'40 Act alternative ETFs help protect investors from the excessive use of leverage, short selling and over-concentration that can be part of non-'40 Act alternative investments.
Traditional alternative strategies, like hedge funds, typically do not disclose their holdings to investors, whereas all ETFs disclose their holdings on a daily basis.
The structure may help reduce some of the risks of these asset classes by providing a diversified fund approach.
Although some alternative assets or markets cannot be converted to cash on a daily basis, ETF shares can be sold at any time during a business day.
Where many traditional, non-ETF alternative strategies have strict investor qualifications, any investor can buy shares in any ETF.
Most traditional, non-ETF alternative strategies have minimum investment requirements that can be prohibitive, to say the least. As ETFs have no minimum requirements, an investor can purchase a single share if they so desire.
It is often costly and risky to purchase alternative assets like commodities and currencies on your own. Though subject to trading fees, ETFs typically have low management fees and can be quite cost effective.
Traditional non-ETF alternative investments can have complicated tax consequences. For example, hedge fund investors must wait for their K-1 (a partnership tax form that outlines the gains or losses of the alternative investment) in order to file their taxes. ETFs have no such requirement -- and may actually be used to help manage taxes through tax-loss harvesting or other tax management strategies.
ETF Basics Part 3: The Benefits of the ETF Structure
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