Question #11
Reading: Reading 35 Exchange-Traded Funds - Mechanics and Applications
PDF File: Reading 35 Exchange-Traded Funds - Mechanics and Applications.pdf
Page: 4
Status: Unattempted
Correct Answer: A
Question
Consider the following two statements about exchange-traded funds: Statement 1: Large ETF orders may incur price-impact costs depending on the liquidity of the secondary market. Statement 2: ETFs that track stable indices will have a lower portfolio turnover cost. It would be most accurate to state that:
Answer Choices:
A. only statement 2 is correct
B. both statements are correct
C. only statement 1 is correct
Explanation
Both statements are correct. ETF costs include management fees and trading costs.
Trading costs include brokerage or commission fees, and bid-ask spreads. Additionally,
larger orders may incur price-impact costs depending on the liquidity of the secondary
market. Portfolio turnover of ETFs results in an implicit cost which acts as a drag on
returns for the investor. ETFs that track stable indices will have lower portfolio turnover
cost.