Certified Plan Sponsor Professional (CPSP) Practice Exam

Which of the following characteristics is associated with exchange traded funds?

1. They can only be purchased through mutual funds

2. They are valued at the end of the trading day

3. They usually have lower expense ratios than mutual funds

4. They are suitable only for long-term investors

The correct answer is: They usually have lower expense ratios than mutual funds

Exchange-traded funds (ETFs) are known for their ability to offer investors a cost-efficient way to gain exposure to a diversified portfolio of assets. One of the prominent characteristics of ETFs is that they generally have lower expense ratios compared to mutual funds. This is primarily because ETFs are typically passively managed, tracking an index rather than engaging in the active management strategies that mutual funds often employ. Consequently, lower management costs are passed on to the investors in the form of reduced fees, making ETFs an attractive option for investors looking to minimize investment costs. The other characteristics mentioned in the choices do not accurately reflect how ETFs operate. They are not limited to purchase through mutual funds, as they are traded directly on stock exchanges similar to stocks. Additionally, ETFs are priced continuously throughout the trading day, unlike mutual funds, which are valued at the end of the trading day. Furthermore, while some investors may prefer ETFs for long-term strategies, they are versatile investment vehicles suitable for both short-term and long-term investment horizons.