SIE Understanding Products and Their Risks Question 93: Answer and Explanation

Question: 93

Which of the following provides a return that uses borrowing to potentially improve returns above that of the target index?

• A. Mutual fund
• B. Inverse ETF
• C. ETF
• D. Leveraged ETF

Correct Answer: D

Explanation:

D: Choice D is correct because a leveraged ETF intends to obtain a return in excess of that of the target index by borrowing to buy investments and/or buying appropriate investments such as options, swaps or futures that provide a reasonable possibility of attaining a return above that of the target index. Choice A is incorrect because, though some mutual funds may use some leverage or purchase derivative instruments for a similar purpose, must mutual funds limit the use of such strategies. Choice B is incorrect because its goal is to obtain a return that is the opposite of the target index, not to exceed its return. Choice C is incorrect because a typical ETF does not use borrowing to a large extent, or it would be classified as a leveraged ETF.