Sunday, August 26, 2012


Investor Bulletin: Exchange-Traded Funds

This bulletin, issued to educate investors about exchange-traded funds, discusses those ETFs that are registered as open-end investment companies or unit investment trusts.  Some extracts:
“ETFs are not mutual funds.”
“Unlike with mutual fund shares, retail investors can only purchase and sell ETF shares in market transactions. That is, unlike mutual funds, ETFs do not sell individual shares directly to, or redeem their individual shares directly from, retail investors. Instead, ETF sponsors enter into contractual relationships with one or more financial institutions known as ‘Authorized Participants.’ Authorized Participants typically are large broker-dealers. Only Authorized Participants are permitted to purchase and redeem shares directly from the ETF, and they can do so only in large aggregations or blocks… commonly called ‘Creation Units.’
“To purchase shares from an ETF, an Authorized Participant assembles and deposits a designated basket of securities and cash with the fund in exchange for which it receives ETF shares. Once the Authorized Participant receives the ETF shares, the Authorized Participant is free to sell the ETF shares in the secondary market to individual investors, institutions, or market makers in the ETF.”
“An ETF’s market price typically will be more or less than the fund’s NAV per share. This is because the ETF’s market price fluctuates during the trading day…”
“For a variety of reasons, an ETF’s market price may trade at a premium or a discount to its underlying value.”
“Authorized Participants can arbitrage this difference (and make a profit) because they can trade directly with the ETF at NAV as well as on the market.”
“Before investing in an ETF, you should read both its summary prospectus and its full prospectus, which provide detailed information on the ETF’s investment objective, principal investment strategies, risks, costs, and historical performance (if any).”
“Be sure to do your research before purchasing an ETF.”
“Do not investment in something that you do not understand. If you cannot explain the investment opportunity in a few words and in an understandable way, you may need to reconsider the potential investment.
source: SEC

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