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ETFs 101: Introduction to Exchange-Traded Funds

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1.
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.
2.
Because their shares are sold to other investors rather than redeemed, exchange-traded funds do not need to buy and sell stocks.
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False. ETFs do at times need to buy and sell stocks, but it is in order to adjust for changes to their underlying indexes.
3.
Exchange-traded funds typically are _______.
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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.
In general, exchange-traded funds are cheaper to buy than index mutual funds if you want to trade regularly.
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False. Because of their commissions, regular trading will likely cost you more with exchange-traded funds.
5.
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.