ETF Quiz: how well do you really know exchange-traded funds?

Q: What is the difference between an index ETF and an actively managed ETF?

An index ETF mechanically tracks a benchmark (such as the S&P 500) with no discretionary choices and a low MER. An actively managed ETF is run by a team that selects securities hoping to beat the index; its fees are higher.

Q: Are ETF distributions taxable?

In a non-registered account, yes — dividends, interest, and distributed capital gains are taxable in the year you receive them. Inside an RRSP or TFSA, tax is deferred or eliminated.

Q: Why use a limit order rather than a market order when buying an ETF?

A limit order guarantees you will not pay above a certain price, which is useful when the bid-ask spread is wide or markets are volatile.

Q: Is an all-in-one ETF right for everyone?

It suits many self-directed investors thanks to built-in diversification and automatic rebalancing, but the ideal asset mix depends on your time horizon and risk tolerance — factors that are unique to each person.

Question 1

What is an exchange-traded fund (ETF) in the simplest terms?

Accepted Answer

A basket of securities (stocks, bonds, etc.) that trades on a stock exchange like a regular share

Answer

A savings account guaranteed by CDIC

Answer

A mutual fund sold directly by a bank

Answer

A derivative product that tracks the Bank of Canada's interest rates

Question 2

The management expense ratio (MER) of a Canadian index ETF is generally…

Accepted Answer

Lower than that of an equivalent actively managed mutual fund

Answer

Higher than that of an equivalent actively managed mutual fund

Answer

The same as that of an equivalent actively managed mutual fund

Answer

Fixed by regulation at 0.25% by the OSC

Question 3

The management expense ratio (MER) measures…

Accepted Answer

The fund's total annual costs expressed as a percentage of net assets

Answer

The fund's annual return after taxes

Answer

The commission paid to your broker on each trade

Answer

The bid-ask spread of the ETF

Question 4

In a market-cap-weighted index ETF (such as one tracking the S&P/TSX 60), which companies carry the largest weight?

Accepted Answer

Companies with the largest total stock-market value (market capitalisation)

Answer

Companies whose shares have the highest unit price

Answer

Companies selected by a management team based on growth prospects

Answer

Companies that paid the highest dividends over the past 12 months

Question 5

What exactly is an all-in-one ETF such as VGRO or XGRO?

Accepted Answer

An ETF that itself holds other ETFs in a predetermined stock/bond mix and rebalances automatically

Answer

An ETF that holds only high-dividend Canadian stocks

Answer

An actively managed fund that picks the best global stocks

Answer

A tax-free savings account structured as an index fund

Question 6

What is the main difference in how ETFs and mutual funds are priced during the day?

Accepted Answer

ETFs trade continuously during market hours; mutual funds are valued just once at the end of each trading day

Answer

ETFs are priced once a week; mutual funds are priced every business day

Answer

ETFs are priced at market close; mutual funds trade continuously

Answer

There is no difference — both are valued at market close

Question 7

A lightly traded ETF (low daily volume) holds only large, liquid TSX stocks. Its real liquidity is…

Accepted Answer

Good, because an ETF's liquidity depends primarily on the liquidity of its underlying holdings, not on its own trading volume

Answer

Very poor, because the ETF's own low volume makes it hard to sell quickly

Answer

Zero, because only very popular ETFs can be redeemed at any time

Answer

Limited to hours when market makers are active, i.e., before 10 a.m.

ETF Quiz: how well do you really know exchange-traded funds?

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