Funds Beginner: Introduction to Exchange-Traded Funds

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1.
The price of an exchange-traded fund on the market is _______.
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Either the net asset value or a price higher or lower than that. Exchange-traded funds do not necessarily trade at the net asset values of their underlying holdings; they are sometimes higher or lower, based on demand and other factors.
2.
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.
3.
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. Those who trade frequently will probably discover this. So if you plan to trade ETFs frequently, you should take note.
4.
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.
5.
Exchange-traded funds are a type of mutual fund.
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False. Exchange-traded funds are not mutual funds; they are baskets of securities that are traded on an exchange. They are actually part mutual fund, part stock.