* 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.
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)||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.|
|Tax efficiency and insulation from activities of other 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.