This information is specific to exchange-traded fund (“ETF”) sales at E*TRADE from Morgan Stanley. Other available investment options feature different fees and charges, and may provide less compensation to E*TRADE from Morgan Stanley.
Summarized below is important information about ETFs and how E*TRADE from Morgan Stanley is compensated when you invest in ETFs.
You can also visit the websites sponsored by the U.S. Securities and Exchange Commission (www.sec.gov) and the Financial Industry Regulatory Authority (www.finra.org) to obtain additional educational information about ETFs.
An ETF’s prospectus contains its investment objectives, risks, charges, expenses, and other important information, and should be read and carefully considered before investing. For a current prospectus, visit the ETF Center at www.etrade.com/etf.
In general, ETF shares cannot be redeemed directly from an ETF. Rather, ETF investors buy and sell shares of ETFs that are listed on a stock exchange. The market price of ETF shares can and does vary from the value of the ETF’s actual holdings (i.e., the net asset value of the shares or its “NAV”), sometimes significantly. Purchasing an ETF at a premium to the NAV and/or selling an ETF at a discount to NAV could significantly affect the realized return earned by an investor and such realized return could be substantially different than the return of the ETF and, if applicable, the index an ETF may seek to track.
Investing in ETFs involves risk, including the loss of principal. Certain ETFs are designed to provide investment results that generally correspond, prior to fees and expenses, to the performance of an underlying index or other benchmark. These ETFs may not be able to replicate the performance of their respective indices or benchmarks because of expenses and/or other factors. Other ETFs are actively-managed and seek to outperform a market index or target return. Similar to other actively-managed products, such as mutual funds, there is no guarantee that an actively-managed ETF will be able to achieve its objective(s). We also have a separate brochure regarding “leveraged and inverse" ETFs, which carry unique and significant risks.
We charge a support fee, also called a revenue-sharing payment, to sponsors of actively-managed ETFs that can be recommended by Morgan Stanley’s Financial Advisors (“In-Scope ETFs”). We do not charge support fees on any other ETFs available for sale at our Firm. The support fee is applied to client account holdings of In-Scope ETFs based on a tiered rate that increases along with the management fee of the ETF. This means that sponsors pay lower rates on In-Scope ETFs with lower management fees than on those with higher management fees. The rate ranges up to a maximum of 0.10% per year (i.e., $10 per $10,000 of assets).
The tiered rates are the same for brokerage and fee-based advisory client account holdings. However, for advisory accounts there are account type and program exceptions and the fees are rebated to clients. Please see the applicable Morgan Stanley ADV brochure for additional information.
Revenue-sharing payments are generally paid out of sponsor or other affiliate revenues or profits and not from ETF assets. However, sponsor or affiliate revenues or profits may, in part, be derived from fees earned for services provided to and paid for by ETFs. We do not receive any portion of these revenue-sharing payments through brokerage commissions generated by an ETF.
Although we seek to charge the same revenue-sharing fee rate schedule for In-Scope ETFs, we have an incentive to promote the In-Scope ETFs whose sponsors make these payments over other ETFs whose sponsors do not, such as, but not limited to, passively-managed ETFs. In addition, since our revenue-sharing rates are higher for In-Scope ETFs with higher management fees, this fact presents a conflict of interest for us to promote In-Scope ETFs with higher management fees over those with lower management fees.
Expense Payments and Data Analytics Fees
We provide sponsors of all ETFs with opportunities to sponsor meetings and conferences, and grant them access to our Branch Offices and, where applicable, Financial Advisors, for educational, marketing and other promotional efforts. Representatives for such ETFs may also work closely with our Branch Offices, and where applicable, Financial Advisors, to develop business strategies and support promotional events for clients and prospective clients, and educational activities. Some ETF sponsors or their affiliates reimburse us for certain expenses incurred in connection with these promotional efforts, client seminars and training programs. ETF sponsors independently decide if and what they will spend on these activities, with some ETF sponsors agreeing to make annual dollar amount expense reimbursement commitments of up to $740,000, although actual reimbursements may be higher. Some sponsors of ETFs also invite members of our team to attend events. Expense payments may include meeting or conference facility rental fees and hotel, meal and travel charges.
We also provide all ETF sponsors with the opportunity to purchase data analytics regarding ETF sales. For ETF sponsors electing to purchase such data, the fee depends on the level of data and ranges up to $700,000 per year. We also offer sponsors of passively-managed ETFs a separate transactional data fee ranging up to $550,000 per year for those sponsors with more than one hundred passively-managed ETFs on our platform. For an additional fee, ETF sponsors may purchase supplemental data analytics regarding financial product sales at our Firm.
These facts present a conflict of interest for us to the extent they lead us to focus on ETFs from those sponsors that commit significant financial and staffing resources to promotional and educational activities and/or purchase data analytics instead of ETFs from sponsors that do not.
ETF sponsors are allowed to provide funding for client/prospect seminars, employee education and training events, an occasional meal and entertainment and gifts. Our non-cash compensation policies set conditions for these types of payments, and do not permit any funding conditioned on achieving any sales target or awarded on the basis of a sales contest.
Other Compensation Received from ETFs
We or our affiliates receive, from certain ETFs, compensation in the form of commissions and other fees for providing traditional brokerage services, including related research and advisory support, and for purchases and sales of securities for ETF portfolios. We also receive other compensation from certain ETFs for financial services performed for the benefit of such ETFs. We prohibit linking the determination of any compensation from and service fees charged to an ETF to the aggregate values of our overall ETF-share sales, client holdings of the ETF or to offset the revenue-sharing, expense reimbursement and data analytics fees described above.
Availability of Affiliated ETFs
Certain of our affiliates, which include Morgan Stanley Investment Management, Eaton Vance, Boston Management and Research, Calvert Research and Management, Atlanta Capital Management Company and Parametric Portfolio Associates, serve as the investment adviser to certain ETFs that we offer. These affiliated entities will receive investment management fees and other fees from any affiliated ETFs. Therefore, we have a conflict of interest to promote affiliated ETFs. Affiliated ETF sponsors are subject to the same economic arrangements as those described herein.
NOTE ON DIVIDEND AND CAPITAL GAINS DISTRIBUTIONS
Domestic ETFs are usually required to distribute dividends and net realized capital gains on their holdings to shareholders. Although ETFs generally experience fewer net realized capital gains than other investment products, such gains can and do occur. Unless an ETF is held in a tax-advantaged account, shareholders will typically have to pay taxes on such income. This is true even if the ETF loses value during a given tax year. Reinvesting these distributions in your ETF does not prevent you from having to pay taxes on the distributions.
For More Information
For additional information on a particular ETF’s fees and expenses, and payment and compensation practices, please refer to the ETF’s Prospectus and Statement of Additional Information.