Question

Which of the following statement(s) regarding the exchange-traded funds (ETF) is (are) correct?

I. Individual ETF shares are traded on the exchanges

II. An authorized participant can redeem ETF shares directly from the ETF provider.

III. The “redemption-in-kind” process helps ETF(s) to maximize tax efficiency.

	A.	Only I
	B.	Only II
	C.	I and III
	D.	I and II
	E.	I, II, and III

Answer 1

The answer is (E) i.e. i , ii and iii are true

Explanation:-

An exchange-traded fund (ETF) is a basket of securities that trade on an exchange, just like a stock.

When an ETF initially goes public, or when an ETF wants to issue additional shares, it does so by selling shares to one or more financial institutions known as “Authorized Participants.” Authorized participants typically are large broker-dealers. Only authorized participants are permitted to purchase and redeem shares directly from the ETF.

ETF distributions are set up this way to maximize tax efficiency and minimize capital gains distributions.

The in-kind redemptions create “more opportunities for ETFs with appreciated and liquid portfolio holdings to defer gain recognition.”

In all cases where ETFs make in-kind redemptions, the fund never has to sell securities to generate cash. As such, it avoids generating taxable gains for non-redeeming shareholders.