Issue 3 - December 2008
Investments in ETFs: Basic Structure
Just like an index mutual fund, each share of an index exchange-traded fund (ETF) represents a partial ownership in an underlying portfolio of securities intended to track a market index. This means that an investor holding shares in any ETF has a beneficial ownership interest in a portion of the investments in the underlying portfolio. It is important to note that the assets in an ETF are separate from the various service providers to the fund, including asset managers, index providers, and custodians. Generally, an ETF is not directly subject to the credit risk of a service provider, except to the extent the service provider is a fund holding, in which case the ETF’s value will be impacted proportionately.
Investments in ETFs: Provider Relationships
While there are several parties that are involved in the daily management and administration of an ETF, any business or credit risk associated with those parties is generally not expected to affect the value of the ETF or its assets, except to the extent the service provider is a fund holding, as noted above. To the extent the credit or business risk of a party may otherwise impact the fund, the fund generally seeks to take appropriate measures to mitigate any such risk.
When making investment decisions under any type of market condition, it is always important for investors to clearly understand the structure and mechanics of the investment vehicles employed in their portfolios. ETFs are set up as separate investment portfolios under the Investment Company Act of 1940. The custodian of the fund maintains the securities and assets of each fund in separate accounts.
|Parties Involved in ETF Management and Operation||Role|
|Investment Professional||Facilitates the day-to-day management of the fund|
|Index Provider||Determines the relative weightings of the securities in the underlying index and publishes information regarding the composition of the underlying index|
|Data Provider||Provides daily pricing for securities|
|Authorized Participant||Handles the creation and redemption of shares|
|Custodian||Provides for the safekeeping and accounting of fund assets|
|Distributor||Assists in the distribution of funds|
|Depository Trust and Clearing Corporation (DTCC)||Ensures orderly assignment and distribution of ETF certificates in a trade|
|To learn more about iShares, visit Pershing's ETF Center in NetExchange. Additional information about iShares can also be found in the Funds’ prospectuses, which may be obtained by calling 1-800-iShares (1-800-474-2737) or by visiting http://www.ishares.com/. Carefully consider the iShares Funds’ investment objectives, risk factors, and charges and expenses before investing. Read the prospectus carefully before investing.|
For Professional Use Only.