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ETFs 101: Introduction to Exchange-Traded Funds

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1.
Compared to mutual funds, exchange-traded funds are ______ to make capital-gains distributions.
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Less likely. However, at times they must, in order to adjust for changes to their underlying indexes.
2.
What are exchange-traded funds?
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Baskets of securities that are traded on an exchange. ETFs are part mutual fund, part stock.
3.
Which statement is false about exchange-traded funds?
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ETFs are always the cheaper choice for all investors. Although the annual expenses of ETFs are below those of mutual funds, you must pay a commission each time you buy an ETF. As a result, ETFs may not be cheaper choices for investors who invest a little bit at a time, or those who trade actively.
4.
In what form do investors buy or redeem shares from an exchange-traded fund?
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In blocks of a certain number. The blocks are typically in groups of 50,000 shares.
5.
Which statement is true about exchange-traded funds (ETFs)?
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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.