With over 1,700 U.S.-listed exchange traded funds to choose from, investors will inevitably find multiple options to track a single investment theme. However, no two ETFs are alike, even if they provide exposure to the same market.
“All exchange-traded funds are not created equal. Before you invest in an ETF, it’s a good idea to know how ETFs can differ from each other,” according to the Financial Industry Regulatory Authority.
Specifically, FINRA breaks it down to four characteristics that help define the ETF investment vehicle, including regulatory structure, management style, investment objective and benchmark index.
For starters, most ETFs are registered with the Securities and Exchange Commission as investment companies under the Investment Company Act of 1940 and publicly trade shares are registered under the Securities Act of 1933. The 1940 act requires funds to register with the SEC, include a board of directors, limit the use of risky investment strategies, maintain a cash hoard for redemptions and provide disclosures for investors. The 1933 act ensures companies provide relevant information through a prospectus and registration statement. While some ETFs that track currencies and commodities are not registered investment companies, they are registered under the Securities Act. [What Index ETFs Can Do For You]
Looking at the management style, funds can be actively or passively managed. Many ETFs passively reflect the performance of a target market index, similar to index mutual funds. Additionally, some ETFs also take a sampling strategy whereby only take a portion, or sample, of the target index to mimic the overall benchmark performance. While various ETFs may track the same index, different fund providers may take slightly varying samples that could cause their ETF products to differ from one another. More recently, some investors have also turned to actively managed ETF strategies crafted by an active portfolio manager who buys and sells stocks on their own investment style instead of passively reflecting a benchmark index.