What are Comparable Products?

ETNs

  • Exchange Traded Notes (ETNs) are similar to ETFs in many respects such as – they trade intraday like ETFs on major stock exchanges, have comparably low expense ratios and cover diverse asset classes.
  • ETNs differ from ETFs in that they are unsecured debt instruments (with no voting rights) issued by a sponsor (e.g. BlackRock) that have their returns linked to the performance of an underlying index or asset class price.
  • While ETNs have no ‘tracking error’ risk, they have additional risks such as credit risk associated with the credit worthiness of the sponsor and the risk of loss of principal.
  • Unlike ETFs, ETNs have a fixed maturity date on which they are redeemed and ETNs do not have any dividend or coupon interest payments.
  • ETNs are only taxed upon sale of units – unlike ETFs that can be more complicated when it comes to taxes.

UITs

  • Unit Investment Trusts (UITs) are ‘buy and hold’ investment portfolios with a relatively fixed portfolio composition.
  • UITs also have a fixed maturity date on which the units are redeemed
  • ETF prices change throughout the day, while UITs are priced once after the end of each trading session as per the Net Asset Value. This makes ETFs easier to trade and offers greater liquidity to investors.

HOLDRs

  • Holding Company Depository Receipts (HOLDRs) cannot add any new shares to its original portfolio – unlike ETFs that can adjust its holdings to reflect changes in the underlying asset class index.
  • HOLDRs also have a fixed annual fee ($8 for every 100 shares owned) and also trade in minimum blocks of 100 shares.

Passive – Index Mutual Funds

  • Index Mutual Funds may have slightly higher expense ratios as compared to ETFs – because ETFs do not have additional administrative expenses and ‘cash drag’ costs that are associated with mutual funds.
  • However, ETF investors have to pay the bid/ask spread and a fixed brokerage every time they buy and sell ETF shares.
  • ETF prices change throughout the day, while mutual fund units are priced once after the end of each trading session as per the Net Asset Value. This makes ETFs easier to trade and offers greater liquidity to investors.
  • ETFs capital gains tend to be more deferred than a similar mutual fund’s would be and hence have an element of tax efficiency for investors.

Actively Managed Mutual Funds

  • Actively managed mutual funds generally have much higher expense ratios as compared to ETFs – because ETFs do not have additional administrative expenses and ‘cash drag’ costs that are associated with mutual funds.
  • However, ETF investors have to pay the bid/ask spread and a fixed brokerage every time they buy and sell ETF shares.
  • ETF prices change throughout the day, while mutual fund units are priced once after the end of each trading session as per the Net Asset Value. This makes ETFs easier to trade and offers greater liquidity to investors.
  • ETFs capital gains tend to be more deferred than a similar mutual fund’s would be and hence have an element of tax efficiency for investors.