Exam CIFC Topic 3 Question 92 Discussion

Actual exam question for IFSE Institute's CIFC exam
Question #: 92
Topic #: 3

Which statement CORRECTLY describes index mutual funds and traditional exchange-traded funds (ETFs)?

A. Index funds use an active investment management style, whereas ETFs use a passive investment management style. B. Both types of funds are closed-end investments that are required to hold the same securities as the index at all times. C. The market price of an ETF must match its net asset value (NAV), whereas there can be discrepancy in the pricing of index funds. D. Both types of funds attempt to replicate the return of a specific market index, but their returns may not perfectly match the index.

Suggested Answer: A Vote an answer

Explanation
Index mutual funds and traditional exchange-traded funds (ETFs) are both types of investment funds that use a passive investment management style, which means they try to track the performance of a specific market index, such as the S&P/TSX Composite Index or the S&P 500 Index. They do so by holding the same securities as the index or a representative sample of them, and by adjusting their portfolio composition and weighting to reflect any changes in the index. However, both types of funds may not be able to exactly replicate the return of the index for various reasons, such as fees, expenses, tracking error, rebalancing frequency, dividend reinvestment, and cash holdings. Therefore, there may be some deviation or difference between the fund's return and the index's return, which is called tracking difference.
References: Canadian Investment Funds Course, Chapter 4: Types of Investments1

by Prof GK at Apr 13, 2024, 01:22 AM

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Comments

mshah

2025-03-07 09:10:07

D is the correct answer

upvoted 1 times

...

Prof GK

2024-04-13 01:22:51

Selected Answer: D

Answer D is correct as both attempts to replicate the index but are unable to do so because of different fees and charges.
Answer A is wrong because both uses the passive management style i.e match the index

upvoted 10 times

...

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