Canadian Securities Course (CSC) Level 2 Practice Exam

What is a characteristic of ETF tradability?

1. Minimum investment of $500

2. Trade at NAVPS

3. Dividend reinvestment for most ETFs

4. High tracking error

The correct answer is: Trade at NAVPS

The correct characteristic of ETF tradability is that they trade at their net asset value per share (NAVPS) throughout the trading day. This allows investors to buy and sell shares of the ETF on an exchange just like stocks, with prices fluctuating in real-time based on market demand and supply. While the actual trading price can sometimes deviate slightly from the NAV due to market conditions, the intention behind ETFs is for them to trade at values close to their NAV. Minimum investment amounts can vary widely depending on the specific ETF or brokerage; they are not standardized and often much lower than $500. Dividend reinvestment is indeed a feature of many ETFs, but it is not universal and can depend on the brokerage platform and the investor’s choice. A high tracking error would indicate a significant difference between the ETF's performance and its benchmark, which is not a characteristic that would be praised for tradability. Thus, the main focus on ETF tradability centers around their ability to be bought and sold at market prices that closely reflect the NAV during trading hours.