Types of ETFs in Canada: Bond, Equity, Commodity, Sector, Factor, Thematic, and Active ETFs Explained

How exchange-traded funds are categorized

ETF categories provide different ways to describe the characteristics of a fund. Rather than using one single classification system, ETFs are often grouped across several dimensions.

Common ETF classifications include:

• Underlying asset class: The type of assets held, such as equities, bonds, commodities, cash equivalents, or a combination of asset classes.

• Geographic exposure: The markets or regions where the fund invests, such as Canada, the United States, international markets, or emerging markets.

• Sector or industry: The areas of the economy represented by the fund, such as technology, financial services, energy, or health care.

• Theme: A broader concept or trend that connects companies across different industries.

• Investment factor: A defined characteristic used to select or weight securities, such as value, size, momentum, quality, or volatility.

• Management approach: Whether the ETF follows an index or uses active portfolio management.

• Income approach: Whether the fund focuses on characteristics such as dividends, option premiums, or other income-related features.

• Currency treatment: Whether foreign currency exposure is hedged or left unhedged.

• Portfolio structure: Whether the fund uses specialized tools such as derivatives, leverage, or other investment techniques.

These categories are not mutually exclusive. A single ETF can have several classifications at the same time.

ETFs categorized by asset class

ETFs can also be grouped based on the type of assets they hold. Asset class categories describe the underlying investments within the fund.

Equity ETFs

Equity ETFs primarily hold shares of publicly traded companies. These funds may provide exposure to companies based on different characteristics, including geography, company size, industry sector, dividend approach, investment theme, or factor-based methodology.

Examples of equity ETF categories can include:

• Canadian equity ETFs.

• U.S. equity ETFs.

• International equity ETFs.

• Sector-focused equity ETFs.

• Dividend-focused equity ETFs.

• Factor-based equity ETFs.

The value of equity holdings can fluctuate based on factors such as company performance, economic conditions, interest rates, market sentiment, and other developments.

Different equity ETFs can have different levels of concentration, geographic exposure, and investment objectives.

Bond ETFs

Bond ETFs hold fixed-income securities such as government bonds, corporate bonds, or other debt instruments.

Bond ETFs can vary based on several characteristics, including:

• Interest-rate sensitivity.

• Duration.

• Credit quality.

• Issuer type.

• Maturity profile.

• Currency exposure.

For example, a short-duration bond ETF may have different characteristics from a longer-duration bond ETF, while government bond exposure can differ from corporate bond exposure.

Commodity ETFs

Commodity ETFs provide exposure to commodity-related assets, such as gold, silver, energy products, or agricultural commodities.

The structure used to provide commodity exposure can vary. Some commodity ETFs may use:

• Physical holdings of a commodity.

• Futures contracts.

• Shares of companies involved in commodity-related industries.

These structures can behave differently because they are influenced by different factors. For example, a fund holding physical commodities may have different characteristics from a fund using futures contracts or investing in commodity-producing companies.

Cash and money market ETFs

Cash and money market ETFs generally hold cash equivalents, short-term debt instruments, deposits, or similar securities.

These funds may focus on short-term instruments and can differ based on:

• The types of securities held.

• The maturity of those securities.

• The issuer characteristics.

• The fund structure.

The risks and features of each fund depend on the specific holdings and investment mandate.

Multi-asset and asset allocation ETFs

Multi-asset ETFs combine different asset classes within a single fund. These funds may include combinations of equities, fixed income, cash equivalents, or other investments.

The mix of assets, rebalancing approach, management style, and investment mandate can vary between funds.

ETFs categorized by geographic exposure

Geographic exposure describes where the companies, bonds, commodities, or other assets within an ETF are located or derived from. ETFs can provide exposure to Canadian markets, the United States, international developed markets, emerging markets, or multiple regions.

Canadian market ETFs

Canadian market ETFs generally provide exposure to securities listed in Canada or companies with significant Canadian market representation.

These ETFs may focus on:

• Broad Canadian equity markets.

• Specific Canadian industries.

• Canadian dividend-paying companies.

• Canadian market factors.

• Canadian fixed-income securities.

Canadian market ETFs can have different levels of concentration, depending on the index or methodology used. For example, a broad market ETF and a sector-focused ETF may both invest in Canadian companies but provide different types of exposure.

U.S. market ETFs

U.S. market ETFs provide exposure to securities listed in or associated with the United States.

Canadian investors may encounter different structures, including:

• Canadian-listed ETFs that hold U.S. securities.

• U.S.-listed ETFs available through certain account structures.

• Currency-hedged ETFs.

• Currency-unhedged ETFs.

Currency treatment can affect how returns are measured for Canadian investors. A U.S. investment held through an unhedged structure can be affected by changes in the U.S. dollar relative to the Canadian dollar.

International and emerging-market ETFs

International ETFs generally provide exposure to markets outside Canada and the United States. These funds may include developed markets, emerging markets, or a combination of regions.

Emerging-market ETFs typically focus on countries with developing financial markets and economies, while international developed-market ETFs generally focus on more established markets.

Factors that can affect these categories include:

• Currency exposure.

• Political and regulatory conditions.

• Market accessibility.

• Market liquidity.

• Economic conditions.

• Regional concentration.

Geographic categories can help describe where an ETF invests, but they do not fully describe every characteristic of the fund. Other factors, such as sector exposure, investment approach, and currency treatment, can also influence how an ETF is structured.

Sector ETFs and thematic ETFs

Sector and thematic ETFs both focus on specific areas of the market, but they organize investments differently.

A sector ETF generally follows an established industry classification, while a thematic ETF groups companies around a broader concept, trend, or area of development.

Sector ETFs

Sector ETFs focus on companies within a defined part of the economy. Common sector categories can include:

• Financial services.

• Energy.

• Technology.

• Health care.

• Utilities.

• Consumer industries.

Sector classifications often follow established industry frameworks used by index providers and financial markets.

Because sector ETFs concentrate investments within a particular area of the economy, their performance can be influenced by developments affecting that industry. Factors such as economic conditions, regulations, consumer demand, and company-specific developments can affect companies within different sectors in different ways.

Sector concentration can create a different exposure profile compared with broader market ETFs that include companies from multiple industries.

Thematic ETFs

Thematic ETFs focus on a broader concept, activity, technology, or social development rather than a traditional industry classification.

Examples of themes can include:

• Artificial intelligence.

• Clean energy.

• Cybersecurity.

• Robotics.

• Digital infrastructure.

Companies included in a thematic ETF may come from several different sectors. For example, a technology-related theme may include companies classified across software, hardware, communications, industrial, or other industries.

Thematic ETFs can vary significantly depending on how the theme is defined, how companies are selected, and how the portfolio is constructed.

Sector ETFs compared with thematic ETFs

Sector ETFs generally group companies according to established industry classifications.

Thematic ETFs generally group companies based on a shared concept or trend that may cross multiple industries.

The distinction relates to how companies are categorized rather than the potential performance of a particular category.

Factor ETFs

Factor ETFs select or weight securities based on specific characteristics defined by a fund methodology or index approach.

Common factor categories can include:

• Value: Companies selected based on valuation-related characteristics.

• Size: Exposure based on company market capitalization.

• Momentum: Companies selected based on measures related to price trends.

• Quality: Companies selected based on financial characteristics.

• Low volatility: Companies selected based on historical price volatility measures.

• Dividend yield: Companies selected partly based on dividend-related characteristics.

Factor definitions can differ between index providers and fund managers. Two ETFs using the same factor label may hold different securities or use different selection methods.

A fund name or category label may provide a general description, but the specific methodology determines how securities are selected and weighted.

Factors can also overlap with other ETF classifications. For example, a fund may be categorized as both an equity ETF and a factor ETF.

When reviewing a factor ETF, investors commonly examine information such as:

• The index methodology.

• The fund prospectus.

• The ETF Facts document.

• The security selection process.

• The weighting methodology.

Passive, index, and actively managed ETFs

ETFs can also be categorized based on how their portfolios are managed. The main distinction involves whether a fund seeks to follow a predefined index or relies on portfolio management decisions.

Index ETFs

Index ETFs seek to track the performance of a specified index before fees and expenses.

The index being followed can represent different types of markets or investment approaches, including:

• Broad-market indexes.

• Sector indexes.

• Thematic indexes.

• Factor-based indexes.

• Rules-based indexes.

The term “index ETF” describes the management approach rather than the level of diversification. An index ETF can represent a broad market or a narrowly defined segment, depending on the index it follows.

The index methodology determines factors such as:

• Which securities are included.

• How holdings are weighted.

• When changes are made.

• How the index is maintained.

Actively managed ETFs

Actively managed ETFs rely on portfolio management decisions rather than seeking to replicate a specific index.

Portfolio managers may make decisions about:

• Security selection.

• Portfolio weighting.

• Buying or selling holdings.

• Managing exposure based on the fund’s stated objective and mandate.

The level of discretion available to managers can vary between funds. Some actively managed ETFs may focus on a specific asset class, sector, income approach, or investment theme.

Active management and passive management describe how a fund operates. They do not by themselves describe what assets the ETF holds or determine potential investment outcomes.

Income-focused ETF categories

Some ETFs are categorized based on how they seek to generate income or distribute returns. Income-focused ETFs can include dividend ETFs, covered call ETFs, and preferred share ETFs. These categories describe the structure or securities held by the fund rather than a guaranteed level of income.

Dividend ETFs

Dividend ETFs generally hold companies selected partly based on dividend-related characteristics. The selection process can vary depending on the fund methodology.

Dividend-focused criteria may include:

• Dividend yield.

• Dividend growth.

• Dividend payment history.

• Financial quality measures.

• Index eligibility requirements.

Dividend ETFs may invest across different sectors, regions, or market segments. The characteristics of the underlying companies and the methodology used by the fund can influence the ETF’s exposure.

Dividend payments from companies are not guaranteed and can change based on company decisions, financial conditions, and other factors.

Covered call ETFs

Covered call ETFs use an options-based approach involving call options written on some or all of the securities held by the fund.

At a high level, the structure may involve:

• Holding a portfolio of securities.

• Writing call options on selected holdings.

• Receiving option premiums.

• Distributing income generated by the investment strategy.

Preferred share ETFs

Preferred share ETFs hold preferred securities, which can have characteristics associated with both equity and fixed-income investments.

Preferred shares can differ from common shares in areas such as:

• Dividend payment structures.

• Priority in company distributions.

• Voting rights.

• Redemption terms.

Factors that can affect preferred share ETF performance include:

• Interest rates.

• Issuer credit quality.

• Market conditions.

• Preferred share terms.

• Changes in investor demand.

The specific characteristics of a preferred share ETF depend on the securities included and the fund methodology.

Currency-hedged and unhedged ETFs

When an ETF invests in foreign securities, currency exposure can become another factor affecting returns for Canadian investors.

A foreign-market ETF may be structured as either currency-hedged or unhedged.

Currency-hedged ETFs

A currency-hedged ETF generally uses financial instruments, such as currency forwards, with the intention of reducing the impact of exchange-rate movements between currencies.

For example, a Canadian-listed ETF holding U.S. securities may use currency hedging to reduce the effect of changes between the U.S. dollar and Canadian dollar.

Currency hedging can involve:

• Additional costs.

• Tracking differences.

• Imperfect results.

• Changes in the effectiveness of the hedge over time.

Currency-hedged ETFs may reduce some currency-related effects, but they do not remove the market risks associated with the underlying investments.

Currency-unhedged ETFs

A currency-unhedged ETF generally leaves foreign currency exposure in place.

For a Canadian investor holding an ETF with U.S. dollar exposure, changes in the USD/CAD exchange rate can affect the Canadian-dollar value of the investment.

For example:

• A stronger U.S. dollar may increase the Canadian-dollar value of the U.S.-dollar holdings, all else being equal.

• A stronger Canadian dollar may reduce the Canadian-dollar value of U.S.-dollar holdings, all else being equal.

Currency exposure represents one component of an ETF’s overall structure. The impact of currency movements can vary depending on market conditions and the underlying assets held by the investment fund.

Specialized and higher-complexity ETF structures

Some ETFs use structures designed to provide specific types of exposure or investment outcomes. These funds can involve additional considerations because their performance may depend on factors beyond the movement of the underlying market or asset.

Leveraged ETFs

Leveraged ETFs generally seek to provide a multiple of the daily return of a benchmark before fees and expenses.

For example, a leveraged ETF designed around a two-times daily objective seeks a return that corresponds to twice the daily movement of its reference benchmark.

However, returns over periods longer than one trading day can differ significantly from the benchmark multiple because of:

• Daily resetting.

• Compounding effects.

• Market volatility.

• The sequence of daily returns.

A leveraged ETF’s longer-term performance depends on the path of the benchmark rather than only its starting and ending values.

Inverse ETFs

Inverse ETFs generally seek to provide the opposite of a benchmark’s daily performance before fees and expenses. These funds may use derivatives or other financial instruments to obtain inverse exposure.

Similar to leveraged ETFs, inverse ETFs commonly involve daily resetting, meaning performance over longer periods can differ from the simple opposite return of the underlying benchmark.

Factors such as market volatility, compounding, and the length of the holding period can affect results.

Crypto-asset ETFs

Crypto-asset ETFs may provide exposure to digital assets or financial instruments connected to digital assets.

These ETFs can differ based on factors such as:

• The type of crypto exposure provided.

• Custody arrangements.

• Market structure.

• Regulatory considerations.

• Fund methodology.

Crypto-asset ETFs represent a specialized category with characteristics that can differ from traditional equity, bond, or commodity ETFs.

Other derivative-based ETFs

Some ETFs use derivatives such as futures, swaps, or options to obtain exposure to specific assets, indexes, or market outcomes.

Because structures can vary significantly, the prospectus, ETF Facts document, and other official fund materials provide details about the specific approach used by each fund.

The bottom line on ETF types for Canadian investors

ETFs can be categorized in many ways, including by asset class, geography, sector, theme, factor, management approach, income structure, and currency treatment. These categories can overlap, meaning one ETF may fit into several classifications at the same time. Equity, bond, commodity, sector, thematic, factor, and actively managed ETFs can each have different structures and characteristics. Reviewing fund objectives, methodologies, holdings, and official disclosures can provide context about how a specific ETF operates.