Indexed Investments

Index investments or indexed investing strategies involve a passive investing approach.† Passive investing involves buying and holding a specific security or market index, for the long term in most cases.†

An index is usually a group of stocks or bonds in a stock or bond market.† In Canada, investors have access to many types of indexes including the S&P/TSX Composite Index, the S&P/TSX 60, the S&P 500 Index, the DEX Universe Bond Index, DEX Universe Federal Bond Index, the MSCI EAFE Index, the Nasdaq 100 Index, the JP Morgan Global Government Bond Index and other indexes.

There are two main types of indexed investments available: Index mutual funds and Exchange-Traded Funds.† Both attempt to mimic the index by investing in the same group of stocks or bonds at the corresponding proportions.†

Exchange Traded Funds (ETFs)

Exchange-Traded Funds (ETFs) is an investment fund traded on a stock exchange.† ETFs are traded like stocks and are considered a low cost and tax efficient mutual fund alternative.† ETFs itself can hold securities including stocks, bonds and even certain commodities.† In most cases, ETFs track various indexes and attempt to replicate their returns.† Other ETFs sometimes use a portion of their funds to invest in other securities such as options and futures.††

There are many types of Exchange-Traded Funds, including leveraged ETFs, inverse ETFs.

Exchange-Traded Funds have gained in popularity, due to many investors belief in passive investment management.† In addition, the costs associated with buying and selling and holding ETFs in comparison to mutual funds has helped ETFs and comparable products gain attention and market share.† †ETFs have lower expense ratios than mutual funds or segregated funds. In addition, ETFs when compared to mutual funds do not have to hold cash reserves to fund redemptions.† Although commission charges or trading charges will be incurred to invest or dispose of ETFs, similar fees are sometimes associated with mutual fund investments that have front end or back end commission charges.†

Exchanged-Trade Funds are also more tax efficient than most mutual funds.† Mutual funds which buy and sell securities can realize capital gains within the fund, and these gains would be taxable to all unit holders, even if these investors did not actually redeem or sell their units.† ETFs on the other hand are not redeemed, they are sold and gains or losses would only be incurred when an individual actually buys and sells an ETF.

Exchange-Traded Funds unlike mutual funds can be traded during stock market hours.† In addition, individuals can utilize more sophisticated trading techniques, including limit orders, stop-loss orders, as well as† have the ability to use options contracts to help limit losses or increase potential returns.†††

Index Funds

Index Funds are mutual funds which are passively managed that attempt to mirror the performance of a specific stock or bond market index.†

In Canada, index funds are available that mirror the S&P/TSX Composite Index, the S&P/TSX 60, the S&P 500 Index, the DEX Universe Bond Index, DEX Universe Federal Bond Index, the MSCI EAFE Index, the Nasdaq 100 Index, the JP Morgan Global Government Bond Index and other indexes.

Index Fund transactions within the fund are not frequent, and do not require research.† As a result the portfolio management is simpler and the associated trading costs and expenses of the fund are much less.† Index funds in Canada have significantly smaller management expense ratios (MERs) than regular mutual funds.†† In addition, most index funds do not have front end commissions or deferred sales charges.†

Research has shown over the last decade that close to seventy five percent of active equity fund managers underperform the market index.† However, in many cases the associated risk and volatility of index funds is greater than the average equity fund.† Investors need to educate themselves about the wide array of index funds and index fund type products available in the marketplace and see whether there is a fit in their personal portfolios.†

Many index funds in Canada can be bought on a no-load basis, however most have an early trading charge to discourage investors from trading the index fund like individual stocks or securities.

Mutual funds in Canada are highly regulated, and performance data is easy to acquire. Mutual funds are issued by prospectus and it is important to note that returns are not guaranteed and principal is not guaranteed.† Unit values fluctuate in value and investors may pay commissions to buy and/or redeem and sell mutual funds.† Investors should always read the prospectus prior to making an investment into a mutual fund.

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