SIE Understanding Products and Their Risks Question 29: Answer and Explanation

Question: 29

Which of the following correctly states a current trend?

• A. Mutual funds are developing momentum to become more attractive than ETFs.
• B. ETFs are developing momentum to become more attractive than mutual funds.
• C. ETNs are developing momentum to become more attractive than mutual funds.
• D. ETNs are developing momentum to become more attractive than ETFs.

Correct Answer: B

Explanation:

B: ETFs are developing momentum to become more attractive than mutual funds due to their retaining popular features of mutual funds, such as diversification, professional management, conventional investment practices, and comparative benchmarks, while adding the features of lower internal fees, intraday liquidity, and fewer taxable events. Mutual funds have been dominant in the past but are not currently developing momentum to become more attractive than ETFs, Choice A, due to their valuation being only once daily, their sales charges, their higher internal fees, and their more frequent taxable events because of income distributions to shareholders. ETNs are not developing momentum to become more attractive than mutual funds, Choice C, or to become more attractive than ETFs in general, Choice D, because ETNs have almost none of the features that make mutual funds and ETFs popular and none of the additional features that are making ETFs develop momentum to become more attractive than mutual funds. Instead, ETNs have limited appeal because they are not directly related to ownership of underlying securities, are subject to the creditworthiness of the issuer, and are appealing mainly to a limited set of investors seeking exposure to relatively exotic investments not readily available through stocks, bonds, or mutual funds.