iShares
Comparing ETFs: Know the Differences
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Choosing from the increasing number of exchange traded funds (ETFs) can be confusing and time consuming. This framework is designed to give investors some key criteria that they may want to take into consideration when selecting the right ETF for their needs.
PROVIDER EXPOSURE STRUCTURE
Key considerations:

  • Experience in the ETF market
  • Size, scale, expertise, track record and level of commitment to the ETF industry
  • Experience and relationships with market participants and index providers
 Key considerations:

  • Targeted exposure
  • Index name recognition
  • An index that’s a trackable, complete and accurate representation of the investment opportunity
  • Frequency of index holdings disclosure and level of transparency
 Key considerations:
LIQUIDITY COSTS  
Key considerations:

  • An ETF’s market volume and liquidity of its underlying securities
  • Liquidity and access in volatile market conditions
  • ETF provider support for liquidity (e.g. strength of relationships with index providers and market participants)
 Key considerations:

  • Explicit costs* - expense ratio, commissions
  • Implicit costs* – trading spread¹, market impact², tracking error, capital gains
  • Tightness of bid/offer spread¹
  • The ETF’s focus on maximizing liquidity, tax efficiency and transparency while minimizing transaction costs for investors
  

* Explicit costs are pre-determined based on the ETF's fees and brokerage firm's commission schedule. Implicit costs may vary based on market events and trading volume. Implicit costs may change continuously based on current market conditions.

1Trading spread, also referred to as bid/ask spread, is the difference between bid/ask prices, which reflect the most current value at which an investor can buy or sell shares of an ETF during market trading hours.

2Market impact is the estimated difference between the displayed market quote and the price at which a trade is actually executed.

ETF Structure Comparison

  ETFs Unit Investment Trusts Grantor Trusts Exchange Traded Notes (ETNs) Limited Partnerships
Registration Investment Company Act of 1940 Investment Company Act of 1940 Securities Act of 1933 Securities Act of 1933 Securities Act of 1933
Recourse Portfolio of securities Portfolio of securities Pro rata interest in the trust Issuer credit Pro rata interest in the partnership
Principle Risk Market risk Market risk Market risk Market and issuer risk Market risk
Tracking Error ³ Low to moderate Moderate Moderate Low Moderate
Tax Issues Potential exposure to capital gains and losses of portfolio, although creation/redemption mechanism works to minimize this. Dividends and interest income passed through to shareholders. Potential exposure to capital gains and losses of portfolio, although creation/redemption mechanism works to minimize this. Dividends and interest income passed through to shareholders. Taxed as though investor effectively holds underlying security. Each investor takes a pro rata share of the income and expenses of the trust. Capital gains only realized upon the sale, redemption or maturity of the ETN. No dividend distributions. Each investor takes a pro rata share of the income and expenses of the partnership.
Transparency High High High Limited. ETNs are generally senior, unsecured, unsubordinated debt securities designed to reflect returns that are linked to the performance of a market index, less investor fees. There is typically not an underlying portfolio of securities that investors have recourse to or transparency into. Limited
Diversification High High Moderate to high Moderate to high Varies
Liquidity Daily on exchange Daily on exchange Daily on exchange Daily on exchange Varies–access MLPs through brokerage accounts
Accessibility Access through any brokerage account (certain firms may have restrictions on product availability on their platforms) Access through any brokerage account (certain firms may have restrictions on product availability on their platforms) Access through any brokerage account (certain firms may have restrictions on product availability on their platforms) Access through any brokerage account (certain firms may have restrictions on product availability on their platforms) Varies–access MLPs through brokerage accounts

3 Tracking error refers to the performance difference of an investment versus its benchmark over a given time period.



Dedicated vs. Multi-Share Class Structure

  Dedicated share class structure Multi-class structure
Investment interest Portfolio of securities (stocks, bonds, swaps). Share of an investment pool invested in a portfolio of securities.
Costs
  • ETF expense ratio
  • Fund expenses, including transaction costs, are distributed pro rata across all shareholders
  • ETF shareholders pay only for potential costs incurred within the ETF
  • Each share class has unique expense ratio
  • Fund expenses, including transaction costs, are distributed pro rata across all shareholders, including potential costs incurred by other share classes. Scale may reduce these costs
  • ETF shareholders may pay for potential costs incurred by other share classes
Tax efficiency and insulation from activities of other shareholders
  • Creation/redemption mechanism helps insulate shareholders from transaction costs and capital gains created by other shareholders
  • One shareholder's actions do not create capital gains distributions for other shareholders
  • ETF creation/redemption mechanism helps insulate ETF shareholders from activities of other ETF shareholders
  • Transactions of mutual fund shareholders may create tax efficiencies by creating additional tax lots; however, redemptions may also create capital gains distributions that are distributable to ETF shareholders
Liquidity Determined by ETF trading volume and liquidity of underlying securities
Tracking error Low to moderate


Investment comparisons are for illustrative purposes only and are not meant to be all-inclusive. Transactions in shares of ETFs will generate tax consequences. ETFs are obligated to distribute portfolio gains to shareholders.

For more information on the differences between ETFs and mutual funds, please click here.

Carefully consider the iShares Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses, which may be obtained by calling 1-800-iShares (1-800-474-2737), or by viewing or downloading a prospectus. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

There can be no assurance that an active trading market for shares of an ETF will develop or be maintained.

In addition to the normal risks associated with investing, narrowly focused investments typically exhibit higher volatility.

Shares of the iShares Funds may be sold throughout the day on the exchange through any brokerage account. However, shares may only be redeemed directly from a Fund by Authorized Participants, in very large creation/redemption units.

This material is not intended to be tax advice. The tax consequences of dividend distributions may vary by individual taxpayer. Please consult your tax professional or financial advisor for more information with regard to your specific situation.

BlackRock does not provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.

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