How do index-tracking ETFs execute their investment strategy? (Select all that apply) A) By actively managing the portfolio based on market conditions. B) By using derivatives like... How do index-tracking ETFs execute their investment strategy? (Select all that apply) A) By actively managing the portfolio based on market conditions. B) By using derivatives like swaps. C) By investing in a diversified basket of assets. D) By holding a representative sample of the underlying securities.
Understand the Problem
The question is inquiring about the methods employed by index-tracking ETFs to implement their investment strategies. It asks for a selection of options that accurately reflect these strategies.
Answer
B, C, and D
The correct answers are B) By using derivatives like swaps, C) By investing in a diversified basket of assets, and D) By holding a representative sample of the underlying securities.
Answer for screen readers
The correct answers are B) By using derivatives like swaps, C) By investing in a diversified basket of assets, and D) By holding a representative sample of the underlying securities.
More Information
Index-tracking ETFs typically aim to replicate the performance of an index by investing in the same securities. Using derivatives like swaps enables replication with potentially lower costs. They also might hold a representative sample, especially when full replication isn't feasible.
Tips
Confusing actively managed ETFs with index-tracking ETFs is a common mistake, as the former involves active decision-making unlike the passive strategy of the latter.
Sources
- Exchange-traded fund - Wikipedia - en.wikipedia.org
- Mutual Funds and Exchange-Traded Funds (ETFs) - SEC.gov - sec.gov
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