Characteristics
We offer a wide range of exchange-traded products (ETPs). ETPs are investment funds that are listed for trading on a national securities exchange and can be bought and sold in the equity trading markets. Shares in an ETP represent an interest in a portfolio of securities. Exchange traded products include but are not limited to exchange traded funds (ETFs) and exchange traded notes (ETNs).
ETPs possess characteristics of both mutual funds and closed-end funds. Similar to mutual funds, an ETP pools assets of multiple investors and invests those pooled assets according to its investment objective and investment strategy. ETPs also continuously offer their shares for sale like mutual funds. In addition, ETPs share certain characteristics with closed-end funds, namely that the fund’s shares trade on a secondary market and may trade at prices higher or lower than the fund’s NAV.
However, ETPs do not sell or redeem individual shares. Instead, certain “authorized participants” have contractual arrangements with the ETP to purchase and redeem ETP shares directly from the ETP in blocks called “creation units” and “redemption units,” respectively, where each creation or redemption unit typically represents 50,000 shares of the ETP. After purchasing a “creation unit,” the authorized participants generally sell the ETP shares in the secondary trading market.
This creation and redemption process for ETP shares provides arbitrage opportunities designed to help keep the market price of ETP shares at or close to the NAV per share of the ETP. For example, if ETP shares are trading at a price below the NAV (generally referred to as a “discount”), an authorized participant can purchase ETP shares in secondary market transactions, and – after accumulating enough shares to compose a “redemption unit” – redeem them from the ETP for the more valuable underlying securities. The authorized participant’s purchase of ETP shares in the secondary market would create upward pressure on ETP share prices, which would bring them closer to the NAV per share of the ETP.
It is important to note that ETPs began as, and may be still most commonly thought of as, passive investment funds that attempted to track the performance of popular investment indices, such as the S&P 500. However, over time, many variations and types of ETPs have evolved and exist today. Some are passive; tracking broad popular indices but also tracking some not that well known indices. Some are actively managed to a particular traditional, or not so traditional, investment strategy. And still further, there are others that are complex products that may have buffers to downside losses, limits on upside profits, perform inverse to an index or are leveraged to attempt to perform at multiples of an index (i.e. 2x or 3x). Given all these variations, it is critical that an investor fully understand the composition of the ETP they are purchasing and its overall investment objective.
Fees and Costs
You will pay a commission every time you buy or sell shares in an ETP. You will pay this commission in addition to the cost of the ETP you choose to buy or sell. For an ETP transaction in the secondary trading market, the commission is based on the same commission formula that we apply to purchases and sales of individual stocks.
- For example, if you purchase 100 shares of an ETF with a share price of $40 per share (an investment of $4,000), you will typically pay a $120 commission. If you purchase 200 shares of a $40 per share ETF or 100 shares of an $80 per share ETF (an investment of $8,000), you will typically pay a $208 commission.
ETPs also deduct ongoing fees and expenses, such as management fees, from ETP assets. These ongoing fees and expenses are typically used to pay for the ETP’s continuing operations, such as paying the ETP’s investment manager, accounting and auditing expenses, legal expenses, and recordkeeping expenses. However, ETPs generally have lower expense ratios than mutual funds because most ETPs are not actively managed and, therefore, do not incur the internal costs of buying and selling the underlying portfolio securities.
These ongoing fees and expenses are typically charged annually as a percentage of your assets. You pay these fees and expenses indirectly because they are deducted from your assets on an ongoing basis.
More Information
More information about ETPs, including their ongoing fees and expenses and overall expense ratio, is available in the ETP’s prospectus. You can request a copy of an ETP’s prospectus from your financial advisor. Additional information about ETPs is available on FINRA’s ETF Resource Page and FINRA’s ETN Investor Alert. The SEC also published an Investor Bulletin about ETFs.
Information about the commission fees you will pay BFE for ETP transactions is available on our Equity and Option Commission Schedule.
