BCSC adds information about Exchange-Traded Funds

BCSC adds information about Exchange-Traded Funds

As we discussed in an Investor Watch from 2009, certain Exchange Traded Funds may not be appropriate for retail investors.

Today, we’ve added an advisory from the North American Securities Administrators Association to the ETF page of our website, which discusses the risks and costs associated with this increasingly popular product.

Over the last few years, ETFs have grown in complexity, and investors may not understand how these investment products work or the potential risks they may face.

We want people to make sure they understand ETFs before they invest and consider whether these investments are right for them. The NASAA Advisory contains sections explaining

  • what an ETF is, and how it compares to a mutual fund
  • common traditional ETFs that mirror stock market indexes or industry segments
  • non-traditional ETFs, like inverse or leveraged products
  • how to determine whether they are suitable for you

The ETF advisory also outlines several risks associated with ETFs, including

  • Liquidation. The number of ETFs that are shut down or liquidated, while previously a rare occurrence, is on the rise, up 500 percent in each of the last three years over 2007 levels (which equates to one ETF each week).
  • Fees. Leveraged and inverse ETFs must be traded all the time, therefore incurring substantial brokerage fees and commissions.
  • Tax Consequences. Leveraged and inverse ETFs may be less tax efficient due to daily resets that can result in significant short-term capital gains that may not be offset by a loss.

Have a look at all of this information if you are considering investing in ETFs. If you have any questions, send us a comment or contact us through our website.