Mutual Funds and ETFs Flashcards

Which structure allows an ETF to create or redeem units in large blocks directly with authorized participants?

Answer: In-kind creation/redemption mechanism

ETFs use an in-kind creation/redemption mechanism where authorized participants exchange baskets of securities for ETF units, keeping prices aligned with NAV.

What is the primary tax advantage of the in-kind ETF redemption process compared to mutual funds?

Answer: Redemptions can be satisfied with low-cost securities, deferring embedded gains

In-kind redemptions allow the ETF to distribute appreciated securities rather than selling them, deferring capital gains recognition for remaining unitholders.

A mutual fund with a 2% management expense ratio (MER) and 0.5% trading expense ratio (TER) has a total cost to investors of:

Answer: 2.5%

The fund's total cost is the MER plus TER, which equals 2.0% + 0.5% = 2.5% annually.

Under Canadian securities regulation, mutual fund prospectuses must be renewed every:

Answer: 12 months

Canadian mutual fund prospectuses must be renewed annually (every 12 months) to ensure disclosure documents remain current.

Which type of ETF uses derivatives to deliver a multiple (e.g., 2x) of an index's daily return?

Answer: Leveraged ETF

Leveraged ETFs use derivatives such as futures and swaps to amplify daily index returns by a stated multiple like 2x or 3x.

What is 'tracking error' in the context of index ETFs?

Answer: The divergence between the ETF's return and its benchmark index return

Tracking error measures how closely an ETF's performance follows its benchmark index, with higher tracking error indicating greater divergence.

A fund-of-funds structure in Canadian mutual funds results in investors bearing:

Answer: Fees at both the underlying fund level and the top-level fund level

Fund-of-funds investors pay MERs at both levels — the underlying funds' fees plus the top-level fund's management fee — leading to layered costs.