4 Ways ETFs Are NOT All Alike
All exchange-traded funds (ETFs) are not created equal. Before you invest in an ETF, it’s a good idea to know how ETFs can differ from each other. Here are four ways ETFs can vary:
Before you invest in an ETF,
know how they can differ
from each other.
- Regulatory structure. Most ETFs are registered with the SEC as investment companies under the Investment Company Act of 1940, and the shares they offer to the public are registered under the Securities Act of 1933. Some ETFs that invest in commodities, currencies or commodity- or currency-based instruments are not registered investment companies, although their publicly offered shares are registered under the Securities Act.
- Management style. Many ETFs are designed to passively track a particular market index and are similar to index mutual funds. These ETFs aim to achieve the same return as the index that they track, by investing in all or a representative sample of the stocks included in the index. In recent years, actively managed ETFs have emerged as another choice for investors. The portfolio manager of an actively managed ETF buys and sells stocks in accordance with an investment strategy, rather than tracking an index.
- Investment objective. Investment objectives vary by ETF and the management style of a given ETF. The objective of passively managed ETFs is to replicate the performance of the index the ETF tracks. On the other hand, advisers of actively managed ETFs invest to achieve a particular investment objective by making investment decisions themselves. Some passively managed ETFs aim to earn a return that is a multiple or a reverse (inverse) multiple of the return of a particular stock index. These are referred to as leveraged or inverse ETFs. An ETF’s investment objective is stated in its prospectus.
- Indices tracked. ETFs track a huge variety of indices. Some indices are very broad market indices, such as total stock or bond market indices. Other ETFs track indices that are narrower, such as those made up of medium and small companies, only corporate bonds or just international companies. Some EFTs track extremely narrow—and sometimes very new—indices that might not be fully transparent or about which little is known.
Learn more about ETFs, including how they trade and fees and expenses.