Question #15
Reading: Reading 35 Exchange-Traded Funds - Mechanics and Applications
PDF File: Reading 35 Exchange-Traded Funds - Mechanics and Applications.pdf
Page: 5
Status: Incorrect
Correct Answer: A
Your Answer: A
Question
ETFs are most likely to underperform the benchmark by their:
Answer Choices:
A. tracking error
B. expense ratio
C. arbitrage gap
Explanation
ETFs generally underperform the benchmark by their expense ratio. Tracking error is the
annualized standard deviation of daily tracking error (which captures the difference in
returns between an ETF and its underlying benchmark). Tracking error may result in the
ETF underperforming or outperforming the benchmark.