FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationRegulatory Fundamentals and General Product KnowledgeEasy
A client is interested in an investment that offers professional management and diversification, similar to a mutual fund, but whose shares trade throughout the day on an exchange like a stock. Which product is being described?
- AExchange-traded fund (ETF)
- BVariable annuity subaccount
- CUnit investment trust (UIT)
- DClosed-end fund
Show answer & explanationAnswer & explanation
Correct answer: A. Exchange-traded fund (ETF)
Exchange-Traded Funds (ETFs) combine features of mutual funds (professional management, diversification) with those of stocks (trade on exchanges throughout the day). Unlike closed-end funds, ETF prices generally track their Net Asset Value (NAV) closely due to an arbitrage mechanism.
Why the other options are wrong
- B. Variable annuity subaccounts are investment options within an insurance contract, not standalone investment products that trade on an exchange.
- C. UITs are fixed portfolios, not actively managed, and typically redeem shares with the trust rather than trading on an exchange like a stock.
- D. Closed-end funds trade on exchanges but can trade at significant premiums or discounts to NAV, and their management style can vary.
Exchange-Traded Fund (ETF)
An investment fund that holds assets like stocks, bonds, or commodities, and whose shares trade on stock exchanges throughout the day, similar to common stock.
- Trades on exchanges like stocks
- Professionally managed (active or passive)
- Diversified portfolio
- Price generally tracks NAV
Memory trick: ETF: 'Exchange' it 'Today' like a 'stock'.