NASAA Series 65, Uniform Investment Adviser Law ExaminationClient Investment Recommendations and StrategiesEasy
A client is looking to invest in a fund that holds a diversified portfolio of stocks and bonds, with the specific characteristic of being traded on a stock exchange like individual stocks. This allows for intra-day trading and price discovery throughout the day. Which type of investment vehicle is the client describing?
- AUnit investment trust (UIT)
- BClosed-end fund (CEF)
- CExchange-Traded Fund (ETF)
- DOpen-end mutual fund
Show answer & explanationAnswer & explanation
Correct answer: C. Exchange-Traded Fund (ETF)
Exchange-Traded Funds (ETFs) are investment funds that hold a basket of assets (like stocks and bonds) and trade on stock exchanges throughout the day, similar to individual stocks. This allows for continuous price discovery and intra-day trading, unlike mutual funds which are priced once daily after market close.
Why the other options are wrong
- A. Unit investment trusts are fixed portfolios that mature on a specific date and are not actively traded on exchanges in the way described.
- B. Closed-end funds are traded on exchanges, but their price can deviate significantly from NAV and they typically have a fixed number of shares issued initially, unlike the client's broader description of intra-day trading for a diversified portfolio.
- D. Open-end mutual funds are priced once daily at Net Asset Value (NAV) after market close, not traded intra-day.
Exchange-Traded Fund (ETF)
An investment fund that holds a diversified portfolio of assets and trades on stock exchanges throughout the day, like individual stocks.
- Trades intra-day on exchanges.
- Offers diversification.
- Typically lower expense ratios than mutual funds.
Memory trick: ETFs: Exchange-traded, exactly like stocks.