NEW YORK ( WisdomTree) -- There are many exchange-traded products on the market today. But would it surprise you to learn that the term "exchange-traded funds" is actually overused? The truth is that although the term "ETF" is now used as a sort of catchall, in reality, we believe only those exchange-traded investments registered under the Investment Company Act of 1940 ("registered") are truly exchange-traded funds.Designed to ensure managers act in the investors' best interests, the Investment Company Act of 1940 ("'40 Act") is an important piece of legislation that defines how investments registered under the '40 Act are built and managed. In general, investments registered under the '40 Act must meet strict anti-fraud rules and diversification minimums and must prohibit excessive use of alternative strategies like leverage (taking out a loan to buy shares of securities, or using stock shares as collateral in an effort to leverage existing portfolios beyond their initial investments) or short selling (borrowing shares of securities to sell now in the hopes of buying them back more inexpensively later and profiting from the difference). The '40 Act helps protect investors by requiring investment companies to disclose their holdings, strategies and financial conditions on a regular basis. However, it is important to note that ETFs registered under the '40 Act should not be considered safe investments and it's still possible to lose money when investing in ETFs.
ETF Basics: The Benefits of the ETF Structure
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