Investors have poured more than two trillion dollars into ETFs since they were first introduced in the United States in 1993. As ETFs gain increasing popularity among everyday investors, regulators are boosting their oversight. Most notably, the Securities and Exchange Commission (SEC) recently announced that it plans to examine the operations of ETFs in the coming year. The current market volatility, for now on the downside, is enhanced by leverage and in-and-out strategies used by an Exchange Trade Fund.
What Is an Exchange Trade Fund?
Despite their rapidly growing popularity, many investors are unfamiliar with how ETFs work. To start, an Exchange Trade Fund is an “exchange-traded fund.” The investment funds must register with the SEC under the 1940 Act as either an open-end investment company or a unit investment trust.
As described by the SEC, ETFs are similar to mutual funds in that they allow investors to pool into an investment vehicle that purchases stocks, bonds, or other assets. In return, investors receive an interest in the pool of underlying assets. However, unlike a mutual fund, an Exchange Trade Fund trades on a public stock exchange. In addition, the net asset value (NAV) of an Exchange Trade Fund is not calculated at the end of each day.
ETFs are popular because they are generally more transparent, liquid and cost-effective than similar investments, such as mutual funds. As noted above, they can be bought and sold like stocks with transaction costs that are much lower than mutual funds. In addition, because capital gains from sales within the Exchange Trade Fund are not passed on to shareholders, they have certain tax advantages.
Before jumping into the Exchange Trade Fund market, investors should also understand that there are a number of different types of ETFs, which can vary in both complexity and volatility. The most basic ETFs, known as Spiders, invests in all of the stocks included in the S&P 500 Composite Stock Price Index. On the other end of the spectrum, the goal of a leveraged or inverse ETFs is to achieve a daily return that is a multiple or an inverse multiple of the daily return of a securities index.
“The current regulatory framework no longer effectively achieves the statutory objectives of the Investment Company Act, which seeks to protect investors from the risks of excessive leverage,” SEC Chair Mary Jo White stated.
Notably, the SEC’s rule proposal limits aggregate exposure to derivatives an Exchange Trade Fund can have to 150 percent of a fund’s net assets. A fund would be permitted to obtain exposure up to 300 percent of the fund’s net assets, provided that the fund satisfies a risk-based test is designed to determine whether the fund’s derivatives transactions, in aggregate, result in a fund portfolio that is subject to less market risk than if the fund did not use derivatives. Critics of the rule argue that it would effectively force some leveraged ETFs out of business.
“The current regulatory framework no longer effectively achieves the statutory objectives of the Investment Company Act, which seeks to protect investors from the risks of excessive leverage,” SEC Chair Mary Jo White stated.
Notably, the SEC’s rule proposal limits aggregate exposure to derivatives an Exchange Trade Fund can have to 150 percent of a fund’s net assets. A fund would be permitted to obtain exposure up to 300 percent of the fund’s net assets, provided that the fund satisfies a risk-based test is designed to determine whether the fund’s derivatives transactions, in aggregate, result in a fund portfolio that is subject to less market risk than if the fund did not use derivatives. Critics of the rule argue that it would effectively force some leveraged ETFs out of business.
Does Your Homeowners Insurance Provide Adequate Coverage?
Your home is likely your greatest asset, which is why it is so important to adequately protect it. Homeowners insurance protects you from the financial costs of unforeseen losses, such as theft, fire, and natural disasters, by helping you rebuild and replace possessions that were lost While the definition of “adequate” coverage depends upon a […]
Understanding the Importance of a Non-Contingent Offer
Making a non-contingent offer can dramatically increase your chances of securing a real estate transaction, particularly in competitive markets like New York City. However, buyers should understand that waiving contingencies, including those related to financing, or appraisals, also comes with significant risks. Determining your best strategy requires careful analysis of the property, the market, and […]
Fred D. Zemel Appointed Chair of Strategic Planning at Scarinci & Hollenbeck, LLC
Business Transactional Attorney Zemel to Spearhead Strategic Initiatives for Continued Growth and Innovation Little Falls, NJ – February 21, 2025 – Scarinci & Hollenbeck, LLC is pleased to announce that Partner Fred D. Zemel has been named Chair of the firm’s Strategic Planning Committee. In this role, Mr. Zemel will lead the committee in identifying, […]
Novation Agreement Process: Step-by-Step Guide for Businesses
Big changes sometimes occur during the life cycle of a contract. Cancelling a contract outright can be bad for your reputation and your bottom line. Businesses need to know how to best address a change in circumstances, while also protecting their legal rights. One option is to transfer the “benefits and the burdens” of a […]
What Is a Trade Secret? Key Elements and Legal Protections Explained
What is a trade secret and why you you protect them? Technology has made trade secret theft even easier and more prevalent. In fact, businesses lose billions of dollars every year due to trade secret theft committed by employees, competitors, and even foreign governments. But what is a trade secret? And how do you protect […]
What Is Title Insurance? Safeguarding Against Title Defects
If you are considering the purchase of a property, you may wonder — what is title insurance, do I need it, and why do I need it? Even seasoned property owners may question if the added expense and extra paperwork is really necessary, especially considering that people and entities insured by title insurance make fewer […]
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Sign up to get the latest from our attorneys!
Explore What Matters Most to You.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.
What Is an Exchange Trade Fund Investment?
Author: Dan Brecher
Investment 101: What Is an Exchange Trade Fund?
Investors have poured more than two trillion dollars into ETFs since they were first introduced in the United States in 1993. As ETFs gain increasing popularity among everyday investors, regulators are boosting their oversight. Most notably, the Securities and Exchange Commission (SEC) recently announced that it plans to examine the operations of ETFs in the coming year. The current market volatility, for now on the downside, is enhanced by leverage and in-and-out strategies used by an Exchange Trade Fund.
What Is an Exchange Trade Fund?
Despite their rapidly growing popularity, many investors are unfamiliar with how ETFs work. To start, an Exchange Trade Fund is an “exchange-traded fund.” The investment funds must register with the SEC under the 1940 Act as either an open-end investment company or a unit investment trust.
As described by the SEC, ETFs are similar to mutual funds in that they allow investors to pool into an investment vehicle that purchases stocks, bonds, or other assets. In return, investors receive an interest in the pool of underlying assets. However, unlike a mutual fund, an Exchange Trade Fund trades on a public stock exchange. In addition, the net asset value (NAV) of an Exchange Trade Fund is not calculated at the end of each day.
ETFs are popular because they are generally more transparent, liquid and cost-effective than similar investments, such as mutual funds. As noted above, they can be bought and sold like stocks with transaction costs that are much lower than mutual funds. In addition, because capital gains from sales within the Exchange Trade Fund are not passed on to shareholders, they have certain tax advantages.
Before jumping into the Exchange Trade Fund market, investors should also understand that there are a number of different types of ETFs, which can vary in both complexity and volatility. The most basic ETFs, known as Spiders, invests in all of the stocks included in the S&P 500 Composite Stock Price Index. On the other end of the spectrum, the goal of a leveraged or inverse ETFs is to achieve a daily return that is a multiple or an inverse multiple of the daily return of a securities index.
“The current regulatory framework no longer effectively achieves the statutory objectives of the Investment Company Act, which seeks to protect investors from the risks of excessive leverage,” SEC Chair Mary Jo White stated.
Notably, the SEC’s rule proposal limits aggregate exposure to derivatives an Exchange Trade Fund can have to 150 percent of a fund’s net assets. A fund would be permitted to obtain exposure up to 300 percent of the fund’s net assets, provided that the fund satisfies a risk-based test is designed to determine whether the fund’s derivatives transactions, in aggregate, result in a fund portfolio that is subject to less market risk than if the fund did not use derivatives. Critics of the rule argue that it would effectively force some leveraged ETFs out of business.
“The current regulatory framework no longer effectively achieves the statutory objectives of the Investment Company Act, which seeks to protect investors from the risks of excessive leverage,” SEC Chair Mary Jo White stated.
Notably, the SEC’s rule proposal limits aggregate exposure to derivatives an Exchange Trade Fund can have to 150 percent of a fund’s net assets. A fund would be permitted to obtain exposure up to 300 percent of the fund’s net assets, provided that the fund satisfies a risk-based test is designed to determine whether the fund’s derivatives transactions, in aggregate, result in a fund portfolio that is subject to less market risk than if the fund did not use derivatives. Critics of the rule argue that it would effectively force some leveraged ETFs out of business.
Let`s get in touch!
Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!
