ETF Frequently Asked Questions (FAQs)

An exchange-traded fund (ETF) is an open-end fund that you can trade on an exchange, like the New York Stock Exchange (NYSE), just as you would buy or sell shares of a company. When an investor purchases an ETF, they receive shares in the ETF, gaining access to the underlying assets that the ETF invests in, rather than owning the underlying shares or assets themselves.

ETFs can be actively or passively managed. Passive ETFs typically track the performance of an index, benchmark, sector or commodity. Active ETFs have a strategically selected underlying portfolio that is actively managed by a professional fund manager with the aim of achieving its investment objectives.

There are several, but you’ll probably hear most often about the following:

Tax efficiency: The ETF vehicle has a natural mechanism that can enhance the tax efficiency of a portfolio. Securities can be redeemed in-kind (i.e. securities are traded for other securities), which allows portfolio managers to remove securities with gains from the portfolio. This does not remove the gains from the portfolio, but instead isolates the gains to investors when they buy and sell at market price.

Liquidity: ETFs can be traded throughout the day when the exchange is open, while mutual funds can be bought or sold only at the end of the day once net asset value (NAV) has been determined.

Lower costs: Generally, the fees associated with ETFs are lower than the fees for mutual funds because ETFs typically have no distribution (e.g. 12b-1) fees and have lower operating fees.

Transparency: Although not all ETFs are transparent, Macquarie ETFs in the US are, and they provide investors with daily disclosure of portfolio holdings.

No transaction fee: Many ETFs can be accessed through platforms with no commission fees.

An ETF’s premium or discount captures the difference between the closing market price and NAV, as a percentage of the ETF’s NAV. Positive values indicate an ETF trading at a premium, and negative values indicate an ETF trading at a discount.

Active ETFs may provide investors with a payment of income or capital in the form of a distribution, although, like dividends, these are not guaranteed and will depend on the performance of the ETF. Distributions are paid to investors in a similar way to a dividend that an investor receives in relation to a share in a company. These distributions will vary for each active ETF depending on the type of investment strategy and type of assets held by the active ETF, and they can range in frequency from a monthly payment to an annual payment.

ETFs will typically charge a management fee, and the fees charged by the ETF will be set out in the ETF’s prospectus.

The fees charged by an ETF are set by the ETF issuer and will be different for each ETF, depending on the strategy. The fees are commonly calculated daily and deducted from the assets of the ETF by the issuer and reflected in the NAV per unit share price of the ETF.

The price of an ETF is influenced by market forces. If the market is volatile, the ETF price may fluctuate accordingly. Markets tend to be more volatile near their open and close, and this is when spreads generally widen. Prices at the beginning of a trading day are influenced by breaking and overnight news and then tend to normalize. 

Based on these trends, the general view is to avoid buying or selling ETFs within the first 30 minutes or during the closing auction at the end of the trading day. In early trading there may be a lower volume of trading activity, in conjunction with economic data news and changes in market sentiment, which can lead to higher market volatility and result in the ETF price not aligning closely with its NAV. The same may be said about trading in the closing auction, when there is a heightened risk of trading an ETF at a price that is at a greater discount or premium to the underlying value of its assets than at other times of the day.

ETFs and other investments traded on exchanges are subject to bid-ask spreads. The bid-ask spread is the difference between the price at which participants are willing to buy units (the bid price) and the price at which participants are willing to sell units (the ask price).

Investors can buy and sell an active ETF like shares of a company. They can use a broker or contact their financial advisor.