8.5 Exchange-Traded Funds

What helps explain the popularity of mutual funds?

I. Mutual funds require a smaller initial investment than stocks or bonds

II. Mutual funds are a primary investment choice in retirement plans

III. Mutual funds frequently outperform market indices

• II only

• I and II only

• II and III only

• I, II, and III

Lyle considers himself a gambler. He likes to do research on individual stocks, market sectors, and the stock market in general, and he likes to buy and sell based on breaking news. Lyle primarily invests in individual stocks and industry-specific mutual funds (i.e., healthcare mutual funds or manufacturing mutual funds). He rarely buys ETFs. What specific advantage of ETFs over mutual funds is Lyle missing out on?

• diversified portfolio

• ability to buy and sell at any time during the trading day

• low-expense ratio

• both low-expense ratio and the ability to buy and sell at any time during the trading day

By purchasing one share of a market index ETFs, an investor will own the equivalent of ____ in his or her stock portfolio

• one stock

• many stocks from the same industry

• many stocks from many industries

• none of these answer choices is correct

Which of the following investment features is more common among mutual funds and less common among ETFs?

• diversification

• low expenses

• professional active management

• wide variety of investment alternatives

Which of the following investment features is typically associated with ETFs but not mutual funds?

• funds provide investors with immediate diversification

• funds can be traded throughout the day

• funds can be purchased that match a market index

• funds are often actively managed

As a novice investor, Laura is concerned about fees. She has heard stories of investors who have lost thousands of dollars in fees over time. She wants to invest in investments that generally have the lowest fees. Given her desire, Laura should focus on purchasing:

• actively managed mutual funds

• index mutual funds

• exchange-traded funds

• both index mutual funds and exchange-traded funds

Amy is just starting out investing and plans to invest $250 per month. She has no other investment money. She plans to pursue a passive investment strategy. Which of the following investment options would be best for Amy at this time?

• actively managed mutual funds

• index mutual funds

• exchange-traded funds

• either index mutual funds or exchange-traded funds

Ramos is an aggressive investor and likes to win at everything. He knows that it is nearly impossible to win or beat the average market return all of the time, but he wants to try! Given his attitude, Ramos should select what type of investment if his number one foal is to beat the market?

• index mutual fund

• bond index ETF

• index-based ETF

• actively managed mutual fund

Miguel is interested in a simple and easy to understand investment. He would like to buy an index-based investment that tracks the S&P 500. Which ETF should he choose?

• QQQ

• IVV

• EFA

• SPY

The largest ETFs are:

• index-based ETFs

• actively managed ETFs

• bond ETFs

• international ETFs