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.”
An iShares spokeswoman claims that a prospectus allows investors to test the waters and investors should turn to the fund provider’s website for more information.
What can you do?
- First, know that most of the information average investors need is on the tear sheet, which we have on our site for most ETFs. You can find them on the ETF Resume.
- Second, still have questions about a particular fund? Call the ETF provider directly and ask! They are responsive and ready to hear from investors like you.
- Third, follow us! We regularly post information about ETFs and how they work. We’re on Twitter, Facebook and you can also sign up for our free daily newsletter.
Even though ETFs are simple to use and cost-effective, some things are not always so clear. And let’s not single out ETFs, either: any prospectus is bound to be difficult for most laypeople to wade through. But it doesn’t change the fact that you need to understand things like index structure and tax treatment – particularly in esoteric asset classes such as commodities and leveraged/inverse ETFs. Follow the steps above, and you’ll come out all right.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.