Exchange Traded Funds (ETFs) are a pooled investment vehicle that allows investors to buy and sell shares of a diversified portfolio of securities on an exchange, similar to individual stocks. ETFs can be based on various asset classes, such as stocks, bonds, or commodities, and can be used for various investment strategies, such as diversification, hedging, or leveraging.
Which of the following is NOT a characteristic of an Exchange Traded Fund (ETF)?
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A) ETFs do trade on an exchange like a stock. B) ETFs are priced throughout the trading day, unlike mutual funds, which are priced at their NAV at the end of the trading day. C) ETFs can be based on various asset classes, such as stocks, bonds, or commodities. D) ETFs allow for in-kind creation and redemption by authorized participants.
What is the primary difference between a passive and an active ETF?
A) The expense ratio may differ between passive and active ETFs, but it is not the primary difference. B) The trading frequency is not the primary difference between passive and active ETFs. C) The primary difference between passive and active ETFs is the management strategy. Passive ETFs seek to replicate the performance of a specific index, while active ETFs aim to outperform a specific index through active security selection. D) The underlying asset class is not the primary difference between passive and active ETFs.
Which of the following pooled investment vehicles trades on an exchange and has a fixed number of shares outstanding?
A) Mutual funds do not trade on an exchange and do not have a fixed number of shares outstanding. B) ETFs trade on an exchange but do not have a fixed number of shares outstanding. C) Closed-end funds trade on an exchange and have a fixed number of outstanding shares. D) UITs do not trade on an exchange and have a predetermined termination date.
In the early 1990s, the first ETF was created, known as the Standard & Poor's Depositary Receipt (SPDR), which tracked the S&P 500 index. This innovation allowed investors to gain exposure to a diversified portfolio of stocks with the ease and flexibility of trading a single stock.
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Example Series 65 Example Practice Question
An investor who wants to gain exposure to the technology sector but wants to avoid picking individual stocks can buy shares of a technology ETF, such as the Technology Select Sector SPDR Fund (XLK). This ETF holds a diversified portfolio of technology stocks and trades on an exchange like a stock, allowing the investor to buy and sell shares easily.
$ *Tax benefits versus mutual funds*: ETFs generally have more favorable tax treatment than mutual funds due to their unique structure and how they are bought and sold.
$ ETFs use in-kind creation/redemption, swapping assets instead of selling, often avoiding taxable events. $ ETFs generally have fewer capital gain distributions due to their structure. $ With ETFs, investors control when they realize capital gains, typically only upon selling shares.