How Well Do You Know ETFs?

How Well Do

You Know ETFs?

ETFs continue to grow in popularity, but many investors don’t know where to start. Take our quiz below to test your ETF knowledge and learn more about how ETFs can help you reach your investment goals.

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Test Your Knowledge

Think you know all about ETFs? Take our pop quiz to test your knowledge!

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Question 1 of 6

ETFs have been around for nearly ten years.

True

Not quite. ETFs are a lot older than you think. According to Vanguard, the first exchange traded fund was launched in the US in 1993, making ETFs more than a quarter century old. Moreover, investors are increasingly turning to ETFs. As of last year, ETF investors held 6 percent of the US stock market, according to Goldman Sachs.

False

That’s right! ETFs are more than 25 years old. Moreover, investors are increasingly turning to ETFs. As of last year, ETF investors held 6 percent of the US stock market, according to Goldman Sachs.

Question 2 of 6

ETFs trade just like mutual funds.

True

Nope. This was a tricky one. ETFs trade more like a stock than a mutual fund. ETFs can be bought and sold throughout the day, similarly to a stock. This means that investors have a better understanding of their price at the time of placing the trade. Conversely, mutual fund shares are priced once per day based on the underlying value of their assets (net asset value) after the market is closed.

False

Yep! ETFs actually trade more like stocks in that they can be bought or sold throughout the day, similarly to a stock. This means that investors have a better understanding of their price at the time of placing the trade. Conversely, mutual fund shares are priced once per day based on the underlying value of their assets (net asset value) after the market is closed.

Question 3 of 6

ETFs are tax free.

True

Not quite. No investment is tax free, but some are more tax-efficient than others. The biggest contributor to a fund’s tax efficiency is whether or not it follows an active or passive strategy, as this will determine the amount of buying and selling the portfolio manager is executing within a portfolio. Because most ETFs follow a passive indexing strategy, they’re generally more tax efficient, though they’re not completely tax free.

False

You’re right! No investment is tax free, but some are more tax-efficient than others. For any fund, the biggest contributor to its tax efficiency is whether or not it follows an active or passive strategy. This determines the amount of buying and selling the portfolio manager is executing within a portfolio. Because most ETFs follow a passive indexing strategy, they’re generally more tax efficient, though they’re not completely tax free.

Question 4 of 6

ETFs that track an index tend to have lower expense ratios than actively managed strategies.

True

That’s right! Research shows that paying a fund manager for an actively traded strategy is one of the highest contributors to overall cost. ETFs that follow an index tend to have lower expense ratios than actively managed strategies.

False

Close, but that’s not quite right. Research shows that paying a fund manager for an actively traded strategy is one of the highest contributors to overall cost. ETFs that follow an index tend to have lower expense ratios than actively managed strategies.

Question 5 of 6

There’s no need to purchase individual sectors in an ETF portfolio.

True

Close, but not quite. While it depends on your unique circumstance, most investors do benefit from owning a diverse set of securities in their portfolios. However, sector ETFs, like ones that track specific sectors or indices, allow investors to finely tune their portfolios.

False

Yep! No single solution is right for every investor, though most investors do benefit from owning a diverse set of securities. However, sector ETFs, like ones that track specific sectors or indices, allow investors to finely tune their portfolios.

Question 6 of 6

Savers looking to generate income during their retirement need to invest in individual bonds.

True

This was a tough one, but that’s not quite it. While it’s possible for some investors to generate income during retirement with individual securities, there are a number of ETF strategies that can also allow investors to diversify their fixed income holdings. Investors can buy both passive and active bond ETFs and, just like with equities, can drill down into more specific fixed income asset classes, like high yield or municipals, if they would prefer.

False

That’s right: There are a number of ETF strategies that can also allow investors to diversify their fixed income holdings. Investors can buy both passive and active bond ETFs and, just like with equities, can drill down into more specific fixed income asset classes, like high yield or municipals, if they would prefer.

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