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1.
What can an investor do to avoid paying a premium (or selling at a discount) for an ETF compared to its net asset value?
Enter a limit order at the ETFs net asset value. An ETF can trade at a premium or discount at any time during the trading day. The only way to avoid paying this premium (or selling at this discount) is to check the intraday net asset value which is updated throughout the trading day, and then entering a limit order for that price.
2.
Exchange-traded funds are available only for equity indices.
False. Exchange-traded funds are available for many other investments, such as currencies and metals.
3.
ETFs have a lot in common with stocks, and a lot of differences from mutual funds. Which statement is incorrect?
Like stocks, ETFs charge an annual fee. Unlike mutual funds, ETFs track the performance of an index. Because ETFs trade on an exchange like stocks, you dont buy them from the fund company (so no redemption fees) but from another investor who is selling his position, in exchange for the share price plus a commission. This also means that ETFs dont always trade at their net asset value, although its rare for them to deviate from that value for an extended period of time. ETFs can also pass on the dividends from the underlying holdings. Unlike a stock, ETFs do charge an annual fee like a mutual fund, and they do track the performance of an index, like many mutual funds do.
4.
What kind of trades can you perform with an ETF?
All of the above. Because ETFs trade on an exchange alongside stocks, you can put in any of the same type of orders with your broker that you can with a stock. Market or limit orders, stop-loss orders, selling short, buying on margin, all of these types of trades are available with ETFs. Some ETFs even have options on them, so if you have options-trading on your account, you can even hedge your holding in an ETF.
5.
What asset classes are not available in ETF format?
None of the above. Not only do ETFs track the performance of just about any index, but they arent limited in what type of asset class they can track. As long as the underlying holdings can be bought and sold themselves, ETFs can hold them in a package for investors. This includes equities from many emerging markets, as well as different kinds of fixed income investments.
