Certified Plan Sponsor Professional (CPSP) Practice Exam

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True or False: An exchange-traded fund (ETF) is priced throughout the trading day, unlike a mutual fund.

True
False
Only during market hours
It is always underpriced

The correct answer is: True

An exchange-traded fund (ETF) is indeed priced throughout the trading day, which is a key characteristic that distinguishes it from a mutual fund. While mutual funds are priced at the end of the trading day based on their net asset value (NAV), ETFs are traded on stock exchanges like individual stocks, allowing their prices to fluctuate continuously during market hours. This provides investors with the flexibility to buy and sell shares at real-time market prices, making ETFs a more liquid investment option compared to mutual funds. The ability to trade any time during the trading day also introduces opportunities for arbitrage, as the market price of an ETF may vary from its NAV due to supply and demand dynamics. Therefore, this characteristic of price fluctuation throughout the day is a fundamental aspect of how ETFs operate in financial markets.