Chapter 19 - Exchange-Traded Funds (Done) Flashcards
What are ETFs?
ETFs (Exchange Traded Funds) are investment funds regulated under national instruments, structured as either mutual fund trusts or corporations, and primarily sold by MFDA or IIROC dealers.
How are ETFs created and redeemed?
ETFs are created and redeemed through a designated broker in blocks of units known as prescribed number of units. The ETF’s total value is derived from its individual common shares held.
What are the key features of ETFs?
ETFs have low costs, are tradable and liquid, offer continuous price discovery, have low tracking errors, are tax-efficient, transparent, and provide low-cost diversification.
What are the different types of ETFs?
Types of ETFs include standard or index-based ETFs (full replication or sampling), rules-based ETFs, active ETFs, synthetic ETFs, leveraged ETFs, inverse ETFs, commodity ETFs, and covered call ETFs.
What are some risks associated with ETFs?
Risks include tracking error, sampling methods risk, liquidity risk, cash drag risk, rebalancing risk, currency hedging risk, concentration risk, composition-related risks, and securities lending risks.
How do ETFs compare with mutual funds in terms of management style?
ETFs mainly consist of passive funds with some active funds, while mutual funds mainly consist of active management styles with some passive managed funds.
How does transparency differ between ETFs and mutual funds?
Most ETFs provide full transparency, whereas most mutual funds limit their disclosure of holdings to once a month.
What is the difference in cash drag between ETFs and mutual funds?
ETFs can handle large infusions of cash without suffering from cash drag, while mutual funds need time to work new money into the market and tend to keep some cash on hand for redemption requests.
How do the embedded fees of ETFs and mutual funds compare?
Management and trading expenses tend to be lower for ETFs because they are typically passively managed, whereas mutual funds have higher fees due to active management.
How are ETFs and mutual funds distributed differently?
ETFs are bought and sold like stocks on the stock market during the trading day, whereas mutual funds are purchased and redeemed directly from the mutual fund at the end of day’s net asset value per unit.
What are some investment strategies using ETFs?
Investment strategies include core or satellite portfolio construction, rebalancing, tactical asset allocation, cash management, exposure to hard-to-access markets, and tax loss harvesting.
What are some other ETF-related investments?
Other ETF-related investments include mutual funds as ETFs, exchange-traded notes (ETNs), which are debt obligations issued by banks promising to pay investors based on the performance of an index or other benchmark.
What is the in-kind exchange process for ETFs?
The in-kind exchange process involves the designated broker creating ETF units by providing a basket of underlying stocks to the ETF company, which in turn provides the broker with the prescribed number of ETF units. These units are then available for trading on the stock market.
How do tracking errors affect ETFs?
Tracking errors represent the difference between the ETF’s performance and the index it tracks. Factors like liquidity and trading delays can cause tracking errors, but lower tracking errors are preferred as they indicate better replication of the index.
What are synthetic ETFs and how do they work?
Synthetic ETFs do not hold the same underlying assets as the index they track. Instead, they use swaps and derivatives to replicate index performance. This makes them less transparent and exposes them to counterparty risk.
