Page 191 - A Canuck's Guide to Financial Literacy 2020

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▪ Equity Commodity ETFs – Equity Commodity ETFs – Equity commodity ETFs
invest in companies that offer exposure to the underlying asset. For example,
the Market Vectors Gold Miners ETF (GDX) and the Market Vectors Junior Gold
Miners (GDXJ) would provide you exposure to companies who are involved in
mining gold.

▪ Inverse ETFs

These popular with hedge funds who engage in short term arbitrage opportunities.
With inverse ETFs, you’re betting that the underlying asset or index would go down.
Inverse ETFs are very attractive to professional portfolio managers as they can be
used to hedge a specific sector or asset class. Keep in mind there are different
strengths of inverse ETFs. You may run into a 1x ETF which seeks 100% of the
inverse performance of the index or asset. There are also 2x or 3x inverse or
leveraged ETFs. The latter are more volatile.

▪ Actively Managed ETFs

These types of ETFs are managed professionally by a portfolio manager who decides
what securities to buy and sell. The goal of these types of ETFs is to perform better
than a benchmark index.

▪ Industry ETFs

Sector specific ETFs invest a particular sector such as energy, REIT, Health Care.
For example, Vanguard Energy ETF (VDE) invests in companies that are involved in
exploring and producing energy products such as oil, natural gas, and coal. Vanguard
Health Care ETF (VHT) would invest in companies that cater to medical or healthcare
products and services.

▪ Foreign Market ETFs

Foreign or International ETFs invest in growing economies around the world. For
example, the iShares MSCI Brazil Index Fund (EWZ) invests in companies in Brazil.
In 2019, the ETF produced a return of almost 125% as Brazil was experiencing an
economic boom. Foreign ETFs are a great way to diversify your portfolio further.

Tracking Error

Tracking error is known as the difference between the portfolio return and the return of the
benchmark. For example, you invested in S&P 500 ETF which replicates the S&P 500
Index, both in composition and in returns. If the ETF returned 10.5% a year but the
benchmark returned 10%, then the tracking error is 0.5%.

When you’re investing an ETF, keep in mind the tracking error, especially if the ETF is
mimicking an underlying index. You would like to see a low tracking error as the ETF is
closely following its benchmark. High tracking errors indicates the opposite.