Exchange-Traded Funds (ETFs) are investment vehicles that are listed on an exchange and can be bought and sold throughout the trading day like stocks. ETFs are a type of exchange-traded investment product that must register with the SEC under the 1940 Act as either an open-end investment company or a unit investment trust. The Investment Company Act of 1940 is an act of Congress that regulates the organization of investment companies and the activities they engage in. It sets standards for the investment company industry and aims to protect investors by ensuring they are aware of the risks associated with buying and owning securities.
Characteristics | Values |
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Definition | Exchange-Traded Funds (ETFs) are a type of exchange-traded investment product that must register with the SEC under the 1940 Act as either an open-end investment company or a unit investment trust. |
Registration | ETFs must register with the SEC under the 1940 Act. |
Investment Type | ETFs are a type of exchange-traded investment product. |
Investment Vehicle | ETFs are listed on an exchange and can be bought and sold throughout the trading day like a stock. |
Investment Objective | ETFs pool investors' money in a fund that makes investments in stocks, bonds, or other assets. |
Trading | Unlike mutual funds, ETF shares are traded on a national stock exchange and at market prices. |
Liquidity | ETFs offer two layers of liquidity: transactions can occur directly with issuers in the primary market or more commonly, through transactions that occur in the secondary market. |
Diversification | ETFs provide investors with a cost-effective way to diversify their portfolios. |
Risk | As with any investment, ETFs can expose investors to a range of risks, so understanding the products and how they work is important. |
Investor Protection | ETFs are regulated under the Securities Act of 1933 and Securities Exchange Act of 1934, and they are subject to regulatory requirements and oversight by the SEC. |
Fees and Expenses | ETFs have fees and expenses, such as expense ratios, which are calculated as a percentage of the assets invested. |
What You'll Learn
- ETFs are a type of exchange-traded investment product that must register with the SEC under the 1940 Act
- ETFs are pooled investment opportunities that include stocks, bonds and other assets
- ETFs are traded on a national stock exchange at market prices
- ETFs are not mutual funds
- ETFs are subject to regulatory requirements and oversight by the Securities and Exchange Commission (SEC)
ETFs are a type of exchange-traded investment product that must register with the SEC under the 1940 Act
Exchange-Traded Funds (ETFs) are a type of exchange-traded investment product that must register with the U.S. Securities and Exchange Commission (SEC) under the Investment Company Act of 1940. This Act, also known as the 1940 Act, regulates the organisation of investment companies and the activities they engage in, with a primary purpose of protecting investors. It ensures that investors are aware of the risks associated with buying and owning securities by requiring investment companies to provide information about their investment objectives, policies, and financial condition.
ETFs are similar to mutual funds in that they offer investors a way to pool their money in a fund that invests in stocks, bonds, or other assets. However, unlike mutual funds, ETF shares are traded on a national stock exchange at market prices. Retail investors can only purchase and sell ETF shares in market transactions, and these transactions typically occur in the secondary market, where existing securities are bought and sold.
Most ETFs are structured as registered investment companies under the 1940 Act, and they generally focus their investments on stocks or bonds with diversification requirements. By registering under the 1940 Act, ETFs provide investors with regulatory protection and ensure compliance with disclosure requirements.
It is important to note that not all exchange-traded products (ETPs) are registered under the 1940 Act. For example, exchange-traded commodity funds, exchange-traded notes (ETNs), and some other ETPs may not fall under the Act's requirements. Therefore, it is essential to understand the specific structure and registration status of an ETP before investing.
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ETFs are pooled investment opportunities that include stocks, bonds and other assets
Exchange-traded funds (ETFs) are a type of investment fund that combines the best attributes of stocks and mutual funds. They are "baskets" of securities that can include assets such as stocks, bonds, commodities, and other assets pooled into one fund. ETFs are bought and sold on an exchange throughout the trading day like stocks. They are also similar to mutual funds in that they are "baskets of investments" chosen and managed by professionals.
ETFs are pooled investment opportunities that offer investors the opportunity to purchase shares of a fund that holds the assets it tracks. They are listed on an exchange and can be traded throughout the day, and generally don’t sell shares to, or redeem shares from, retail investors directly. ETFs employ a unique share issuance and redemption mechanism. They enter into contracts with financial institutions (typically large broker-dealers) to act as "authorised participants" (APs). APs purchase and redeem shares directly with the ETF in the primary market in large blocks of shares called creation units. APs typically sell some or all of their ETF shares in the secondary market, on an exchange. This enables investors to buy and sell ETF shares like the shares of any publicly traded company.
The assets held by an ETF might pay interest or dividends, which may be either reinvested or paid periodically to shareholders, depending on how the ETF is structured. ETFs either passively track the performance of an underlying index or other benchmark or are actively managed investments. Those that are actively managed rely on a fund manager to make decisions for the fund in accordance with an investment strategy rather than tracking an index. Actively managed products might have higher expense ratios than similar products tracking an index, which has the potential to eat into returns over time.
ETFs are popular investment choices due to their potential built-in diversification benefits, comparatively low costs, and potential tax advantages. They are also a good option for investors who want the ease of stock trading but the diversification benefits of mutual funds.
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ETFs are traded on a national stock exchange at market prices
Exchange-traded funds (ETFs) are a type of investment fund that is also an exchange-traded product, meaning they are traded on stock exchanges. In the United States, most ETFs are set up as open-ended funds and are subject to the Investment Company Act of 1940. ETFs must be registered with the Securities and Exchange Commission (SEC).
The market price of an ETF will typically be more or less than the fund's net asset value (NAV) per share. This is because the ETF's market price fluctuates during the trading day due to various factors, including the underlying prices of the ETF's assets and the demand for the ETF. The NAV, on the other hand, is the value of the ETF's assets minus its liabilities, calculated at the end of each business day.
The ability to trade ETFs throughout the day, at market prices, offers several advantages. ETFs offer low expense ratios and fewer broker commissions compared to buying the stocks individually. They also provide greater tax efficiency than mutual funds, as most buying and selling occur through an exchange, and the ETF sponsor does not need to redeem shares each time an investor wishes to sell or issue new shares each time an investor wishes to buy.
The first ETF was the SPDR S&P 500 ETF (SPY), launched by State Street Global Advisors in 1993. As of January 2024, there was $5.4 trillion invested in equity ETFs and $1.4 trillion invested in fixed-income ETFs in the US.
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ETFs are not mutual funds
Exchange-Traded Funds (ETFs) and mutual funds are both professionally managed collections of individual stocks or bonds. They are both less risky than investing in individual stocks and bonds and they both offer a wide variety of investment options. However, there are some key differences between the two.
Firstly, ETFs can be traded intra-day like stocks, whereas mutual funds can only be purchased at the end of each trading day, based on a calculated price known as the net asset value. This makes ETFs a better choice for active traders. ETFs are also cheaper to invest in, as they have no minimum investment requirements beyond the price of one share. Mutual funds, on the other hand, typically have minimum investment requirements of hundreds or thousands of dollars. ETFs are also usually passively managed, whereas mutual funds are actively managed. This means that ETFs tend to have lower fees and expense ratios than mutual funds.
Another difference is that ETFs provide real-time pricing and allow for more sophisticated order types, giving the investor more control over the price of their trade. Mutual funds, on the other hand, offer the same price to everyone who bought and sold that day, calculated after the trading day is over. ETFs also allow for automatic investments and withdrawals, whereas mutual funds do not.
Finally, ETFs may be more tax-efficient than mutual funds. As passively managed portfolios, ETFs tend to realise fewer capital gains than actively managed mutual funds.
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ETFs are subject to regulatory requirements and oversight by the Securities and Exchange Commission (SEC)
Exchange-traded funds (ETFs) are subject to regulatory requirements and oversight by the Securities and Exchange Commission (SEC). The SEC's Division of Investment Management regulates the investment companies that issue ETFs, while the Division of Trading and Markets regulates the trading-related aspects of ETFs. Both divisions require ETFs to comply with specific rules.
The Investment Company Act of 1940, enforced and regulated by the SEC, defines the responsibilities and requirements of investment companies and the requirements for any publicly traded investment product offerings. This includes ETFs, which are considered hybrid investment products. While ETFs were not originally allowed under U.S. securities laws, the SEC has issued exemptive orders allowing them to operate under the Investment Company Act.
The ETF Rule (Rule 6c-11), adopted by the SEC in 2019, allows ETFs that meet certain conditions to go to market without obtaining an exemptive order. This rule eliminates certain regulatory requirements and provides a faster track for funds to enter the market. It applies to both passive and active open-ended funds but does not cover closed-end funds or leveraged and inverse ETFs.
The conditions for reliance on Rule 6c-11 include transparency, custom basket policies and procedures, and website disclosure. ETFs must provide daily portfolio transparency on their websites, disclose certain information such as historical data on premiums and discounts, and implement firewalls to prevent prohibited insider trading.
The SEC's regulation of ETFs facilitates greater competition and innovation in the ETF marketplace, leading to more choices for investors. It also ensures that ETFs comply with investor protection measures, such as transparency and disclosure requirements.
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Frequently asked questions
The Investment Company Act of 1940 is an act of Congress that regulates the organization of investment companies and the activities they engage in. It was signed into law by President Franklin D. Roosevelt to protect investors after the 1929 Stock Market Crash and the Great Depression.
Exchange-Traded Funds (ETFs) are a type of exchange-traded investment product that must register with the SEC under the 1940 Act. ETFs offer investors a way to pool their money in a fund that makes investments in stocks, bonds, or other assets.
Yes, ETFs are 1940 Act investment products. They are registered with and regulated by the SEC as investment companies under the 1940 Act.
ETFs provide investors with a convenient and cost-effective way to diversify their portfolios. They combine aspects of mutual funds and conventional stocks, offering the benefits of both. ETFs are also more tax-efficient than mutual funds and provide intraday trading flexibility.