CSC Mutual Funds and ETFs 4 — Questions and Answers
Question 1: An ETF trading at $50.25 when its NAV is $50.00 is said to be trading at a:
- Discount of $0.25
- Premium of $0.25 (Correct answer)
- Par value
- Net asset value
Correct answer: Premium of $0.25
When an ETF's market price exceeds its NAV, it trades at a premium; authorized participants can arbitrage this by creating new units until the premium disappears.
Question 2: Which of the following is a key risk specific to leveraged and inverse ETFs held for periods longer than one day?
- Currency risk
- Volatility decay (beta slippage) (Correct answer)
- Dividend reinvestment risk
- Tracking error elimination
Correct answer: Volatility decay (beta slippage)
Leveraged and inverse ETFs reset daily, causing volatility decay or beta slippage where compounded daily returns diverge significantly from the leveraged index return over time.
Question 3: In Canada, which regulator oversees the registration and conduct of mutual fund dealers?
- OSFI
- CIRO (formerly MFDA) (Correct answer)
- Bank of Canada
- CRA
Correct answer: CIRO (formerly MFDA)
CIRO (Canadian Investment Regulatory Organization, formerly MFDA) regulates mutual fund dealers and their registered representatives in Canada.
Question 4: A money market mutual fund primarily invests in which type of securities?
- Common shares of large-cap companies
- Short-term, high-quality debt instruments with maturities under 365 days (Correct answer)
- Long-term government bonds
- Real estate investment trusts
Correct answer: Short-term, high-quality debt instruments with maturities under 365 days
Money market funds invest in short-term, highly liquid, investment-grade debt instruments such as T-bills and commercial paper to preserve capital.
Question 5: What is the significance of the 'portfolio turnover rate' disclosed in a mutual fund's MRFP?
- It shows how often fund managers change
- It indicates how frequently the fund trades its portfolio, affecting transaction costs and tax efficiency (Correct answer)
- It measures how often investors redeem units
- It reflects dividend frequency
Correct answer: It indicates how frequently the fund trades its portfolio, affecting transaction costs and tax efficiency
A high portfolio turnover rate means the fund trades frequently, generating higher transaction costs and potentially more taxable distributions for investors.
Question 6: Which type of mutual fund structure is most commonly used in Canada, allowing continuous issuance and redemption of units at NAV?
- Closed-end fund
- Open-end fund (Correct answer)
- Interval fund
- Exchange-traded closed-end fund
Correct answer: Open-end fund
Open-end mutual funds continuously issue and redeem units at the current NAV, giving investors daily liquidity at a fair price based on underlying assets.
Question 7: What is the role of a mutual fund's 'independent review committee' (IRC) under NI 81-107?
- To manage the fund's day-to-day investments
- To review and provide recommendations on conflict-of-interest matters involving the fund manager (Correct answer)
- To set the fund's management expense ratio
- To approve all investor redemptions
Correct answer: To review and provide recommendations on conflict-of-interest matters involving the fund manager
The IRC, required under NI 81-107, provides independent oversight by reviewing conflict-of-interest matters and making recommendations to protect unitholder interests.
CSC Mutual Funds and ETFs 4
An ETF trading at $50.25 when its NAV is $50.00 is said to be trading at a: