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LOS b: Distinguish among style, sector, index, global, and stable value strategies in equity investment and among exchange traded funds (ETFs), traditional mutual funds, and closed-end funds.

A)	sector investment strategies.

B)	index investment strategies.

C)	style investment strategies.

A sector strategy invests in the stocks of a particular industry. An index strategy models the portfolio to mimic the benchmark index. A style strategy looks for investments with common underlying characteristics.

The Big Fund is a mutual fund that invests primarily in the equity of pharmaceutical companies. The investment style of the Big Fund can best be classified as a:

A large-cap strategy focuses on the equities of companies with large capitalization. Both large cap and growth are examples of style strategies, which look for investments with common underlying characteristics. A sector strategy invests in one, defined industry.

A portfolio that pursues a stable-value investment strategy would most likely invest in:

Investing in low P/E stocks is a value strategy. Buying high P/E stocks is a growth strategy. A stable-value fund would be most likely to invest in short-term, fixed-income securities.

Closed-end funds and exchange traded funds (ETFs) have which of the following characteristics in common?

A)	Both closed-end funds and ETFs stand ready to redeem shares.

B)	The structures of closed-end funds and ETFs prevent shares from trading at a significant premium or discount to NAV.

C)	Shares of both closed-end funds and ETFs trade in the secondary market.

Only ETFs stand ready to redeem shares; investors in closed-end funds can only divest through trading in the secondary market. The in-kind redemption process prevents ETFs from trading at significant premiums or discounts. There are no barriers in the structure of closed-end funds to prevent share prices deviating from NAV. Shares of both closed-end funds and ETFs do trade in the secondary market.

Which of the following statements about exchange-traded funds (ETFs) and closed-end funds is least accurate?

A)	ETFs attempt to track the performance of a stock index, but closed-end funds usually do not.

B)	Because of arbitrage, shares of an ETF rarely trade at a premium or discount to NAV as shares of a closed-end fund often do.

C)	ETFs can only trade in the secondary market, while closed-end funds can be redeemed in cash by the manager of the underlying index.

While both ETFs and closed-end funds trade on stock exchanges, only ETFs can be redeemed in cash. The remaining statements are true.

Which of the following statements regarding exchange traded funds (ETFs) is FALSE?

A)	ETFs are funds that can be traded in a stock market.

B)	ETF investors own shares of the underlying investment company.

C)	ETF shares can be sold short or margined.

ETF shares trades in the stock market just like traditional equities, and can be sold short or margined. ETF investors own shares of the underlying investment portfolio, not of the company.

Which statement is the least accurate analysis of a mutual fund equity investment strategy?

A)	Stable value funds invest in long-term fixed-income securities with regular cash flows and a steady interest rate.

B)	Sector funds may set performance targets drastically different than the overall market’s expected returns.

C)	Global funds managed by U.S. investment companies often contain U.S. stocks.

Stable value funds seek both timely principal payments and steady interest rates, but tend to invest in short-term securities with regular principal payments. Global funds frequently contain stocks from the investment manager’s home country. Index funds are designed to track a certain index, and fees are typically lower than those of actively managed funds. Because different industry sectors have different growth characteristics, some sector funds’ targets will of necessity diverge from the broader market.