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1.
Which statement is true about exchange-traded funds (ETFs)?
The arbitrage mechanism that keeps ETFs' prices in line with their NAVs should work most of the time. Differences between an ETF's price and its NAV can occur with those ETFs that aren't traded very often. Also, it's unclear how well the arbitrage mechanism will work during a full-fledged market correction.
2.
How do investors buy and sell most exchange-traded funds?
Through a broker. Because these shares trade on an exchange, investors have to go through a broker to buy and sell shares. Only the very wealthy can sell shares back to the sponsoring fund family. And when they do, they won't get cash back, but shares of the ETF's underlying holdings.
3.
Exchange-traded funds typically are _______.
Passively managed, or indexed. For the arbitrage mechanism to work, potential arbitragers must have full, timely knowledge of the ETF's holdings. Active managers rarely disclose this information more than twice per year, though, which is why indexing has been the strategy of choice for ETFs thus far.
4.
When can you buy exchange-traded funds?
Anytime during the trading day. As opposed to mutual funds, which are sold at the end of the day no matter when during the day you place your order, you can buy exchange-traded funds at any time during the day.
5.
Exchange-traded funds are always cheaper to buy than mutual funds.
False. If you trade frequently, ETFs will likely be more expensive than mutual funds, due to the commissions.
