Funds Beginner: 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.
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.
3.
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.
4.
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.
5.
Exchange-traded funds charge commissions.
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True. Unlike their competitors the no-load index funds, ETFs do charge commissions.