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ETFs 101: Exchange-Traded Funds

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1.
Exchange-traded funds are always cheaper to buy than mutual funds.
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False. If you trade frequently, ETFs will likely be more expensive than mutual funds, due to the commissions.
2.
How do investors buy and sell most exchange-traded funds?
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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 charge commissions.
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True. Unlike their competitors the no-load index funds, ETFs do charge commissions.
4.
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.
5.
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.
DONE