What causes ETF prices to change?

ETFs (exchange traded funds) that track an index will rise or fall in price depending on the performance of the index that they track. Economic news, fluctuations in commodity prices and the performance of individual large-cap stocks that are heavily weighted in a given index are all factors that have an impact on stock market indexes. For example, the S&P/TSX Composite Index is heavily weighted towards financial stocks and resource stocks. If a few large bank stocks rise in price on a given day, this can have a positive impact on the performance of the index. On the other hand, if a few large oil and gas stocks experience a dramatic slump while the rest of the index holds steady, this can pull the index down on that day.

Commodity ETFs will rise or fall with the price of the underlying commodity, but because of the way some of them are structured, they do not always track precisely the commodity’s price performance. This is what’s known as a “tracking error.” Also, since some commodity ETFs rely on the use of futures contracts that have rollover dates attached to them, they may not perfectly match the commodity price over long periods of time. In fact, some are designed to track the daily price performance of the commodity rather than its long-term price performance. It is important to read the prospectus for any ETF you want to buy, as this information will be disclosed there.

Fixed-income ETFs typically experience less fluctuation in price than equity or commodity ETFs because their underlying securities are much less volatile. A government bond ETF, for example, may experience a day-today price fluctuation of only a fraction of a percent. This type of ETF is specifically designed to be a more conservative investment.