ETFs, explained

Exchange-traded funds hold a basket of securities and trade on an exchange like a single stock.

Two funds with similar names can hold very different things. Read the index methodology, not the marketing. A "Canadian dividend" fund might screen on yield, on dividend growth, or on a committee's judgement — and those three rules produce three different portfolios.

The four things worth checking

• Methodology: what has to be true for a holding to be included, and what forces it out.
• Concentration: Canadian equity funds are frequently dominated by financials and energy, whatever the label says.
• Total cost: the management expense ratio plus the trading spread you pay to get in and out.
• Currency treatment: whether foreign holdings are hedged back to Canadian dollars, which changes your return materially.

Liquidity is not the same as trading volume

An ETF's real liquidity comes from the securities it holds, not from how many units changed hands yesterday. A thinly traded fund holding large-cap stocks can be easier to exit than a busy fund holding venture names.

Registered accounts

Where you hold a fund changes what you keep. Foreign withholding tax treatment differs across RRSP, TFSA and non-registered accounts, and the same fund can be a sensible holding in one and an expensive one in another.