Which of the following statements is correct regarding ETFs and mutual funds?

Question

BlackTom AI · Accepted Answer

Question restatement: The prompt asks which statement about ETFs and mutual funds is correct, with four options provided.
Option 1: 'The share price of an ETF is determined on the central limit order book of an exchange.' This is largely accurate in spirit. ETFs trade on stock exchanges where prices arise from supply and demand in the limit order book, and intraday prices fluctuate accordingly. The phrase 'central limit order book' is a common way to describe the main order book used for matching bids and asks on many exchanges, so this captures the essence that ETF prices are determined in real time on an exchange rather than being fixed only by NAV at the end of the day.
Option 2: 'Investment funds are inferior to diversification which is a fundamental principle of investing.' This is a normative statement about diversification and does not address ETFs vs mutual funds directly. It’s also overly broad and incorrect as a blanket claim, because both funds and other vehicles can offer diversification depending on the strategy and holdings.
Option 3: 'Passive funds typically have higher expense ratios than active funds.' This is incorrect in the typical industry pattern. Passive funds (index funds/ETFs) generally have lower expense ratios than actively managed funds because they require less active management and trading.
Option 4: 'Mutual fund holdings are available to the public at daily frequency.' In practice, mutual fund portfolios are not disclosed daily; many mutual funds publish holdings with a delay (e.g., quarterly or semi-annually) due to trading activity and regulatory reporting schedules. Therefore this statement is inaccurate.
Overall, only Option 1 correctly describes ETF price determination on an exchange’s order book framework, while the other options contain factual inaccuracies or misleading generalizations.

Which of the following statements is correct regarding ETFs and mutual funds?

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