NASAA Series 65, Uniform Investment Adviser Law ExaminationInvestment Vehicle CharacteristicsMedium
An investor is seeking an investment that provides exposure to a broad market index, trades throughout the day on an exchange, and has lower expense ratios compared to many actively managed funds. Which of the following would be most appropriate?
- AOpen-End Mutual Fund
- BExchange-Traded Fund (ETF)
- CClosed-End Fund
- DUnit Investment Trust (UIT)
Show answer & explanationAnswer & explanation
Correct answer: B. Exchange-Traded Fund (ETF)
ETFs are designed to track indexes, trade like stocks on exchanges throughout the day, and typically have lower expense ratios than actively managed mutual funds, fitting all the investor's criteria.
Why the other options are wrong
- A. Open-end mutual funds are priced once per day at Net Asset Value (NAV) and often have higher expense ratios if actively managed.
- C. Closed-end funds trade on exchanges but can trade at a premium or discount to NAV, and may not always track a broad market index directly.
- D. UITs are unmanaged, fixed portfolios that terminate on a specific date, not trading continuously or necessarily tracking a broad market index in the same way.
Exchange-Traded Fund (ETF)
A type of investment fund that holds assets such as stocks, commodities, or bonds, and trades on stock exchanges like regular stocks.
- Trades throughout the day
- Typically passively managed (index tracking)
- Lower expense ratios than actively managed funds
- Can be bought on margin and sold short
Memory trick: ETFs: Exchange-Traded Funds trade like stocks, low fees, track indexes.