FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationRegulatory Fundamentals and General Product KnowledgeMedium
A registered representative is discussing the differences between exchange-traded funds (ETFs) and open-end mutual funds with a client. Which of the following statements about ETFs is most accurate?
- AETFs are redeemable directly with the issuing fund at their net asset value (NAV) at the end of the day.
- BETFs typically have higher expense ratios than comparable open-end mutual funds due to active management.
- CETFs can be bought and sold throughout the trading day at market-determined prices.
- DETFs are always actively managed and seek to outperform a benchmark index.
Show answer & explanationAnswer & explanation
Correct answer: C. ETFs can be bought and sold throughout the trading day at market-determined prices.
Unlike mutual funds which are priced once daily at NAV, ETFs trade on exchanges like stocks throughout the day, with their prices determined by supply and demand, potentially deviating from NAV.
Why the other options are wrong
- A. This describes open-end mutual funds; ETFs are generally not redeemable directly with the fund by individual investors.
- B. Most ETFs are passively managed and generally have lower expense ratios than actively managed mutual funds.
- D. Most ETFs are passively managed and track an index, not actively seeking to outperform.
Exchange-Traded Funds (ETFs)
Investment funds that trade on stock exchanges like individual stocks, offering diversification and often tracking an index.
- Trade continuously throughout the day.
- Market price can differ from NAV.
- Often passively managed, tracking an index.
- Typically lower expense ratios than actively managed mutual funds.
Memory trick: ETFs are 'exchange-traded,' mutual funds are 'mutual convenience.'