Exchange-Traded Fund (ETF)

Question 1

What does ETF stand for?

Answer 1

Exchange-Traded Fund

Question 2

What is an Exchange-Traded Fund (ETF)?

Answer 2

An ETF is a type of investment fund that holds a collection of assets, such as stocks, bonds, or commodities, and is traded on stock exchanges like individual stocks.

Question 3

How is an ETF similar to a stock?

Answer 3

Like a stock, an ETF is traded on an exchange and its price fluctuates throughout the day based on supply and demand.

Question 4

What is the key difference between ETFs and mutual funds?

Answer 4

ETFs are traded on exchanges throughout the day like stocks, whereas mutual funds are traded only at the end of the trading day at the net asset value (NAV).

Question 5

What does ‘diversification’ in ETFs refer to?

Answer 5

Diversification refers to holding a variety of assets in one fund, reducing risk exposure to individual assets.

Question 6

What are the two main types of ETFs?

Answer 6

Passive ETFs and Active ETFs.

Question 7

What is a passive ETF?

Answer 7

A passive ETF aims to replicate the performance of a specific index, such as the S&P 500.

Question 8

What is an active ETF?

Answer 8

An active ETF is managed by a portfolio manager who makes decisions about asset allocation and selection with the goal of outperforming an index.

Question 9

How are ETF shares created or redeemed?

Answer 9

ETF shares are created or redeemed in large blocks of shares, known as creation units, through a process involving authorized participants.

Question 10

What is an ‘authorized participant’ in the context of ETFs?

Answer 10

An authorized participant is a large financial institution that has the right to create or redeem shares of an ETF.

Question 11

How do ETFs generate income for investors?

Answer 11

ETFs can generate income through dividends from the underlying assets or from interest in the case of bond ETFs.

Question 12

What is the expense ratio of an ETF?

Answer 12

The expense ratio is the annual fee that ETFs charge to cover management and administrative costs, expressed as a percentage of assets.

Question 13

What is the liquidity of an ETF?

Answer 13

Liquidity refers to how easily an ETF can be bought or sold on the market, which is typically high due to its structure and the presence of authorized participants.

Question 14

What is a sector ETF?

Answer 14

A sector ETF focuses on a specific sector of the economy, such as technology, healthcare, or energy.

Question 15

What is a bond ETF?

Answer 15

A bond ETF invests primarily in bonds and provides exposure to the bond market.

Question 16

What is the difference between a stock ETF and a bond ETF?

Answer 16

A stock ETF holds equities, whereas a bond ETF holds fixed-income securities.

Question 17

What is the tax efficiency of ETFs?

Answer 17

ETFs are generally more tax-efficient than mutual funds due to the in-kind creation and redemption process, which minimizes capital gains distributions.

Question 18

What is a leveraged ETF?

Answer 18

A leveraged ETF uses financial derivatives and debt to amplify the returns of an underlying index.

Question 19

What is an inverse ETF?

Answer 19

An inverse ETF seeks to provide the opposite performance of a particular index, typically using derivatives.

Question 20

What are the risks associated with leveraged and inverse ETFs?

Answer 20

Leveraged and inverse ETFs are riskier because they use financial instruments to amplify returns, which can lead to significant losses, especially in volatile markets.

Question 21

What is a commodity ETF?

Answer 21

A commodity ETF invests in physical commodities such as gold, oil, or agricultural products.

Question 22

What does the term ‘tracking error’ mean in ETFs?

Answer 22

Tracking error is the difference between the performance of an ETF and the performance of its benchmark index.

Question 23

What are the benefits of investing in ETFs?

Answer 23

ETFs offer benefits such as diversification, lower costs, liquidity, and tax efficiency.

Question 24

How does an ETF’s price change during the day?

Answer 24

An ETF’s price fluctuates throughout the day based on supply and demand, similar to how a stock trades.