Mutual Funds and ETFs Flashcards

A balanced mutual fund typically allocates assets between which two major asset classes?

Answer: Equities and fixed income securities

Balanced funds blend equities for growth and fixed income for income and stability, aiming to offer a middle ground between pure equity and bond funds.

When a mutual fund distributes a return of capital (ROC), what is the immediate tax consequence for a Canadian investor?

Answer: It is not immediately taxable but reduces the investor's adjusted cost base

ROC distributions reduce the investor's adjusted cost base rather than being immediately taxable, deferring taxation until the units are sold.

Which ETF replication method holds all (or a representative sample of) the actual securities in an index?

Answer: Physical replication

Physical replication means the ETF directly holds the underlying securities of the index, either all of them (full replication) or a representative sample (sampling).

What is a 'clone fund' in the context of Canadian mutual funds?

Answer: A Canadian fund that mirrors a foreign fund using derivatives to gain foreign exposure within RRSP rules

Clone funds used derivatives to replicate foreign fund returns within a Canadian registered plan, historically used before the foreign content limits for RRSPs were eliminated.

Under CSC principles, what does 'dollar-cost averaging' through regular mutual fund purchases achieve for investors?

Answer: Reducing the average cost per unit by buying more units when prices are low and fewer when prices are high

Dollar-cost averaging means investing fixed amounts regularly, automatically purchasing more units when prices fall and fewer when prices rise, potentially lowering average cost.

Which of the following best describes a 'currency-hedged' ETF?

Answer: An ETF that uses forward contracts or other derivatives to neutralize foreign exchange fluctuations on foreign holdings

Currency-hedged ETFs use forward contracts or swaps to offset foreign exchange movements, so returns reflect only the underlying foreign asset performance, not currency shifts.

What is the primary purpose of the 'right of rescission' available to Canadian mutual fund purchasers?

Answer: To cancel a mutual fund purchase within two days if the Fund Facts document was not delivered before the trade

Canadian securities law grants investors the right to rescind (cancel) a mutual fund purchase within two business days if proper Fund Facts disclosure was not provided before the trade.