Question #3
Reading: Reading 35 Exchange-Traded Funds - Mechanics and Applications
PDF File: Reading 35 Exchange-Traded Funds - Mechanics and Applications.pdf
Page: 1
Status: Correct
Correct Answer: A
Question
Zhang Wei, portfolio manager at Zenith Capital, makes the following two statements: Statement 1: For ETFs, hard closures entail creation halts and changes in investment strategy. Statement 2: When a bank ETN issuer is no longer interested in additional borrowings, the resulting creation halts may cause those ETNs to trade at a discount. Regarding the statements made by Wei, it would be most accurate to state that:
Answer Choices:
A. only statement 2 is correct
B. neither statement is correct
C. only statement 1 is correct
Explanation
Both statements are incorrect. Soft closures entail creation halts and changes in
investment strategy. When creations are halted by bank ETN issuers, those ETNs may
trade at a significant premium to their NAV as the arbitrage mechanism breaks down.