Canadian Securities Course (CSC) Level 2 Practice Exam

What distinguishes rules-based Exchange Traded Funds (ETFs) in their approach to investment?

1. High MER costs

2. Goal-oriented strategy

3. Extensive market trading

4. Passive investment style

The correct answer is: Goal-oriented strategy

A distinguishing characteristic of rules-based Exchange Traded Funds (ETFs) is their reliance on a systematic, criteria-based approach to investment selection. This involves adhering to predefined rules or guidelines that dictate how assets are chosen, managed, and rebalanced within the fund. A goal-oriented strategy is critical here, as it reflects a focus on specific investment outcomes or benchmarks, aimed at achieving particular investment objectives, rather than reacting dynamically to market conditions. The other options do not align with the defining aspects of rules-based ETFs. High management expense ratios (MERs) are typically not associated with rules-based ETFs, as they often aim to maintain lower costs compared to actively managed funds. Extensive market trading is not a specific feature of rules-based strategies; rather, it might refer to the liquidity of ETFs in general, which is unrelated to the structure of the investment approach. Lastly, while passive investment styles can share similarities with rules-based approaches, not all rules-based ETFs are purely passive; the emphasis is on the adherence to rules rather than the absence of active management considerations entirely.