NBI exchange-traded funds (ETFs) provide investors with innovative portfolio and risk diversification opportunities. Much like mutual funds, ETFs may invest in an underlying pool of assets such as stocks, bonds, currencies, derivatives or commodities. NBI’S lineup of ETFs provides a compelling way to gain non-traditional active and alternative niche exposure and diversify portfolio risk.
Alternative investment solutions are assets outside the space of conventional asset classes such as stocks and bonds. These ETFs provide more diversification and risk management opportunities.
Index tracking ETFs
The most common type of ETF, seeks to replicate and passively track the performance of an underlying benchmark by investing in its component securities.
Exposure to a wide range of asset classes or individual securities can reduce volatility and offer increased protection against market downturns.
Information on an ETF’s current price/underlying holdings is easily accessible and disclosed frequently.
Buying and selling ETFs is relatively simple, as they are traded on organized exchanges.
ETF management fees allow the investor to minimize the management fees paid and capture the maximum potential return.
ETFs offer the flexibility of tax management strategies such as tax loss selling.
What is an exchange-traded fund (ETF) and how does it differ from a mutual fund?
Much like a regular mutual fund, an ETF may invest in an underlying pool of assets such as stocks, bonds, currencies, options or commodities. Unlike regular mutual funds, however, the units of ETFs are listed and trade on a stock exchange just like common stock. This means that pricing is transparent and ETF units can be bought and sold throughout the regular trading day.
What is the difference between the NAV and price?
All ETFs have two end-of-day "values". They have a closing market price per unit, as determined on the exchange, (the trading session's last trade), and a NAV per unit, as determined by the ETF's accounting process after the market closes.
The closing price is typically the last transaction price of the ETF recorded by the stock exchange, whereas the NAV per unit is an independent calculation created by the ETF’s fund accountant, which calculates the market value of each unit based on the underlying value of the securities held by the ETF net of all its liabilities.
How is the trading price of an ETF determined?
The trading price of an ETF is expected to be approximately equal to the trading value of the underlying securities held in the fund plus any undistributed net income, less fees and expenses. The ETF's market value will trade during the day based on supply and demand, but generally is expected to trade at or close to the fund's NAV.
Why does an ETF trade at a premium or discount to its NAV?
A premium or discount to an ETF’s NAV per unit occurs when the market price of an ETF is above or below that NAV per unit. If the market price is higher than the NAV, the ETF is said to be trading at a “premium”. If the price is lower, it is trading at a “discount”.
What is the difference between a bid and offer and why is there a spread?
Considering an ETF is traded on an exchange and has a volume and liquidity properties; at any given time during trading hours there are two prices for an ETF. The price that someone is willing to buy the ETF is referred to as the “bid”; and the price that someone is willing to sell the ETF is known as the “ask”. The difference between these two prices is measured as the bid-ask spread.
Bid-ask spreads can differ depending on certain factors:
1. Similar spreads on the underlying securities – Determining how liquid the underlying assets and securities held in the ETF will determine how liquid the ETF is and as such will have a narrow or large spread. As such, if the underlying securities in the ETF are very liquid, it is safe to say that the ETF itself will be very liquid and will have a small spread (i.e. basket of large-cap stocks).
2. Cost of portfolio construction and trading – ETFs that invest in foreign securities will have additional costs associated; such as foreign currency exchanges and or foreign holding taxes.
3. Trading volume – an investor willing to make a very large purchase of an ETF may force the market maker to generate more units of the ETF causing a spike in demand which would ultimately drive the “ask” price higher. This action is called “market impact costs.”
4. Market risks - Bid-ask spreads can also widen during times of increased market volatility. If market makers are required to take extra steps to facilitate their trades during periods of volatility, spreads of the underlying securities may be wider, which will mean wider spreads on the ETF.
NBI ETFs are offered by National Bank Investments Inc., a wholly owned subsidiary of National Bank of Canada. Commissions, management fees and expenses all may be associated with investments in exchange-traded funds (ETFs). Please read the prospectus or ETF Fund Facts document(s) before investing. ETFs are not guaranteed, their values change frequently and past performance may not be repeated. ETF units are bought and sold at market price on a stock exchange and brokerage commissions will reduce returns. NBI ETFs do not seek to return any predetermined amount at maturity. Index returns do not represent NBI ETF returns. The indicated rates of return are the historical total returns for the periods including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, commission charges or income taxes payable by any unitholder that would have reduced returns.
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