Exchange traded funds (ETFs) are known for their simple and easy-to-use design. But some argue that the prospectuses that define an ETF’s investment strategy descriptions are not so easy to understand.
Ah, the prospectus. They can be vague, the descriptions can make it difficult to compare similar funds and the expenses, along with other potential risks, and often they are simply complex, remarks Ian Salisbury for The Wall Street Journal.
Fees and expenses may be a little tricky since funds may list different numbers for “management fees,” “total annual fund operating expenses,” “net operating expenses” or “expense cap.” Fund providers may levy fees equal to operating costs and then issue waivers to reduce what is actually paid. Needless to say, the process can be simplified and some fund providers are doing so.
Still, the Securities and Exchange Commission (SEC) stated that prospectuses are “a treasure trove of valuable information.”
Tom Mench, a Cincinnati-based financial advisor who specializes in ETFs, believes that prospectuses are mainly for lawyers and regulators to scrutinize and “a sane human should not read prospectuses.”