NASAA Series 66 Uniform Combined State Law ExaminationInvestment Vehicle CharacteristicsMedium
A client is interested in an investment that tracks the performance of a specific market index, offers intra-day trading flexibility, and generally has lower expense ratios compared to actively managed mutual funds. Which of the following investment vehicles best fits this description?
- AExchange-Traded Fund (ETF)
- BUnit Investment Trust (UIT)
- CClosed-End Fund
- DOpen-End Mutual Fund
Show answer & explanationAnswer & explanation
Correct answer: A. Exchange-Traded Fund (ETF)
Exchange-Traded Funds (ETFs) are designed to track an index, can be traded throughout the day on exchanges like stocks, and typically have lower expense ratios than actively managed funds. This aligns with all characteristics the client is seeking.
Why the other options are wrong
- B. Unit Investment Trusts are fixed portfolios that terminate on a specified date and are not typically traded intra-day after their initial offering.
- C. Closed-end funds trade on exchanges but are actively managed, often have higher expense ratios, and may not track a specific index closely.
- D. Open-end mutual funds are priced once per day at Net Asset Value (NAV) and are not traded intra-day.
Exchange-Traded Fund (ETF)
An investment fund traded on stock exchanges, much like stocks. ETFs hold assets such as stocks, commodities, or bonds and generally track an underlying index.
- Trades intra-day on exchanges
- Typically tracks a market index
- Lower expense ratios than actively managed funds
- Can be bought on margin and sold short
Memory trick: ETFs are like a stock that holds a basket, always ready for a trade.