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ETFs 104: Mutual Funds or Exchange-Traded Funds--Which to Choose?

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1.
The in-kind creation and redemption process for ETFs means that the cost basis of stocks can be done away with.
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True. It can be washed away because shares of underlying companies are traded in-kind rather than for cash.
2.
An advantage of ETFs over mutual funds is that they have lower overhead charges.
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True. An advantage of ETFs over mutual funds is that they don't have to manage hundreds of customer accounts or staff call centers, so they have lower overhead charges that translate into lower expense ratios.
3.
A potential disadvantage to the exchange-traded aspect of an ETF is _______.
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All of the above. Market prices of an ETF can deviate from the underlying net asset value. ETFs are bought and sold likes stocks, so bid ask spread costs and commissions costs can be incurred.
4.
When paying a trading commission on each trade, what sort of investment strategy is better used with mutual funds than ETFs?
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Dollar cost averaging or reinvestment plans. Because they involve many smaller transactions, each potentially incurring transactions cost, dollar cost averaging or reinvestment plans are generally better implemented with mutual funds.
5.
A key difference between mutual funds and exchange-traded funds is _______.
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ETFs are traded on an exchange, whereas mutual funds are traded with the fund company. The "ET" in ETF stands for exchange-traded. ETFs are bought and sold on an exchange like a stock, whereas mutual funds are transacted either directly or through a broker with the fund company.