ETFs?
How is the price of an ETF determined?
When placing a trade for an ETF, should I place a Market Order or Limit Order?
What determines the Bid and Ask of an ETF?
What is your target market for BMO ETFs?
Are all BMO ETFs eligible for registered plans?
Can non-residents, including U.S. residents, invest in BMO ETFs?

BMO ETFs

How does BMO's entry into the ETF market affect its mutual fund buissiness?
How do you choose the weighting methodology for your ETFs?
How does an ETF follow an Index over time? - missing accordion
What is tracking error?
Will BMO ETFs have any exposure to currency risk?
What are Covered Call ETFs?
Are you developing more ETFs?

Fixed Income ETFs

How does BMO's entry into the ETF market affect its mutual fund buissiness?
What is the Fixed Income Weighted Average Coupon?
What is the Fixed Income Weighted Average Yield to Maturity?
What is the Fixed Income Weighted Average Duration?

Tax Considerations

What are the tax considerations for the BMO ETF family?
What is the tax treatment of selling investments in ETFs?
Do BMO ETFs pay dividends or distributions?
What is the tax treatment of ETF distributions?
What are BMO ETF Tax Parameters?
What are the tax implications for non-resident investors in BMO ETFs?
What is the frequency of distributions, and is there a schedule?