Canadian Securities Course (CSC) Level 2 Practice Exam

How do ETFs handle dividend reinvestment according to the text?

1. All ETFs offer it as a standard feature

2. It is more common for ETFs with active management strategies

3. It allows investors to buy partial units

4. ETFs with high MERs do not support dividend reinvestment

The correct answer is: It allows investors to buy partial units

The correct answer is that ETFs allow investors to buy partial units. This feature is significant because it enhances accessibility for investors, enabling them to reinvest dividends automatically in smaller increments rather than requiring a full unit purchase. This partial unit buying capability contributes to the flexibility and convenience that many investors seek when considering reinvestment strategies. While some exchange-traded funds (ETFs) do offer dividend reinvestment plans, it isn't a universal feature across all ETFs, hence not all of them standardly provide this option. Active management strategies might utilize different reinvestment approaches, but this does not imply that it is more common in this category compared to passive ETFs. Additionally, the management expense ratio (MER) of an ETF does not directly relate to whether it supports dividend reinvestment. High MERs pertain to the operating costs of the fund, which influences overall performance rather than the operational mechanics of dividend handling. Therefore, understanding that partial units can be purchased is crucial for investors looking to engage in systematic reinvestment of dividends effectively.