Exchange-Traded Funds (ETFs): Definition, Types, and Benefits

Question 1

How are ETF shares typically created and redeemed?

Accepted Answer

By authorized participants in large creation/redemption baskets

Answer

Through direct purchase and sale on the exchange

Answer

Through a broker-dealer

Answer

By the ETF provider directly

Question 2

Which of the following is NOT a key characteristic of Exchange-Traded Funds (ETFs)?

Accepted Answer

Minimum investment threshold

Answer

Trade like stocks on exchanges

Answer

Offer diversification

Answer

Provide intraday liquidity

Question 3

Which type of ETF tracks the performance of a specific industry or sector?

Accepted Answer

Sector ETF

Answer

Index ETF

Answer

Bond ETF

Answer

Commodity ETF

Question 4

What is NOT an advantage of investing in ETFs?

Accepted Answer

Guaranteed returns

Answer

Diversification

Answer

Lower costs

Answer

Intraday trading

Question 5

What is the primary function of index funds within the ETF market?

Accepted Answer

Offer diversified exposure to a specific market index

Answer

Actively managed to outperform a benchmark index

Answer

Exclusively traded in the primary market

Answer

Incur higher expense ratios than other ETF types

Question 6

When diversifying an ETF portfolio, which factor is essential to consider?

Accepted Answer

Correlation between ETFs

Answer

Expense ratio of each ETF

Answer

Trading volume of each ETF

Question 7

ETFs that focus on a specific industry sector are known as:

Accepted Answer

Sector ETFs

Answer

Index ETFs

Answer

Bond ETFs

Answer

Currency ETFs

Question 8

Which of the following is NOT a characteristic of ETFs?

Accepted Answer

High expense ratios compared to mutual funds

Answer

Traded during regular trading hours

Answer

Passively managed, tracking an underlying index

Answer

Offer diversification benefits

Question 9

The primary purpose of an ETF is to:

Accepted Answer

Track the performance of an underlying index or asset class

Answer

Generate higher returns than the market

Answer

Provide tax benefits to investors

Answer

Outperform actively managed funds

Question 10

ETFs that hold a combination of stocks, bonds, and possibly commodities are known as:

Accepted Answer

Balanced ETFs

Answer

Index ETFs

Answer

Sector ETFs

Answer

Target-date funds

Question 11

The expense ratio of an ETF indicates:

Accepted Answer

The annual operating costs of the fund

Answer

The fund's potential return

Answer

The fund's risk level

Answer

The fund's net asset value per share

Question 12

Analyze the regulatory framework governing ETFs, highlighting the roles of regulatory bodies and investor protection measures.

Accepted Answer

The Securities and Exchange Commission (SEC) is the primary regulatory body for ETFs in the United States.

Accepted Answer

Investor protections for ETFs include transparent prospectus disclosure and redemption provisions.

Answer

ETFs are not subject to regulatory oversight.

Answer

ETFs are exempt from all tax reporting requirements.

Question 13

Which ETF type tracks the performance of a specific country's stock market?

Accepted Answer

Country ETF

Answer

Sector ETF

Answer

Industry ETF

Answer

Bond ETF

Question 14

What is the key difference between open-ended and closed-ended ETFs?

Accepted Answer

Open-ended ETFs can be created or redeemed continuously, while closed-ended ETFs have a fixed number of shares.

Answer

Open-ended ETFs have lower fees than closed-ended ETFs.

Answer

Open-ended ETFs offer more liquidity than closed-ended ETFs.

Answer

Closed-ended ETFs are actively managed, while open-ended ETFs are passively managed.

Question 15

What is the typical expense ratio range for ETFs?

Accepted Answer

0.05% - 0.25%

Answer

0.25% - 0.75%

Answer

0.75% - 1.50%

Answer

1.50% - 2.50%

Question 16

What is a key distinction between ETFs and mutual funds?

Accepted Answer

ETFs trade on stock exchanges like stocks, while mutual funds are bought and sold directly from the fund company.

Answer

ETFs have higher management fees than mutual funds.

Answer

ETFs offer more flexibility in trading than mutual funds.

Answer

Mutual funds are more tax-efficient than ETFs.

Question 17

When evaluating Exchange-Traded Funds (ETFs) for investment, which ethical and sustainability factors should be taken into account?

Accepted Answer

Environmental impact of the companies in the ETF

Accepted Answer

Social responsibility of the companies in the ETF

Answer

Expense ratio

Answer

Political affiliations of the companies in the ETF

Question 18

How do ETFs expand investment opportunities beyond domestic markets for investors?

Accepted Answer

ETFs track indices that include companies from various countries, enabling global diversification.

Answer

ETFs offer access to a range of securities limited to domestic markets.

Answer

ETFs allow investors to trade directly on foreign exchanges, removing geographic barriers.

Answer

ETFs provide direct ownership of foreign companies, enabling investors to engage with international entities.

Question 19

Which strategies can help investors reduce the difference in returns between an ETF and the index it follows?

Accepted Answer

Choosing ETFs with lower fees

Accepted Answer

Choosing ETFs that directly own the assets in the index

Answer

Choosing ETFs managed actively

Answer

Choosing ETFs that frequently buy and sell assets

Question 20

What type of ETF tracks a specific segment of the economy, such as technology or healthcare?

Accepted Answer

Sector ETF

Answer

Index ETF

Answer

Commodity ETF

Answer

Bond ETF

Question 21

What is a potential drawback of investing in ETFs?

Accepted Answer

Higher management fees compared to index funds

Answer

Limited diversification due to narrow investment mandates

Answer

Restrictions on intraday trading during market hours

Answer

Complete immunity to market fluctuations

Question 22

In an ETF portfolio designed for broad market exposure, which type of ETF would be most appropriate?

Accepted Answer

Total market ETF

Answer

Large-cap growth ETF

Answer

Small-cap value ETF

Answer

Mid-cap blend ETF

Question 23

What is the primary purpose of an ETF prospectus?

Accepted Answer

To provide comprehensive information about the ETF's objectives and risks

Answer

To list all of the ETF's individual holdings

Answer

To guarantee the ETF's performance against a benchmark

Answer

To market the ETF's potential benefits

Question 24

Which characteristic is NOT typically associated with Exchange-Traded Funds (ETFs)?

Accepted Answer

High minimum investment requirements

Answer

Diversification

Answer

Intraday liquidity

Answer

Low management fees

Question 25

What is a key advantage of investing in an ETF that tracks a broad market index, such as the S&P 500?

Accepted Answer

Broad exposure to the stock market

Answer

High return potential

Answer

Guaranteed dividends

Answer

Tax benefits

Question 26

Which type of ETF provides investment exposure to a specific industry, such as technology or healthcare?

Accepted Answer

Sector ETF

Answer

Index ETF

Answer

Commodity ETF

Answer

Currency ETF

Question 27

What is the primary role of an ETF issuer?

Accepted Answer

To create and manage the ETF, ensuring it meets regulatory requirements

Answer

To provide investment advice to ETF investors

Answer

To determine the ETF's expense ratio

Answer

To guarantee the ETF's performance

Question 28

What is the significance of an ETF's expense ratio for investors?

Accepted Answer

It represents the ongoing costs and fees associated with managing the ETF, impacting its long-term performance

Answer

It determines the ETF's return on investment, guaranteeing higher returns with higher expense ratios

Answer

It provides information about the ETF's trading volume and liquidity

Answer

It is unrelated to the ETF's investment strategy and performance

Question 29

How do ETFs facilitate intraday liquidity for investors?

Accepted Answer

ETFs are traded on stock exchanges, allowing for real-time buying and selling during trading hours.

Answer

ETFs have a fixed number of shares, which limits their liquidity.

Answer

ETFs offer a guaranteed return, eliminating liquidity concerns.

Answer

ETFs are only available for large-cap stocks, which can affect liquidity.

Question 30

What is the primary advantage of investing in an ETF over investing in individual stocks?

Accepted Answer

Instant diversification, spreading risk across multiple assets

Answer

Lower expense ratios, resulting in reduced investment costs

Answer

Guaranteed higher returns, ensuring profitability

Answer

Tax-advantaged treatment, offering potential tax savings

Question 31

Which type of ETF tracks the performance of a specific index, such as the Dow Jones Industrial Average?

Accepted Answer

Index ETF

Answer

Sector ETF

Answer

Bond ETF

Answer

Commodity ETF

Question 32

What is the purpose of an actively managed ETF?

Accepted Answer

To outperform a benchmark index by using strategic investment decisions

Answer

To match the performance of a specific index, providing a passive investment option

Answer

To reduce investment risk by diversifying across multiple asset classes

Answer

To offer tax-free earnings, providing additional financial benefits

Question 33

Which of the following sectors is not typically represented by an ETF?

Accepted Answer

Education

Answer

Technology

Answer

Healthcare

Answer

Manufacturing

Question 34

What is the role of an ETF prospectus?

Accepted Answer

To provide detailed information about the ETF's investment objectives, holdings, and potential risks

Answer

To guarantee a certain level of return for investors, ensuring profitability

Answer

To advertise the benefits of investing in the ETF, without providing substantial information

Answer

To provide tax-related guidance to investors, advising on potential tax implications

Question 35

How do expense ratios and other fees associated with ETFs impact investment returns over time?

Accepted Answer

Expense ratios lower returns over time.

Answer

ETF fees have no effect on returns.

Answer

Higher expense ratios can increase returns.

Answer

Fees apply only to actively managed ETFs.

Question 36

ETFs typically track:

Accepted Answer

Indexes or sectors

Answer

Commodities and currencies

Answer

Individual stocks and bonds

Question 37

Which type of ETF provides exposure to a specific industry or sector?

Accepted Answer

Sector ETF

Answer

Index ETF

Answer

Bond ETF

Answer

Commodity ETF

Question 38

What is a key difference between an ETF and a mutual fund?

Accepted Answer

ETFs trade like stocks throughout the trading day

Answer

Mutual funds offer higher potential returns

Answer

ETFs are more expensive to manage

Question 39

Which of the following is a potential disadvantage of investing in ETFs?

Accepted Answer

Tracking error

Answer

Diversification benefits

Answer

Low management fees

Answer

High liquidity

Question 40

When investing in an ETF, the expense ratio:

Accepted Answer

Covers the management and operational costs of the fund

Answer

Is deducted directly from the investor's account balance

Answer

Determines the potential return on investment

Question 41

Which of the following statements about ETF Net Asset Value (NAV) is true?

Accepted Answer

It is calculated once per trading day

Answer

It is always higher than the ETF's market price

Answer

It represents the fund's real-time market value

Question 42

Which factor should NOT be considered when selecting an ETF?

Accepted Answer

Fund manager's experience

Answer

Liquidity

Answer

Expense ratio

Answer

Tracking accuracy

Question 43

What is the role of an authorized participant (AP) in the ETF market?

Accepted Answer

To create and redeem ETF shares

Answer

To set the ETF's price

Answer

To manage the fund's assets

Answer

To provide investment advice to ETF investors

Question 44

Which of the following is NOT a typical characteristic of Exchange-Traded Funds (ETFs)?

Accepted Answer

Closed-end structure

Answer

Tracking a specific index or sector

Answer

Diversification of assets

Answer

Trading throughout the day like stocks

Question 45

What type of ETF allows investors to gain leveraged or inverse exposure to an underlying index?

Accepted Answer

Leveraged ETF

Answer

Commodity ETF

Answer

Sector ETF

Answer

Index ETF

Question 46

What is the primary advantage of investing in ETFs compared to individual stocks?

Accepted Answer

Diversification and cost-effectiveness

Answer

Higher potential for short-term gains

Answer

Tax advantages over individual stock investments

Answer

Greater control over individual stock selections

Question 47

Which of the following represents a risk associated with investing in ETFs?

Accepted Answer

Tracking error

Answer

High minimum investment requirements

Answer

Lack of diversification

Answer

Limited trading opportunities

Question 48

How do ETFs differ from mutual funds in terms of trading?

Accepted Answer

ETFs trade throughout the day like stocks, while mutual funds are priced once daily.

Answer

Mutual funds offer more frequent trading opportunities than ETFs.

Answer

Mutual funds are not subject to SEC regulation.

Answer

ETFs require higher minimum investments than mutual funds.

Question 49

What is the primary purpose of an expense ratio in ETFs?

Accepted Answer

To cover the costs of managing and operating the ETF

Answer

To provide tax benefits for ETF investors

Answer

To generate profits for fund managers

Answer

To offset trading commissions paid by investors

Question 50

Which of the following investment strategies is best suited for using ETFs in a portfolio?

Accepted Answer

Asset allocation and diversification

Answer

Timing the stock market

Answer

Speculating on short-term market fluctuations

Answer

Day trading

Question 51

How do ETFs facilitate liquidity for investors?

Accepted Answer

They allow for continuous buying and selling throughout the trading day

Answer

They offer tax-loss harvesting opportunities for investors.

Answer

They provide guaranteed redemption prices for investors.