Chapter 22

Question 1

Managed Product

Answer 1

a pool of capital gathered and invested in a portfolio of individual securities according to a specific investment mandate

Question 2

Mutual Fund

Answer 2

an open-ended investment company, structured either as a corporation or a trust, that raises capital by issuing shares (in the case of a mutual fund corporation) or units (in the case of a mutual fund trust)

Question 3

Wrap Funds

Answer 3

portfolios of managed products “wrapped” together and sold as a single product

Question 4

Wrap Accounts

Answer 4

accounts for which a qualified portfolio manager is authorized to select securities and execute trades on behalf of a client (can include mutual funds, pooled funds, or individual securities )

Question 5

Funds of Funds

Answer 5

invest in portfolios of other managed products, usually mutual funds

Question 6

Separately Managed Wraps

Answer 6

target investors with higher levels of investable assets. Accounts are managed on a segregated basis, thereby enabling the client to own individual securities

Question 7

Synthetic ETFs

Answer 7

Do not hold the same underlying exposure as the index they track, instead they are constructed with derivatives such as swaps to achieve the return effect of the index

Question 8

Leveraged ETFs

Answer 8

The fund uses borrowed capital, in addition to investor equity, to provide higher exposure to the underlying index
Uses derivates such as swaps to achieve the leveraged return effect

Question 9

Inverse ETFs

Answer 9

constructed with derivatives such as swaps to achieve an inverse return effect

Question 10

3 Commodity ETFs

Answer 10

1. physical based
2. future based
3. equity based

Question 11

Future Based ETFs

Answer 11

Invest in futures contracts of different commodities, with an underlying portfolio of money market instruments to cover the full value of the contracts

Question 12

Equity Based ETFs

Answer 12

Invest in listed companies that are involved in exploration and development or in the processing or refining of a commodity

Question 13

Risk of roll yield loss

Answer 13

Occurs when the future price of the asset is above the expected future spot price, and so the investor will lose money when rolling contracts into the next month

Question 14

Risk of Front Running

Answer 14

Since commodity ETFs must periodically roll over their holders as future contracts expire, In anticipation of the rollover, traders have been known to buy the new contract and attempt to profit on the tide created by the ETF’s large buy orders

Question 15

Counterparty risk in derivatives

Answer 15

ETFs that employ swaps face this risk that the other side of the swap may not be able to fulfill its obligations over the life of the contract (failure to receive payments, not loss of principal

Question 16

Why do swaps carry more counterparty risk than ETFs?

Answer 16

Because they are processed and guaranteed through a clearinghouse

Question 17

What happens when a Canadian ETF distributes a non-Canadian dividend?

Answer 17

no further tax is deducted because US tax is withheld (if held in taxable account)

Investor can get the withholding tax back by claiming a foreign tax credit (if held in taxable account)

Question 18

How are distributions taxed from US listed ETFs?

Answer 18

As ordinary income (even capital gains)

Question 19

Core and Satellite

Answer 19

• Core: intended to contribute the majority of the returns
• Satellite: more focused on riskier sectors that are intended to be traded based on market condition changes and boost returns

Question 20

6 ETF Investment Strategies

Answer 20

1. Core and Satellite
2. Rebalancing
3. Tactical Asset Allocation
4. Cash management
5. Simplified exposure to once hard to access asset classes
6. tax loss harvesting

Question 21

Hedge Funds

Answer 21

Lightly regulated pools of capital with managers who have great flexibility in their investment strategies and are often referred to as alternative investment strategies

Question 22

Hurdle Rate

Answer 22

Minimum rate of return that a hedge fund must make before a performance fee can be taken

Question 23

High Water Mark

Answer 23

contract provision preventing a hedge fund manager from collecting a performance fee until the higher previous net asset value is exceeded

Question 24

hedge Fund Prime Broker

Answer 24

Investment dealer or brokerage that supplies services to the hedge fund in the implementation of trading strategies

Responsible for trade execution, financing agreements, and collateral management

Question 25

Hedge fund Custodian

Answer 25

responsible for holding and tracking all of the assets and for transferring securities and cash to and from the prime broker as required

Question 26

Hedge fund administrator

Answer 26

Processes subscriptions and redemptions and calculates the hedge fund’s NAV

Question 27

Bitcoin the token

Answer 27

piece of code that represents ownership of a digital concept (a bitcoin) with financial value

Question 28

Bitcoin the protocol

Answer 28

the distributed network, or blockchain, that maintains the ledger of balances of bitcoin the token

Question 29

Blockchain

Answer 29

Bitcoin is powered by open-source code, known as blockchain, which creates a shared public ledger

Each transaction is a “block” that is “chained” to the code, creating a permanent record of the transaction

Question 30

Bitcoin mining

Answer 30

Members of the peer-to-peer bitcoin platform independently confirm the transactions using high-speed computers through a process called bitcoin mining

Question 31

PPNs

Answer 31

debt instrument issued by a bank in the form of a deposit note
Delivers a return (if any) in the form of interest and has a maturity date upon which the issuer promises to return the face value (i.e., the principal) of the note

Question 32

Overlay Management

Answer 32

a service that combines several managed investment products into a single account controlled by a single authority

Question 33

unified managed accounts

Answer 33

essentially software tools and data feeds so that the wealth manager is able to monitor the client’s overall portfolio