Canadian Securities Course (CSC) Level 2 Practice Exam

What components should be considered regarding ETFs management, transparency, and fees?

1. Low advisor compensation

2. Secondary market distribution

3. Passive management, full transparency

4. Active management, high cash drag flow

The correct answer is: Passive management, full transparency

The correct choice emphasizes that ETFs (Exchange-Traded Funds) are typically designed with passive management strategies and a commitment to full transparency. Passive management means that ETFs usually aim to replicate the performance of a specific index rather than actively selecting securities, leading to potentially lower costs and reduced trading activity. Full transparency refers to the fact that ETF holdings are often disclosed on a daily basis, allowing investors to see exactly what assets are held within the fund. This transparency is a critical feature as it builds investor trust and allows for informed decision-making. In contrast, other options may not align with the typical structure and benefits associated with ETFs. While low advisor compensation can be relevant in a broader investment context, it doesn't specifically address the fundamental aspects of ETF management and transparency. Secondary market distribution might touch on how ETFs are traded but does not reflect the core management and transparency characteristics. Lastly, active management coupled with high cash drag flow contradicts the ETF model, which usually benefits from lower expenses and greater efficiency. Therefore, focusing on passive management and full transparency captures the essence of what investors generally seek in ETFs.