Question

QUE 1(a)// Describe the process of creating an exchanged - traded fund (EFT) . How does it differ from the process by which an open - end fund is created ?

QUE 1(b)//   

For each pair of funds listed below, select the one that is likely to be less risky. Briefly explain your answer.
a.) Growth versus growth-and-income funds.
b.) Equity-income versus high-grade corporate bond funds.
c.) Balanced versus sector funds.
d.) Global versus value funds.
e.) Intermediate-term bonds versus high-yield municipal bond funds.
f.) Target date fund with a target date of 2020 vs. one with a target date of 2040.

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Answer 1

Answer(1a): ETFs- ETFs are the open ended funds that track the performance of a benchmark

Process of creating an exchanged - traded fund (ETF)- ETFs are created by a "Creation and Redemption" process which occurs in the primary market at fund level. There is underlying security for each ETF, underlying security can be shares, commodities, currency etc. ETFs is a basket of securities. ETF is created by issuing a basket of specific securities. A company that is issuing ETF should be registered with U.S security and exchange commission.

Answer(1b):

a.) Growth versus growth-and-income funds- Growth fund is less risky as it provides capital appreciation. It invests into growth stocks.

b.) Equity-income versus high-grade corporate bond funds-- Equity income provides fixed and regular income to investors, they invest more into debt and less into equities. They are less risky.
c.) Balanced versus sector funds- Balanced fund is less risky as it invests equal percentage into equity and debt while sector fund invests into a particular sector that is high risky.
d.) Global versus value funds- Value fund is less risky, it invests into some good valuation stocks and into debt also. Global fund invests internationally so it is high risky.
e.) Intermediate-term bonds versus high-yield municipal bond funds- Intermediate term bond is less risky, they have maturity within 7 to 10 years.