Certified Plan Sponsor Professional (CPSP) Practice Exam

Which of the following is NOT true about exchange traded funds (ETFs)?

1. ETFs can be traded throughout the day on an exchange.

2. ETFs often have lower expense ratios compared to mutual funds.

3. ETFs require a minimum investment similar to mutual funds.

4. ETFs typically have a diversified portfolio of underlying assets.

The correct answer is: ETFs require a minimum investment similar to mutual funds.

The statement indicating that ETFs require a minimum investment similar to mutual funds is not true. Unlike mutual funds, which often have specific minimum investment requirements that can range from hundreds to thousands of dollars, ETFs can typically be bought in shares on an exchange without a minimum investment amount. This flexibility allows investors to purchase as few shares as they wish, making ETFs more accessible to a broader range of investors. In contrast, the other statements accurately describe characteristics of ETFs. They can indeed be traded throughout the day on an exchange, offering investors the ability to buy and sell shares in real-time just like stocks. Additionally, ETFs usually have lower expense ratios compared to mutual funds, primarily due to their passive management structure and lower operating costs. Lastly, ETFs are known for maintaining a diversified portfolio of underlying assets, which helps mitigate risk for investors.