Canadian Securities Course (CSC) Level 2 Practice Exam

What should an ETF investor expect regarding annual fees?

1. High cash drag flow

2. No tracking error

3. Low turnover

4. A set percentage of the investment value

The correct answer is: A set percentage of the investment value

An ETF investor should expect annual fees to typically be a set percentage of the investment value. This is known as the management expense ratio (MER), which reflects the ongoing operating costs of managing the ETF. These costs are expressed as a percentage of the fund’s assets under management and are deducted from the fund’s returns. This structure ensures that investors have a clear understanding of the costs they incur relative to their investment, allowing for easier comparison between different funds. While other considerations such as cash drag flow, tracking error, and turnover are important in evaluating an ETF’s performance and efficiency, they do not directly represent the annual fees incurred by an investor. Annual fees being a set percentage of the investment value gives a clear metric for investors to assess and understand their costs.