Canadian Securities Course (CSC) Level 2 Practice Exam

Which factor determines if an ETF is narrow or broad based on its underlying assets?

1. Asset liquidity

2. Asset management

3. Asset variety

4. Asset weights

The correct answer is: Asset variety

The correct choice revolves around the concept of asset variety. A narrow-based ETF typically focuses on a specific sector or industry, containing a limited number of underlying assets that represent a concentrated investment approach. In contrast, a broad-based ETF encompasses a wide range of underlying assets across various sectors or categories, thereby providing a more diversified investment opportunity. When assessing an ETF's scope, the variety of its underlying assets is a key determinant. A higher variety indicates a broad-based approach, which allows investors to capture performance across a larger market segment, whereas limited variety points to a narrow focus that can increase risk due to potential sector volatility. Other options, while relevant to ETFs, do not directly determine whether an ETF is categorized as narrow or broad. Asset liquidity pertains to how easily assets can be bought or sold without affecting their price, while asset management concerns how the ETF is managed and tracked. Asset weights, on the other hand, relate to the proportion each asset has within the ETF but do not directly indicate whether the ETF is narrow or broad based in scope.