Question #8
Reading: Reading 35 Exchange-Traded Funds - Mechanics and Applications
PDF File: Reading 35 Exchange-Traded Funds - Mechanics and Applications.pdf
Page: 3
Status: Correct
Correct Answer: B
Question
ETF ownership costs are least likely to be increased by:
Answer Choices:
A. security lending
B. portfolio turnover
C. bid–ask spreads
Explanation
The main components of ETF cost are the fund management fee, tracking error, portfolio
turnover, trading costs (including commissions, bid–ask spreads, and
premiums/discounts), taxable gains/losses, and security lending. These costs generally
reduce returns, with the exception of security lending, which can be considered a
"negative" cost as it generates additional income that offsets fund expenses. Security
lending for an ETF typically means loaning a portion of portfolio holdings to short sellers.