ETF Structure and Practice: Potential Issues or Popular Myths?

16 Pages Posted: 22 Dec 2015

Date Written: December 2012

Abstract

At first glance, exchange-traded funds (ETFs) may seem like ideal investments. Benefits including low cost, flexibility and tax advantages make them viable choices for many investors and have helped assets in ETFs grow substantially in the past 10 years. While some ETFs could be suitable investments in many situations, aspects of their structure and how they are being used may be creating potential risks.

This article combines excerpts of select, existing studies and comments from industry experts to debunk certain myths about the dangers of ETF investing and to highlight possible issues for individual and institutional ETF investors, especially issues related to liquidity, securities lending and short interest. We seek to provide the basis for measured questions that thoughtful ETF investors may pose regarding investments already made, or being considered.

Throughout this piece, we refer to ETFs for simplicity, but the issues addressed also could be applied to most exchange-traded products (ETPs) such as exchange-traded notes (ETNs) or exchange-traded certificates, currencies and commodities (ETCs).

Keywords: exchange-traded funds, ETFs, liquidity, securities lending, short interest

JEL Classification: G10, G11, G14, G15, G20, G22, G23, G30

Suggested Citation

Institute, Brandes, ETF Structure and Practice: Potential Issues or Popular Myths? (December 2012). Brandes Institute Research Paper No. 2012-06. Available at SSRN: https://ssrn.com/abstract=2706296 or http://dx.doi.org/10.2139/ssrn.2706296

Brandes Institute (Contact Author)

Brandes Investment Partners ( email )

11988 El Camino Real, Suite 500
P.O. Box 919048
San Diego, CA 92191-9048
United States

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