William

Yu
ETFS
1-What is an ETF? A Mutual Fund? Describe the various types of both instruments
Answer: An ETF is an investment fund traded on stock exchanges, much like stocks, and it tracks an
index, a commodity, or bonds. Common types of ETFs: 1) Index ETFs: replicate the performance of a
specific index, which may be based on stocks, bonds or commodities; 2) Commodity ETFs: invest in
commodities, such as precious metals, agricultural products; 3) Stock ETFs: track national indexes such
as the S&P 500.
A mutual fund is an investment fund that pools money from many investors to invest in securities
such as stocks, bonds, and money market instruments. Common types of ETFs: 1) open-end funds-buy
back shares from their investors at the end of every business day at the NAV; 2) closed-end funds-
issue shares to the general public through IPO.
2-Why would one invest in an ETF versus a mutual fund? Identify the relative advantage/disadvantage
of investing in each instrument.
Answer: Investing in an ETF offers several advantages over mutual fund. First, a mutual funds net
asset value is quoted, and investors can buy or sell their shares once a day. In contrast, an ETF can be
traded continuously throughout the day. Second, unlike a mutual fund, an ETF can be sold short or
purchased on margin. Third, tax efficiency-ETFs have low turnover of their portfolio securities and
they do not have to sell securities to meet investor redemptions, which are features of mutual funds.
Fourth, lower cost. Investors who buy ETFs do so through brokers rather than buying directly from the
fund. However, there are some disadvantages to ETFs. First, while mutual funds can be bought at no
expense from no-load funds, ETFs must be purchased from brokers for a fee. Second, ETFs trade as
securities, their prices can depart from NAV.
3-What are the relative commission rates of ETFs vs. mutual funds?
Answer: ETF typically has a flat fee ranging from $10 to $20. Mutual funds can charge 1% to 3%
4-Is the risk exposure of investing in an ETF greater than a comparable Mutual Fund?
Answer: Most ETFs are designed to replicate the performance of an associated index, their overall risk
level should not be significantly higher or lower than that of the index. Whether is it an EFT or a
mutual fund, the risk is determined by the performance characteristics of the funds underlying assets.
5-Now that you understand the nature of both instruments, where would you place your hard earned
savings as you save for a home purchase within the next 3-5 years? What about retirement savings?
Answer: Mutual Funds and 401K