Only ETFs included by this summary are those that have been authorised by the Investment Company Act of 1940 (the “1940 Act”) as open-end investment companies or unit investment trusts. Other exchange-traded product categories, such as commodities exchange-traded funds and exchange-traded notes, which are not registered under the 1940 Act are not covered by it.
The information that follows is generic in nature and is not meant to address the particulars of your financial situation. Before making an investment decision, be sure you completely comprehend the specific investment product you are thinking about.
ETFs are an example of an exchange-traded investment product that, in accordance with the 1940 Act, must be registered with the SEC as either a unit investment trust or an open-end investment corporation (often referred to as “funds”).
ETFs provide investors with a similar opportunity to pool their funds in a fund that invests in stocks, bonds, or other assets as do mutual funds and, in exchange, earn an interest in that investment pool. ETF shares, in contrast to mutual funds, are traded on a national stock exchange at market prices that may or may not be the same as their net asset value (NAV), which is calculated by dividing the ETF’s assets minus its liabilities by the total number of outstanding shares like mutual fund distributor platform.
Factors to Take into Account Before Investing in ETFs
Mutual funds are not ETFs. ETFs typically combine aspects of mutual funds, which can be bought or sold at their NAV per share at the close of each trading day, with the intraday trading feature of closed-end funds, whose shares trade all day long at market prices.
Retail investors can only buy and sell ETF shares through market transactions, in contrast to mutual fund shares. To put it another way, unlike mutual funds, ETFs do not sell or redeem individual shares from retail investors directly. Instead, “Authorized Participants” are a group of financial institutions with which ETF sponsors have contractual agreements. Large broker-dealers often make up Authorized Participants. Only Authorized Participants are allowed to buy and sell ETF shares directly, and they can only do so in significant groups or blocks (like 50,000 ETF shares), also known as “Creation Units.”
In open market transactions, other investors buy and sell ETF shares at market rates. The market price of an ETF will normally be greater or less than the NAV per share of the fund. This is because, while the ETF’s NAV is determined by the ETF at the end of each business day as the value of the ETF’s assets minus its liabilities, the market price of the ETF fluctuates throughout the trading day as a result of various factors, including the underlying prices of the ETF’s assets and the demand for the ETF.