Chapter 13-ETFs

Question 1

____ pioneered the concept of a tradable basket of stocks with the creation of the S&P ___ (SPDR) in 1993.

Answer 1

The American Stock Exchange; Depositary Receipt

Question 2

___ of outstanding ETF shares are retail-owned by individuals. However ___ of day to day trading volume remains institutional, mostly by ___.

Answer 2

85%; 90%; hedge funds

Question 3

The 10 largest ETFs account for ___ of all ETF assets and ___ of ETF trading volume. SPY (S&P 500 ETF) trades ___ a day with just a ___ bid/ask spread.

Answer 3

40%; 50%; over 100 million shares; 1 cent

Question 4

ETFs are classified as ___ or ___.

Answer 4

open-end companies or unit investment trusts

Question 5

ETFS don’t sell directly to ___ and only issue shares in large blocks (____ share blocks) known as ___.

Answer 5

investors; 50,000; creation units

Question 6

An ETF, like any other type of investment company, has a ___. Those buying the creation units receive this and sometimes ETFs deliver a ___ to secondary market purchasers.
ETFs not delivering a ___ must give investors a document known as a ___ Description.
All ETFs deliver a ___ on request.

Answer 6

prospectus (3X)
Product
prospectus

Question 7

ETFs structured as open-ended companies must also have a ___.
Open-end ETFs must also provide shareholders with ___ reports.

Answer 7

SAI
annual and semiannual

Question 8

Four companies oversee ___ of all ETF assets (over $5 trillion): ___, _____, S____, I____.

Answer 8

90%; Barclays Global (Blackrock), Vanguard, State Street, and Invesco

Question 9

If you have investors with ___ tolerance, consider triple or ___ ETF funds. These funds have average expense ratios of ___ and are designed to triple or ___ an investor’s ____.

Answer 9

high risk; double
less than 1%; double; gains or losses

Question 10

ETFs are not required to ____ thus avoiding capital gains taxes for the remaining investors.
Since they’re traded on an exchange, ETFs are insulated from costs of having to ___.

Answer 10

sell securities to meet investor cash redemptions; trade securities to accommodate shareholder purchases and redemptions.

Question 11

Power Shares ETFs had the ___ average fees and the ____ average tracking error, ___%.

Answer 11

highest; highest; 0.7%

Question 12

A ___ allows you to buy at the best current price available. Most orders are ___ with the typical bid-ask spread with very popular ETFs being ___%.

Answer 12

market order; market orders; .01%

Question 13

A ____ allows you place a buy order indicating that you are willing to pay $X per share or Less.

Answer 13

buy limit order

Question 14

A ___ allows you to indicate you want $X per share or More. If someone is not willing to sell you shares for $X or less, the order is not filled.

Answer 14

sell limit order

Question 15

A ___ order goes into effect as soon as the price per share hits a certain price. Then this order become a market order.

Answer 15

stop-loss or stop

Question 16

ETFs and tracking errors
1) When there is a panic, ___ of several ETFs can be quite different than the underlying ___.
2) Advisors should think twice about ___ any investment, and in particular an ETF or ___, during period of high short-term volatility.
3) It’s very likely that any ___, no matter how narrow or ___, is likely to be corrected in 1-_ days.

Answer 16

1) pricing; index
2) selling; CEF
3) disparity; wide; 2

Question 17

ETNs do not have to comply with the ____ but are registered under the ____.

Answer 17

Investment Company Act regulations; Securities Act of 1933

Question 18

ETNs are traded throughout the ___, can be bought ___, and can be ___.

Answer 18

day; on margin; shorted

Question 19

ETNs do not have a___; ___ is based on indexes published by the issuer.

Answer 19

NAV; daily value

Question 20

Unlike an ETF, an ETN represents a ____. Since ETNs are backed by the the issuer’s ___, investors need to keep abreast of the issuer’s ___.

Answer 20

promise by its issuer to match returns of a particular index or commodity.
promise; credit rating

Question 21

ETNs are not notes, they are ___ contracts.
The typical bid-ask spread of an ETN is ___.

Answer 21

prepaid forward futures.
5-10 basis points.

Question 22

Many banks offer ETNs including ____, ____, B____, D____, and ____

Answer 22

Barclays, Goldman Sachs, Bear Stearns, Deutsche Bank, and JP Morgan Chase

Question 23

Most commodity-type ETFs buy ____.
Taxable investors owe tax on any appreciation each year even if the ETF investor does not ____.
Any gain is taxed ___ as long-term and ___ as short-term.
Many ETFs are structured as ____ with investors getting a ___ instead of a 1099.

Answer 23

futures contracts.
sell any shares.
60%; 40%
limited partnerships; K-1

Question 24

If someone wants to add a commodities-type asset, ___ are likely to be more tax efficient than similar commodity-based ____.

Answer 24

ETNs; ETFs

Question 25

Although the IRS has not yet ruled on commodity ETNs, they currently treating the notes as ____.
This means gains are only taxed ___; and gains from ETNs held for ___ are considered long-term.

Answer 25

prepaid financial contracts.
upon sale; more than 1 year

Question 26

Some ETF benefits include:
1) no sales ____
2) lower ___ and ____
3) broad or sector-specific ____
4) shareholders aren’t hurt by ____
5) the ability to write _____

Answer 26

1) load
2) fees and tax efficiency
3) diversification
4) active traders
5) covered calls

Question 27

In general, ETFs have a ___ than mutual funds. Almost all ETFs are ___.

Answer 27

lower annual expense ratio; index funds

Question 28

The IBF doesn’t recommend ETNs because the investor is relying on the ____; during a crisis the institution may have ____.

Answer 28

assets/creditworthiness of the financial institution; very few assets.

Question 29

For very popular ETFs, the typical bid-ask spread is ___.

Answer 29

.01%