The Securities and Exchange Commission has issued an investor bulletin on the risks of exchange traded funds, particularly ETFs that employ sophisticated strategies.
“Certain ETFs can be relatively easy to understand. Other ETFs may have unusual investment objectives or use complex investment strategies that may be more difficult to understand and fit into an investor’s investment portfolio,” the SEC’s Office of Investor Education and Advocacy said.
“For example, ‘leveraged ETFs’ seek to achieve performance equal to a multiple of an index after fees and expenses. These ETFs seek to achieve their investment objective on a daily basis only, potentially making them unsuitable for long-term investors,” it added.
ETFs are baskets of securities that trade on exchanges during the day like individual stocks, while traditional mutual funds are priced once a day at the close.
Most ETFs are passively managed funds designed to track indices comprised of stocks, bonds, commodities and other asset classes. However, some ETFs are actively managed. Also, some ETFs use leverage to magnify market returns while others are “inverse” funds that move in the opposite direction of the market.
“Do not invest in something that you do not understand. If you cannot explain the investment opportunity in a few words and in an understandable way, you may need to reconsider the potential investment,” the SEC bulletin said.
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