A. Like most complicated financial products, investors need to read fine prints to prevent from being caught off guard when something taken for granted didn't happen. Here are 3 specific reasons one needs to read the fine prints of Mutual Funds and ETFs.
1. Trading Prices
For mutual funds, most investors know they can only be traded once a day, and most people thought the trading price is the fund's closing price, set at 4pm EST.
Wrong. As we have explained here, there are hundreds of funds whose closing prices are set before 4pm! So if your buy/sell order is submitted just before 4pm, you could be trading on next trading day's closing price!
2. Trading Multiples
Most people might thought trading multiples of a fund is pretty straightforward, for example, PE of a fund, just look at the stocks held by the fund and then do the calculation.
Unfortunately, it's not that simple. Take iShares Nasdaq Biotechnology (IBB) as an example, if you read the fine prints, you will find that most of the biotech stocks are not making money at all, therefore are excluded in the calculation. If you just use the fund's published ETF as a investment guild, you will be seriously misguided.
3. Underlying Values
For ETFs, since they can be traded in read time, you might think their trading prices should mirror their underlying value closely. Unfortunately, due to ETFs' complicated design, surprises could and did happen.
Read here about what happened on August 24, 2015 and you will see what it happens, how painful it could be for some unfortunate investors!