Question #19
Reading: Reading 35 Exchange-Traded Funds - Mechanics and Applications
PDF File: Reading 35 Exchange-Traded Funds - Mechanics and Applications.pdf
Page: 6
Status: Incorrect
Correct Answer: A
Your Answer: B
Question
PSTO ETF is quoted at a bid-ask spread of 0.10%. ETF commissions are 0.04% of trade value. Management fees are 0.09% per year. The average annual total cost of holding the PSTO ETF for 3 years is closest to:
Answer Choices:
A. 0.15%
B. 0.45%
C. 0.30%
Explanation
Round-trip commission = 2 × 0.04% = 0.08%
Round-trip trading cost = round-trip commission + spread = 0.08% + 0.10% = 0.18%
Holding cost for 3 years = round-trip trading cost + management fees = 0.18% + (3 ×
0.09%) = 0.45%
Average annual cost (for 3-year holding period) = 0.45% / 3 = 0.15%