A Guide for Investors SEC

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Mutual Funds and Exchange,Traded Funds ETFs, American investors often turn to mutual funds and exchange. traded funds ETFs to save for retirement and other financial. goals Although mutual funds and ETFs have similarities they. have differences that may make one option preferable for any. particular investor This brochure explains the basics of mutual. fund and ETF investing how each investment option works. the potential costs associated with each option and how to. research a particular investment,U S Securities and Exchange Commission. Office of Investor Education and Advocacy,100 F Street NE. Washington DC 20549 0213,Toll free 800 732 0330,Website www Investor gov. U S SECURITIES AND EXCHANGE COMMISSION 1,Table of Contents.
How Mutual Funds and ETFs Work 4,How Mutual Funds Work 4. How ETFs Work 6,Common Features of Mutual Funds and ETFs 8. Factors to Consider 11,Before Investing in Mutual Funds or ETFs 11. Different Types of Mutual Funds and ETFs 13,Different Types of Investment Strategies 19. How Mutual Funds and ETFs Can Provide,Returns to Investors 22.
Things That Could Reduce Mutual Funds and,ETFs Returns 24. Fees and Expenses 24,Classes of Mutual Funds 33,Tax Consequences 36. Sources of Information 37,Avoiding Common Pitfalls 41. Past Performance 41,Looking Beyond a Mutual Fund or ETF Name 42. Bank Products Versus Mutual Funds 42,If You Have a Question or Complaint 44.
Glossary of Key Mutual Fund,and ETF Terms 45,2 MUTUAL FUNDS AND ETFS. Key Points to Remember, Mutual funds and ETFs are not guaranteed or insured by. the FDIC or any other government agency even if you buy. through a bank and the fund carries the bank s name You. can lose money investing in mutual funds or ETFs, Past performance is not a reliable indicator of future per. formance so don t be dazzled by last year s high returns. But past performance can help you assess a fund s volatility. All mutual funds and ETFs have costs that lower your invest. ment returns Shop around and compare fees,U S SECURITIES AND EXCHANGE COMMISSION 3. How Mutual Funds and ETFs Work,How Mutual Funds Work.
A mutual fund is an SEC registered open end investment. company that pools money from many investors and invests. the money in stocks bonds short term money market instru. ments other securities or assets or some combination of. these investments The combined securities and assets the. mutual fund owns are known as its portfolio which is managed. by an SEC registered investment adviser Each mutual fund. share represents an investor s proportionate ownership of the. mutual fund s portfolio and the income the portfolio generates. Investors in mutual funds buy their shares from and sell. redeem their shares to the mutual funds themselves Mutual. fund shares are typically purchased from the fund directly or. through investment professionals like brokers Mutual funds. are required by law to price their shares each business day and. they typically do so after the major U S exchanges close This. price the per share value of the mutual fund s assets minus. its liabilities is called the NAV or net asset value Mutual funds. must sell and redeem their shares at the NAV that is calculated. after the investor places a purchase or redemption order This. means that when an investor places a purchase order for. mutual fund shares during the day the investor won t know. what the purchase price is until the next NAV is calculated. 4 MUTUAL FUNDS AND ETFS,Types of Investment Companies. There are three basic types of investment companies. Open end investment companies or open end,funds which sell shares on a continuous basis. purchased from and redeemed by the fund or,through a broker for the fund. Closed end investment companies or closed end,funds which sell a fixed number of shares at one. time in an initial public offering that later trade on. a secondary market and,Unit Investment Trusts UITs which make a one.
time public offering of only a specific fixed number. of redeemable securities called units and which will. terminate and dissolve on a date that is specified at. the time the UIT is created, Mutual funds are open end funds ETFs are generally. structured as open end funds but can also be struc. tured as UITs ETFs operate pursuant to SEC exemptive. U S SECURITIES AND EXCHANGE COMMISSION 5,How ETFs Work. Like mutual funds ETFs are SEC registered investment com. panies that offer investors a way to pool their money in a fund. that makes investments in stocks bonds other assets or some. combination of these investments and in return to receive an. interest in that investment pool Unlike mutual funds how. ever ETFs do not sell individual shares directly to or redeem. their individual shares directly from retail investors Instead. ETF shares are traded throughout the day on national stock. exchanges and at market prices that may or may not be the. same as the NAV of the shares, ETF sponsors enter into contractual relationships with one. or more Authorized Participants financial institutions which. are typically large broker dealers Typically only Authorized. Participants purchase and redeem shares directly from the. ETF In addition they can do so only in large blocks e g 50 000. ETF shares commonly called creation units and they typically. pay for the creation units in an in kind exchange with a group. or basket of securities and other assets that generally mirrors. the ETF s portfolio, Once an Authorized Participant receives the block of ETF. shares the Authorized Participant may sell the ETF shares in. the secondary market to investors An ETF share is trading at. a premium when its market price is higher than the value of. its underlying holdings An ETF share is trading at a discount. when its market price is lower than the value of its underlying. holdings A history of the end of day premiums and discounts. that an ETF experiences i e its NAV per share compared to. its closing market price per share can usually be found on. the website of the ETF or its sponsor Like a mutual fund an. ETF must calculate its NAV at least once every day. 6 MUTUAL FUNDS AND ETFS,A Word about Exchange Traded Products ETPs.
ETFs are just one type of investment within a broader. category of financial products called exchange trad. ed products ETPs ETPs constitute a diverse class, of financial products that seek to provide investors. with exposure to financial instruments financial,benchmarks or investment strategies across a wide. range of asset classes ETP trading occurs on national. securities exchanges and other secondary markets, making ETPs widely available to market participants. including individual investors,Other types of ETPs include exchange traded. commodity funds and exchange traded notes ETNs,Exchange traded commodity funds are structured as.
trusts or partnerships that physically hold a precious. metal or that hold a portfolio of futures or other. derivatives contracts on certain commodities or cur. rencies ETNs are secured debt obligations of finan. cial institutions that trade on a securities exchange. ETN payment terms are linked to the performance,of a reference index or benchmark representing. the ETN s investment objective ETNs are complex, involve many risks for interested investors and can. result in the loss of the entire investment,This brochure discusses only ETFs that are reg. istered as open end investment companies or unit,investment trusts under the Investment Company. Act of 1940 It does not address other types of ETPs. such as exchange traded commodity funds or ETNs,U S SECURITIES AND EXCHANGE COMMISSION 7.
Common Features of Mutual Funds and ETFs,Some common features of mutual funds and ETFs are. described below Whether any particular feature is an advan. tage or disadvantage for you will depend on your unique. circumstances always be sure that the investment you are. considering has the features that are important to you. Professional Management Most funds and ETFs are, managed by investment advisers who are registered with. Diversification Spreading investments across a wide range. of companies or industry sectors can help lower risk if a. company or sector fails Many investors find it less expen. sive to achieve such diversification through ownership of. certain mutual funds or certain ETFs than through owner. ship of individual stocks or bonds,Low Minimum Investment Some mutual funds accom. modate investors who don t have a lot of money to invest by. setting relatively low dollar amounts for the initial purchase. subsequent monthly purchases or both Similarly ETF. shares can often be purchased on the market for relatively. low dollar amounts,8 MUTUAL FUNDS AND ETFS,Liquidity and Trading Convenience Mutual fund. investors can readily redeem their shares at the next. calculated NAV minus any fees and charges assessed on. redemption on any business day Mutual funds must send. investors payment for the shares within seven days but. many funds provide payment sooner ETF investors can. trade their shares on the market at any time the market is. open at the market price minus any fees and charges. incurred at the time of sale ETF and mutual fund shares. traded through a broker are required to settle in two. business days, Costs Despite Negative Returns Investors in mutual funds.
must pay sales charges annual fees management fees and. other expenses discussed on pages 24 32 regardless of. how the mutual fund performs Investors may also have to. pay taxes on any capital gains distribution they receive. Investors in ETFs must pay brokerage commissions annual. fees management fees and other expenses discussed on. pages 24 32 regardless of how the ETF performs ETF. investors may also have to pay taxes on any capital gains. distributions however because of the structure of certain. ETFs that redeem proceeds in kind taxes on ETF investments. have historically been lower than those for mutual fund. investments It is important to note that the tax efficiency of. ETFs is not relevant if an investor holds the mutual fund or. ETF investment in a tax advantaged account such as an IRA. or a 401 k,U S SECURITIES AND EXCHANGE COMMISSION 9. Lack of Control Investors in both mutual funds and ETFs. cannot directly influence which securities are included in the. funds portfolios, Potential Price Uncertainty With an individual stock or an. ETF an investor can obtain real time or close to real time. pricing information with relative ease by checking financial. websites or by calling a broker By contrast with a mutual. fund the price at which an investor purchases or redeems. shares will depend on the fund s NAV which the fund might. not calculate until many hours after an order has been. 10 MUTUAL FUNDS AND ETFS,Factors to Consider,Before Investing in Mutual Funds or ETFs. Determine your financial goals and risk tolerance When. it comes to investing in mutual funds and ETFs investors. have thousands of choices Before you invest in any mutual. fund or ETF you must decide whether the investment strat. egy and risks are a good fit for you You should also consid. er more generally whether the unique style of investing of. the mutual fund s or ETF s sponsor is a good fit for you The. first step to successful investing is to figure out your current. financial goals and risk tolerance either on your own or. with the help of an investment professional, Beware of risk All investments carry some level of risk. An investor can lose some or all of the money he or she. invests the principal because securities held by a fund go. up and down in value Dividend payments may also fluctu. ate as market conditions change Mutual funds and ETFs. have different risks and rewards Generally the higher the. potential return the higher the risk of loss, Consider the sponsor s investing style Before you invest.
you may want to research the sponsor of the mutual fund. or ETF you are considering The sponsor s website is often. a good place to begin and it is helpful to spend some time. browsing through the website to get a better understanding. of the sponsor s underlying philosophy on investing Each. U S SECURITIES AND EXCHANGE COMMISSION 11, sponsor has its own style of investing that will affect how it. manages its mutual funds and ETFs It is helpful to under. stand each sponsor s style of investing so you can better. choose the right investment for you, Ask and check Before you engage an investment profes. sional or purchase shares of a mutual fund or ETF make. sure you research and verify relevant information to deter. mine which option is best suited for you,Investment professionals Details on an investment. professional s background and qualifications are avail. able on the SEC s Investment Adviser Public Disclosure. IAPD website www adviserinfo sec gov or on the, SEC s website for individual investors Investor gov. If you have any questions about checking the back,ground of an investment professional you can call.
the SEC s toll free investor assistance line at 800. 732 0330 for help, Mutual funds and ETFs You can research a mutual fund. or ETF by reading its prospectus discussed on pages. 37 39 carefully to learn about its investment strategy. Liquidity and Trading Convenience Mutual fund investors can readily redeem their shares at the next calculated NAV minus any fees and charges assessed on redemption on any business day Mutual funds must send investors payment for the shares within seven days but many funds provide payment sooner ETF investors can trade their shares on the market at any time the market is open at the

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