Investing Quiz – What’s Your ETF IQ?

So you think you know all about exchange-traded funds, more commonly known as ETFs? Okay, then how about putting your knowledge to the test with the InvestorPlace ETF IQ Test.

The following 10 questions will help you determine your grasp of the terms, concepts and strategies associated with these ultra-flexible investment vehicles. Along the way, we hope the answers might just give you a few new insights about the current state of ETFs and their place in the financial markets. 

To be certain, ETFs have become all the rage on Wall Street and for many good reasons. We’ll test your knowledge of those reasons in the following quiz, so if you’re ready to go, let’s get started.

As of March 31, 2010, the number of ETFs traded on U.S. equity exchanges was…

A) 658

B) 863

C) 1,167

D) 2,431

.

As of March 31, 2010, ETFs contained assets totaling approximately…

A) $557 billion
B) $752 billion
C) $806 billion
D) $1.12 trillion

True or False: The SPDR S&P 500 (SPY) is the most popular ETF traded today.

Investors like ETFs becuase they offer…

A) Transparency
B) Low expense ratios
C) Diversity of holdings
D) Ease of trade
E) All of the above
F) None of the above

True or False: Mutual funds are generally more tax efficient than ETFs.

Which of the following ETF issuers offers the greatest number of ETFs and has the most assets under management?

A) Blackrock
B) PowerShares
C) State Street Global Advisors
D) Vanguard

ETFs allow investors to do which of the following…

A) Go short a specific market sector
B) Employ leverage to a specific market sector
C) Protect their portfolio against inflation
D) Profit when interest rates rise
E) All of the above
F) None of the above

True of False: ETFs are better suited for short-term traders and investors who don’t plan on buying and holding an investment.

Which of the following ETFs was the top-performer in 2009?

A) Market Vectors Coal ETF (KOL)
B) Claymore/BNY Mellon BRIC ETF (EEB)
C) Direxion Daily Technology Bull 3X Shares (TYH)
D) Direxion Daily Emerging Markets Bull 3X Shares (EDC)
E) Market Vectors Russia ETF (RSX)

Question 1: B – According to ETF issuer State Street Global Advisors, the total number of ETFs traded on U.S. equity exchanges was 863.

Question 2: C – According to State Street Global Advisors, there was approximately $806 billion in assets invested in ETFs. That number has grown mightily from the $300 million or so in assets held in ETFs just five years ago.

Question 3: True – The SPDR S&P 500 ETF is by far the most popular ETF with nearly three times the average daily trading volume of the next most popular ETF, the iShares Russell 2000 (IWM).

Question 4: E – ETFs offer investors transparency — you know exactly what stocks you own when you own an ETF. The expense ratios on ETFs are very low, much lower than with traditional mutual funds. Because ETFs offer a basket of stocks that are tied to a specific index or market sector, you get diversity of holdings. Finally, ETFs are traded on U.S. stock exchanges, and unlike mutual funds, you can buy and sell ETFs at any time of day for whatever the bid or ask price of the ETF may be at that time.

Question 5: False – ETFs are generally more tax efficient than mutual funds, chiefly due to their low turnover. Many actively managed mutual funds buy and sell numerous holdings each month, and that buying and selling can cause short-term capital gains. With ETFs there is no turnover save for the occasional restructuring of an underlying index.

Question 6: A – By far, the ETF issuer with both the largest number of ETF offerings (201) and the most ETF assets under management (nearly $386 billion) is Blackrock. The company gained its ETF industry dominance via last year’s acquisition of Barclays Global Investors, which at the time operated the iShares division. This is why you’ll see the name iShares still in the official name of most Blackrock ETFs.

Question 7: False – There is a wide variety of commodity ETFs on the market today, including ETFs that allow you to buy gold, silver, oil, natural gas, world currencies, agricultural commodities and many more. In fact, just about every major commodity available can be traded using ETFs.

Question 8: E – The massive variety of ETFs currently on the market allow investors to go short specific market sectors, as well as employ double and even triple leverage in a specific market sector. There are ETFs designed to rise with inflation that are pegged to Treasury Inflation Protected Securities, and there are rising interest rate ETFs that move higher along with long-term bond yields.

Question 9: False – While ETFs certainly are well suited to short-term traders, these investment vehicles are so diverse that they can be used by any type of investor. ETFs can be used to go long, go short, to hedge a position or to build a position. The truth is that whatever your individual investing goals may be, ETFs can be used to help you achieve those goals.

Question 10: C – The top-performing ETF in 2009 was the Direxion Daily Technology Bull 3X Shares (TYH) with a gain of 238.4%. This fund seeks investment results equal to 300% of the performance of the Russell 1000 Technology index. The triple leverage in this fund is what’s largely responsible for its massive gains, and it’s this high degree of leverage in certain ETFs that makes hitting home runs with these investment vehicles possible.