Which of the following statements describes a characteristic of exchange-traded funds (ETFs)?

Exchange-Traded Funds (ETFs) generally feature lower expense ratios compared to traditional mutual funds. This cost efficiency is primarily because many ETFs are passively managed, designed to track a specific market index (e.g., the S&P 500). This passive strategy minimizes the need for active portfolio management, research, and frequent trading, which are significant costs associated with actively managed mutual funds. The lower operational overhead of ETFs is passed on to investors in the form of a lower expense ratio, making them a cost-effective investment vehicle for gaining broad market exposure.

A: ETFs are traded on stock exchanges and investors pay brokerage commissions; they do not have front-end or back-end sales loads, which are characteristic of many mutual funds.

B: As securities traded on an exchange, most ETFs are marginable, meaning they can be purchased with borrowed funds, subject to Regulation T and brokerage firm policies.

C: ETFs trade intraday on exchanges at market-determined prices, which can be at a premium or discount to their Net Asset Value (NAV). Mutual funds are priced once per day at the NAV.

1. FINRA (Financial Industry Regulatory Authority). "All About Exchange-Traded Funds (ETFs)." FINRA.org.

Section: Costs. "ETFs typically have lower expenses than actively managed mutual funds."

Section: Trading. "ETFs trade like stocks... You can place the same types of orders you would for a stock (such as limit and stop-loss orders) and can buy ETFs on margin... you will have to pay a brokerage commission to buy and sell ETF shares." This confirms options A

B

and C are incorrect.

2. U.S. Securities and Exchange Commission (SEC). "Investor Bulletin: Exchange-Traded Funds (ETFs)." Investor.gov

August 23

2012.

Section: How are ETFs different from mutual funds? "Unlike mutual funds

which are priced once at the end of the trading day

ETF shares are traded throughout the day on stock exchanges at market prices... ETFs often have lower investment advisory or management fees and other expenses than actively managed funds." This directly supports answer D and refutes C.

3. Lettau

M.

& Madhavan

A. (2018). "Exchange-Traded Funds 101 for Economists." Journal of Economic Perspectives

32(1)

135-54.

Page 137

Section: The ETF Ecosystem. The article notes that a key advantage and driver of ETF growth is their "low cost

" contrasting them with higher-cost actively managed funds. DOI: https://doi.org/10.1257/jep.32.1.135