NASAA Series 65, Uniform Investment Adviser Law ExaminationInvestment Vehicle CharacteristicsEasy
A portfolio manager is seeking an investment that provides exposure to a broad market index, offers intraday trading flexibility, and generally has lower operating expenses compared to actively managed mutual funds. Which of the following would be the most suitable choice?
- AExchange-Traded Fund (ETF)
- BOpen-End Mutual Fund
- CUnit Investment Trust (UIT)
- DClosed-End Fund
Show answer & explanationAnswer & explanation
Correct answer: A. Exchange-Traded Fund (ETF)
ETFs are designed to track indexes, trade on exchanges throughout the day like stocks, and typically have lower expense ratios than actively managed mutual funds, making them an ideal fit.
Why the other options are wrong
- B. Open-end mutual funds are priced once daily at Net Asset Value (NAV) and often have higher expense ratios if actively managed.
- C. Unit Investment Trusts are passively managed, have a fixed portfolio, and do not offer intraday trading or the flexibility of an ETF.
- D. Closed-end funds also trade intraday but can trade at a premium or discount to NAV, and may not always track a broad market index as closely as an ETF.
Exchange-Traded Fund (ETF)
A type of pooled investment security that operates much like a mutual fund but trades like a common stock on a stock exchange.
- Trades intraday on exchanges.
- Typically passively managed, tracking an index.
- Generally lower expense ratios than actively managed mutual funds.
- Offers diversification and market exposure.
Memory trick: Pooled funds: Mutual, ETF, Closed, UIT – different ways to share the market.