Test your knowledge

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Exchange-traded funds charge commissions.

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True

False

True. Unlike their competitors the no-load index funds, ETFs do charge commissions.

Compared to mutual funds, exchange-traded funds are ______ to make capital-gains distributions.

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More likely

Less likely

Equally likely

Less likely. However, at times they must, in order to adjust for changes to their underlying indexes.

Exchange-traded funds typically are _______.

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Passively managed, or indexed

Actively managed--ETF managers pick stocks to buy and sell

Unmanaged investments

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.

In what form do investors buy or redeem shares from an exchange-traded fund?

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In single shares of any number

In blocks of a certain number

Either of the above

None of the above

In blocks of a certain number. The blocks are typically in groups of 50,000 shares.

If you are an active, frequent trader of exchange-traded funds, then your trading expenses will probably _______ those of mutual funds.

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Exceed

Equal

Match

Exceed. Those who trade frequently will probably discover this. So if you plan to trade ETFs frequently, you should take note.

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