In a recently released bulletin from the SEC, the emergence of ETFs in the marketplace has come under renewed scrutiny. Its examination of structural issues, reporting discrepancies and potential illiquidity has brought to the surface a number of concerns that may still be misunderstood amongst advisors and their clients.
The report, attached for your review, serves as a warning to the financial industry and sets out a number of items to consider prior to purchasing ETFs, summarized below:
- ETF may not own the securities it reports on its balance sheet. It may only have the rights to the securities with an authorized broker being the counterparty (the ETF picks the broker which may be a related party).
- Since brokers are the primary traders of ETFs it is highly likely in such a scenario that there would be no bid for ETF shares.
- In the flash decline of the markets about two years ago, most ETFs went no bid for close to two hours.
- They are only tax efficient if investors buy and hold. ETFs trigger immediate tax consequences when switching and rebalancing non-registered investments.
- An ETF may trade at a premium or at a discount of its underlying securities
- ETF sales support in the form of investor materials and market commentary are very limited.
ETFs are commonly seen as direct substitutes to mutual funds but they lack the major benefits that mutual funds provide including diversification, no charges for buying additional units and an experienced portfolio manager. Mutual funds also allow investors to automatically reinvest their distributions in more units, allowing investors to benefit from compounding. ETFs may prove to be a useful investment vehicle for specific situations but they do not necessarily offer the performance, flexibility, diversification or services that most investors need.
Full Report: SEC Investor Bulletin ETF’s –