This post is the third post of a multi-part series of pieces designed to provide education around ETFs. For the full publication, click here.
ETFs have a relationship with several facets of capital markets. One key relationship is with Authorized Participants (APs). Understanding this relationship as well as what goes into the Total Cost of Ownership of an ETF is important. In this post, we explore both of these topics in a bit more detail.
What is the relationship of ETFs and Capital Markets?
A. The basics
ETFs do not sell shares directly to investors. Shares of ETFs are issued in large blocks called creation units, typically numbering 50,000 shares per unit. Purchasers of creation units are often large financial institutions, called authorized participants (APs), and these purchases are often made "in-kind" vs. via a cash transaction. These "in-kind" transactions can have potential tax efficiency benefits in relation to capital gains tax treatment (see "The In-kind Creation Process & The Players" figure below).
The ETF share creation and redemption process facilitates trading on the secondary market at prices that are generally in line with funds' Net Asset Values (NAVs), although ETF shares can trade at a premium or discount to NAV. This process requires that portfolio holdings be disclosed daily.
B. The Authorized Participant (AP)
What is an ETF's "Total Cost of Ownership"?
The total cost of owning an ETF may extend beyond its listed management fee. Other potential ETF costs can be thought of across four verticals (see "TCO Illustration" below): Expense Ratios, Bid-Ask Spread, Trading Commission1 and Tracking Error. Once considering all four of these verticals, it is possible that an ETF with a higher expense ratio could have a lower total cost than one with only a lower expense ratio.
1. If Applicable
Shares of ETFs are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns.
Carefully consider the Funds' investment objectives, risk factors, charges and expenses before investing. This and additional information can be found in the Funds' full or summary prospectus, which may be obtained by calling 1-888-GX-FUND-1 (1.888.493.8631), or by visiting globalxfunds.com. Read the prospectus carefully before investing.
Global X Management Company LLC serves as an advisor to Global X Funds. The Funds are distributed by SEI Investments Distribution Co. (SIDCO), which is not affiliated with Global X Management Company LLC.
Investing involves risk, including the possible loss of principal. This information is not intended to be individual or personalized investment or tax advice. Please consult a financial advisor or tax professional for more information regarding your situation.
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