SIE Understanding Products and Their Risks Question 53: Answer and Explanation

Question: 53

Which of the following statements is NOT true regarding mutual funds and UITs?

• A. The units of many UITs trade throughout the trading day on an exchange, whereas a mutual funds' orders are executed only after the trading day ends.
• B. A UIT's assets are typically fully invested, whereas a mutual fund's assets are usually not.
• C. Mutual funds and UITs both issue an initial public offering (IPO), and both may occasionally have a follow-on offering.
• D. A mutual fund's share value is determined daily, but its shares do not trade on an exchange, as a UIT may.

Correct Answer: C

Explanation:

C: Choice C is correct because, rather than a follow-on offering, mutual funds have what amounts to a continual initial public offering (IPO), which means they continually offer newly-issued shares when investors place buy orders. Mutual funds continually redeem those shares when offered for sale by investors. UITs have an initial public offering and may have a follow-on offering. Choice A is incorrect because the units of many UITs trade throughout the trading day on an exchange, whereas a mutual funds' orders are executed only after the trading day ends. Choice B is incorrect because a UIT's assets are typically fully invested and have no active investment management. In contrast, a mutual fund's assets are usually not fully invested but are actively managed, so cash equivalents are held after investments are sold, while waiting for target investment purchases. Choice D is incorrect because a mutual fund's share value is determined daily after the close of the market. Its shares do not trade on an exchange, but a UIT's units typically trade on an exchange.