As we've discussed before, while exchange-traded funds are increasingly popular with investors, they pose a serious risk to individuals. Now, with the addition of several similarly named but structurally different products, the $1 trillion exchange-traded market has become even more complicated and confusing.
On Saturday, Barron's published an ETF Special Report titled "Everything Wants to Be Called an ETF These Days." In the article, author Michael Shari highlights the differences between a traditional exchange-traded fund and its similarly named spin-offs.
Leveraged exchange-traded funds, for example, invest in derivatives (securities priced and valued based on the fluctuating values of one or more underlying assets), as do commodity ETFs. These exchange-traded products are therefore particularly risky, because derivatives are often used for speculative purposes.
Exchange-traded notes (ETNs), another type of exchange-traded product often lumped in with traditional ETFs, are primarily unsecured debt securities. ETNs, by definition, offer zero principal protection - a reality that some investors may not understand.
"If you're not careful, the exchange-traded fund you thought you'd ordered could turn out to be something very different," warns Michael Shari in Saturday's ETF Special Report.
Individuals who are interested in the exchange-traded market need to make sure they fully understand the structure of the products they're buying and the underlying risks and costs associated with them. (For help identifying the risks of certain specialized ETFs, read this SEC alert.)
For more information about the different exchange-traded products, read the full Barron's article here.