Call Now For a Free Consultation:
(614) 532-4576
Nationwide Representation

Supposedly Simple ETFs Not So Simple to Understand

"Overly dense and/or overly generic prospectuses render an investment product that should be relatively easy to understand too complicated for most investors," reports the WSJ in a Nov. 27 article.

What Are Exchange-Traded Funds?

The products, exchange-traded funds (ETFs), generally involve investment strategies that should be simple for the lay investor to understand. ETFs are mutual funds that trade on listed exchanges (such as the NYSE) in the same manner as traditional stocks. Unfortunately, according to the WSJ, "while they would seem to be transparent, their trading sometimes doesn't reflect their underlying value."

On May 6, for example, the market experienced a "flash crash" during which many ETFs seemed to become almost entirely worthless in a few brief seconds, only to rebound moments later. A look through many of the funds' prospectuses would not indicate that level of risk to most readers.

What Makes ETFs Difficult to Understand?

As reported in the article, many of the prospectuses contain overly generic and vague language, which makes it difficult for potential investors to understand both the risks of the funds and how one ETF may differ from another. In addition, ETFs often have complicated fee structures that are explained in terminology that is too complex for most investors to follow.

These problems mean that most prospectuses do not do a very good job of explaining the risks and benefits of a particular ETF to potential investors. While the firms that offer the funds often believe the documents disclose all necessary information, financial advisers and investors do not always agree. One adviser quoted in the article suggests basing the appraisal of a fund on its past performance history rather than on the information in the prospectus. "Show me the returns," he says. "Am I getting what I thought I would?"

The information contained in The Firm’s posts on its blog, fraud alerts, investigations or elsewhere on the site is based upon information obtained from other sources including, but not limited to, news outlets and federal, state, and regulatory agency filings. All suspects and subjects of postings herein are presumed innocent until proven guilty in a court of law or administrative action and any and all crimes are alleged until a court or regulatory agency finds otherwise .

Share This Story
If you found the information provided by this article useful, consider sharing to your social media channels to help others in their search for reliable resources.
Consult with Our Legal Team
There is never a cost associated with a consultation
Atlanta Office

945 East Paces Ferry Road, Suite 2275
Atlanta, GA 30326
Columbus Office

305 W. Nationwide Blvd
Columbus, OH 43215
Meyer Wilson
New Orleans Office

900 Camp Street 
Suite 337
New Orleans, LA 70130
Los Angeles Office

2029 Century Park East,
Suite 400N
Los Angeles, CA 90067
Cleveland Office

4781 Richmond Rd.
Suite 400
Warrensville Heights, OH 44128
Bloomfield Hills Office

41000 Woodward Ave.,
Suite 350
Bloomfield Hills, MI 48304
Quick Links
The information contained in this Website is provided for informational purposes only, and should not be construed as legal advice on any subject matter. No recipients of content from this site, clients or otherwise, should act or refrain from acting on the basis of any content included in the site without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from an attorney licensed in the recipient's state. Read More
The information contained in this Website is provided for informational purposes only, and should not be construed as legal advice on any subject matter.
Read More
chevron-down linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram