ETF tweakings: Good or bad?

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As of press time, Securities and Exchange Commission is proposing rules that could affect certain exchange-traded funds (ETFs).

Specifically, SEC wants to ensure that corporate-bond, high-yield-bond and emerging-market ETF holdings can be sold without affecting the underlying markets and that the ETFs’ use of derivatives is limited.

“The new rules the SEC is considering putting in place are aimed at making ETFs more resilient and protecting investors in the event of market stress,” says Boris Valentinov of Wells Fargo.

Although the rules might change before they’re finalized before the end of 2016, Valentinov and other experts expect that some rules will be phased in over a period of 18 months.

Experts believe that changes could lead investors to consider exchange-traded notes (ETNs) instead. ETNs, which cover a variety of markets and trade daily, like ETFs do, don’t hold stocks or bonds, like ETFs do. Instead, ETNs essentially are promissory notes to pay investors a rate of return that’s based on an index.

ETNs aren’t a good alternative, because they have less regulation than do ETFs and—more important—they’re unsecured debt, experts say. In other words, if a company that issued an ETN were to default, investors might lose all of their investment.

Instead, experts whom we interviewed suggest that you don’t change anything for the time being. Although the ETFs might have increased expenses to pay for new regulation, a more orderly market would benefit the investor in the long run, says Bob Dannhauser of CFA Institute.