Question

The exchange-traded funds (ETFs), as compared to mutual funds:

A) Are more cost-effective for investors with a short-term horizon.
B) Generate higher taxable gains.
C) Accommodate investors pursuing narrow market segments.
D) Are more diversified.
E) Have higher overhead expenses.

Answer 1

Exchange-traded funds (ETFs) and mutual funds have several differences. ETFs are more cost-effective for short-term investors, generate lower taxable gains, and accommodate narrow market segments. Additionally, ETFs are more diversified, while mutual funds have higher overhead expenses.

Step-by-step explanation:

Exchange-traded funds (ETFs) and mutual funds are both popular investment options. However, they differ in several key aspects:

1. Cost-effectiveness: ETFs are generally more cost-effective for investors with a short-term horizon as they have lower expense ratios compared to mutual funds.
2. Taxable gains: ETFs are structured in a way that minimizes taxable gains for investors, making them more tax-efficient compared to mutual funds.
3. Market segments: ETFs can accommodate investors pursuing narrow market segments by offering specialized funds that focus on specific sectors or themes.
4. Diversification: ETFs are designed to track a specific index or asset class, providing investors with instant diversification compared to mutual funds which can have a narrower focus.
5. Overhead expenses: Mutual funds generally have higher overhead expenses due to their active management approach and administrative costs.