For more than 100 years, mutual funds have been the choice for making investments for most Canadians. But while they’ve certainly made people money over the years, many investors are fed up with expensive fees and returns that don’t beat the benchmark.

That’s why exchange-traded funds (ETFs) were created. These investment products — the first one was developed in Toronto in 1990 — track an index such as the S&P/TSX Composite Index, and in many cases, they cost almost nothing to buy.

Basic ETFs hold the same stocks as an index. That means, for instance, if the S&P/TSX falls five per cent on a certain day, so does the value of the ETF. If the S&P/TSX delivers a year-end return of 14 per cent, like it did in 2010, your ETF will have gone up by that much, too.

The bottom line is that these securities are cheap, easy to trade and, for the most part, simple to understand. But let’s dig a little deeper. Here are some things you need to know about ETFs and making investments.

1. ETFs are cheap

The main reason that making investments in ETFs has become so popular over the past decade is because they’re cheap to buy. When investors purchase a mutual fund . they’re charged a fee — usually about 2.5 per cent on their assets — to own the fund. Most of that money goes to paying portfolio managers who pick stocks.

The good thing about ETFs is that there are no fund managers involved, as stock selection is based on what’s listed on an index. Fees are therefore dramatically lower, often under one per cent. Some ETFs charge as little as 0.1 per cent.

2. You can trade ETFs like stocks

It’s simple to trade stocks: Just open a brokerage account, find a company you like and hit the buy button with your mouse. It’s the same thing when thinking about ETFs. Unlike mutual funds, which take longer to trade, you can buy and sell ETFs in seconds and you can purchase one share or more.

While the easy access can be dangerous — if the market falls . you may be tempted to sell — it makes it easy to scoop up a new investment or get out of one if you need some quick cash.

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