Canadian Securities Course (CSC) Level 2 Practice Exam

The choice of an inverse exchange traded fund is indeed the correct answer. Inverse exchange traded funds (ETFs) are designed to provide returns that are opposite to the performance of a specific benchmark or index. These funds achieve their inverse effect through the utilization of derivatives, such as futures contracts, options, and swaps. By strategically employing these financial instruments, they can amplify downward price movements, effectively allowing investors to profit in bear markets or hedge against declines in the underlying assets.

On the other hand, while covered call ETFs, equity-based ETFs, and physical-based ETFs all serve distinct purposes in an investment strategy, they do not focus on generating inverse returns. Covered call ETFs, for instance, generally involve holding a portfolio of stocks and writing call options on those stocks to generate income. Equity-based ETFs typically mirror the performance of a stock index, while physical-based ETFs invest directly in physical commodities like gold or silver. None of these types utilize derivatives for the purpose of achieving an inverse return effect, which distinctly defines the nature and function of inverse ETFs.

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