Washington State Department of Financial Institutions

Exchange Traded Funds

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Exchange Traded Funds (ETFs) have grown increasingly popular among retail investors seeking safe, stable alternatives to mutual funds.

Before investing in an ETF, ask yourself these questions:

  1. Do I understand this investment?
  2. Is this investment right for me?

What are ETFs?

ETFs are baskets of investments such as stocks,bonds, commodities, currencies, options, swaps, futures contracts and other derivative instruments that are created to mimic the performance of an underlying index or sector.

ETFs are often compared to mutual funds because they pool investors’ assets and use professional fund managers to invest the money according to a specific strategy detailed in the fund’s prospectus.

Unlike a mutual fund, which is bought or sold directly from the fund issuer at the fund’s net asset value (NAV), which is set at the end of each trading day, an ETF is bought and sold on an exchange like any other listed stock at a price continuously determined on the exchange.

Initially, ETFs were purchased primarily by sophisticated investors, such as hedge fund managers, who used the products to “hedge” against a particular risk. Today, retail investors with investment objectives of safety and stability are purchasing ETFs as an alternative to mutual funds and other investments.

Common Traditional ETFs

Non-traditional or Synthetic ETFs

What are the risks associated with ETFs?

Are ETFs suitable for you?

Not all ETFs are the same. Some may be appropriate for long-term holders, but others may require daily monitoring. You need to know your investment objectives and risk tolerance level as well as your investment timeline.

Synthetic products like leveraged or inverse ETFs are not appropriate for “buy and hold” investors because an ETF may reset each day, and its performance may quickly deviate from the underlying index, currency, commodity or basket of assets it is attempting to mirror. In other words, it is possible that your ETF could suffer significant loss even if the long-term performance of the index or sector shows a gain.

You should consult a tax adviser and registered investment professional to determine the potential tax consequences and to better understand the risks and benefits of an ETF to your portfolio. Investors unfamiliar with the features and applications of exotic ETFs may be introducing into their investment portfolios an investment that can increase losses more rapidly than anticipated.

Before you invest

Just like other investment opportunities, you should contact the Washington State Department of Financial Institutions (DFI) to determine if the ETF and the person recommending the investment are properly registered in Washington. Contact DFI at 1.877.RING DFI (746-4334).

ETFs should be registered with the U.S. Securities and Exchange Commission (SEC). You should ask for and read the ETF’s prospectus before investing.

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