Investors have poured more than two trillion dollars into ETFs since they were first introduced in the United States in 1993. As ETFs gain increasing popularity among everyday investors, regulators are boosting their oversight. Most notably, the Securities and Exchange Commission (SEC) recently announced that it plans to examine the operations of ETFs in the coming year. The current market volatility, for now on the downside, is enhanced by leverage and in-and-out strategies used by an Exchange Trade Fund.
What Is an Exchange Trade Fund?
Despite their rapidly growing popularity, many investors are unfamiliar with how ETFs work. To start, an Exchange Trade Fund is an “exchange-traded fund.” The investment funds must register with the SEC under the 1940 Act as either an open-end investment company or a unit investment trust.
As described by the SEC, ETFs are similar to mutual funds in that they allow investors to pool into an investment vehicle that purchases stocks, bonds, or other assets. In return, investors receive an interest in the pool of underlying assets. However, unlike a mutual fund, an Exchange Trade Fund trades on a public stock exchange. In addition, the net asset value (NAV) of an Exchange Trade Fund is not calculated at the end of each day.
ETFs are popular because they are generally more transparent, liquid and cost-effective than similar investments, such as mutual funds. As noted above, they can be bought and sold like stocks with transaction costs that are much lower than mutual funds. In addition, because capital gains from sales within the Exchange Trade Fund are not passed on to shareholders, they have certain tax advantages.
Before jumping into the Exchange Trade Fund market, investors should also understand that there are a number of different types of ETFs, which can vary in both complexity and volatility. The most basic ETFs, known as Spiders, invests in all of the stocks included in the S&P 500 Composite Stock Price Index. On the other end of the spectrum, the goal of a leveraged or inverse ETFs is to achieve a daily return that is a multiple or an inverse multiple of the daily return of a securities index.
“The current regulatory framework no longer effectively achieves the statutory objectives of the Investment Company Act, which seeks to protect investors from the risks of excessive leverage,” SEC Chair Mary Jo White stated.
Notably, the SEC’s rule proposal limits aggregate exposure to derivatives an Exchange Trade Fund can have to 150 percent of a fund’s net assets. A fund would be permitted to obtain exposure up to 300 percent of the fund’s net assets, provided that the fund satisfies a risk-based test is designed to determine whether the fund’s derivatives transactions, in aggregate, result in a fund portfolio that is subject to less market risk than if the fund did not use derivatives. Critics of the rule argue that it would effectively force some leveraged ETFs out of business.
“The current regulatory framework no longer effectively achieves the statutory objectives of the Investment Company Act, which seeks to protect investors from the risks of excessive leverage,” SEC Chair Mary Jo White stated.
Notably, the SEC’s rule proposal limits aggregate exposure to derivatives an Exchange Trade Fund can have to 150 percent of a fund’s net assets. A fund would be permitted to obtain exposure up to 300 percent of the fund’s net assets, provided that the fund satisfies a risk-based test is designed to determine whether the fund’s derivatives transactions, in aggregate, result in a fund portfolio that is subject to less market risk than if the fund did not use derivatives. Critics of the rule argue that it would effectively force some leveraged ETFs out of business.
Breach of Contract Explained: Types and Consequences
Breach of contract disputes are the most common type of business litigation. Therefore, nearly all New York and New Jersey businesses will likely have to deal with a contract dispute at least once. Understanding when to file a breach of contract lawsuit and how long you have to sue for breach of contract is essential […]
How to Dissolve a Corporation in New Jersey: A Step-by-Step Guide
Closing your business can be a difficult and challenging task. For corporations, the process includes formal approval of the dissolution, winding up operations, resolving tax liabilities, and filing all required paperwork. Whether you need to understand how to dissolve a corporation in New York or New Jersey, it’s imperative to take all of the proper […]
Gross Lease vs. Net Lease: Understanding the Key Differences
Commercial leases can take a variety of forms, which is often confusing for both landlords and tenants. Understanding the different types, especially the gross lease structure, is important when selecting the lease that best suits your needs. One key distinction between lease types is how rent is calculated and paid. This article addresses the two […]
What to Do If You Are Impacted by a Retailer Bankruptcy Part 2
Over the past year, brick-and-mortar stores have closed their doors at a record pace. Fluctuating consumer preferences, the rise of online shopping platforms, and ongoing economic uncertainty continue to put pressure on the retail industry. When a retailer seeks bankruptcy protection, a myriad of other businesses are often impacted. Whether you are a supplier, customer, […]
The Current Administration's Proposals for the Financial Services and Banking Industries Will Affect Your Business
Since his inauguration two months ago, Donald Trump’s administration and the Congress it controls have indicated important upcoming policy changes. These changes will impact financial services policies and priorities. The changes will particularly affect cryptocurrency, as well as banking rules and regulations. Key Regulatory Changes in Cryptocurrency For example, in the burgeoning cryptocurrency business environment, […]
Tips for Commercial Landlords Impacted by Wave of Retailer Bankruptcies Part 1
The retail sector has experienced a wave of bankruptcy filings over the last year. Brick-and-mortar businesses in financial distress include big-name brands like Big Lots, Party City, The Container Store, and Vitamin Shoppe. When large retailers seek bankruptcy protection, they are not the only businesses impacted. Landlords can be particularly hard hit. While commercial landlords […]
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Sign up to get the latest from our attorneys!
Explore What Matters Most to You.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.
Let`s get in touch!
Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!
