Exchange traded funds (ETF) owe many of their advantages to their unique structure, which defers from that of traditional mutual funds. However, not all ETF structures are created equal. The standalone ETF structure that iShares utilizes is strikingly simple and designed to meet the needs of many types of investors.
Standalone ETF Structure
- Investors buy and sell on the exchange. As demand for the ETF changes, shares of the ETF may be created or redeemed by an Authorized Participant (“AP”) –a group of pre-approved institutional firms who have entered into an agreement with the ETF’s distributor. The APs create ETF shares by delivering a basket of securities and in return they receive a large block of ETF shares from iShares. A redemption works similarly, with the AP instead providing the large block of ETF shares back to iShares and receiving a basket of securities back.
- The in-kind mechanism of creation redemption helps to isolate shareholders from the action of others and externalizes transaction costs to each buyer and seller of the ETF. This gives clients further control over their own tax situation and helps ETFs be more tax-efficient than a traditional mutual fund structure.
- Holdings of iShares ETFs are disclosed on a daily basis on iShares.com.
- Multi share class ETFs are a distinct share class of an existing mutual fund which all own a pro-rata portion of an investment pool.
- As a result of this difference in structure, investors could potentially receive capital gains as a result of others trading activity since the assets of the ETF are part of a commingled Pool.
- Mutual funds and multi-shares class ETFs only disclose their holdings on a quarterly basis.
Key Benefits of the Standalone Structure
Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses and, if available, summary prospectuses, which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal.
Shares of the iShares Funds may be bought and sold throughout the day on the exchange through any brokerage account. Shares are not individually redeemable from the Fund, however, Shares may be redeemed directly from a Fund by Authorized Participants, in very large creation/redemption units. Although market makers will generally take advantage of differences
between the NAV and the trading price of iShares Fund shares through arbitrage opportunities, there is no guarantee that they will do so.
Transactions in shares of ETFs will result in brokerage commissions and will generate tax consequences. All regulated investment companies are obliged to distribute portfolio gains to shareholders. Trading shares of the iShares Funds will also generate tax consequences and transaction expenses.
Investment comparisons are for illustrative purposes only. To better understand the similarities and differences between investments, including investment objectives, risks, fees and expenses, it is important to read the products’ prospectuses. The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).
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