NASAA Series 65, Uniform Investment Adviser Law ExaminationInvestment Vehicle CharacteristicsMedium
A client is looking to invest in a pooled investment vehicle that aims to replicate the performance of a specific market index, such as the S&P 500. They desire low expense ratios and the ability to trade shares throughout the day on a stock exchange. Which of the following options would best meet these requirements?
- AAn Exchange-Traded Fund (ETF).
- BA closed-end fund.
- CA unit investment trust (UIT).
- DAn open-end mutual fund.
Show answer & explanationAnswer & explanation
Correct answer: A. An Exchange-Traded Fund (ETF).
ETFs are designed to track indexes, have low expense ratios, and trade on exchanges throughout the day, fitting all the client's criteria.
Why the other options are wrong
- B. Closed-end funds trade on exchanges but often trade at a premium or discount to NAV and may not solely aim to replicate an index with low expense ratios.
- C. UITs are static portfolios with a fixed termination date, not actively traded throughout the day.
- D. Open-end mutual funds trade once a day at NAV and may have higher expense ratios.
Exchange-Traded Fund (ETF)
A type of pooled investment security that operates like a mutual fund but trades like a stock on an exchange, typically tracking an index, and known for low expense ratios.
- Trades on exchanges throughout the day.
- Tracks a specific index.
- Generally has low expense ratios.
Memory trick: ETFs are 'Easy To Find' on the exchange and track indexes.