George Go, CFA, a U.S. domestic investor, wishes to diversify his domestic portfolio. Which of the following investment alternatives offer the lowest diversification benefit primarily because of its high correlation to U.S. markets? A) Exchange Traded Funds. B) American Depository Receipts. C) Closed-end country funds. D) Open-end country funds. Your answer: A was incorrect. The correct answer was C) Closed-end country funds. One of the primary disadvantages of a closed-end fund is that its NAV may be highly correlated with the U.S. stock market, which reduces the benefit of international diversification. So you’re telling me that in the universe of ETF’s, many of which track US indices, a closed end country fund has a higher correlation to the US mkts? Also- wouldn’t they want to say that the premium/discount to NAV ability might make it more correlated to US markets, not the NAV itself? I don’t see why if an open ended fund and closed end fund had the exact same investments, they’d have the same NAV… so that’s not what’s correlated, right? It’d be more the stock price on the CEF since that might i guess move w/ US mkts more and create discounts/premiums to NAV? Maybe I’m thinking way too much about 1 dumb qbank question, but I don’t like this answer at all.
etfs track indexes but not necessarly whole market an energy etf can go up while the market goes down for example NO ADR represent comp from other companies - NO Either C or D I actually chose D because open trade at nav so it represents the market at any point for me C is not as good because it can trade at a premium or discount because of liquidity reason and expectations regarding the fund that are different than the expectations regarding the market. I would have picked D
but what if he ETF was a S&P 500 ETF, then to me the ETF is the obvious choice. Question was vague and there are just too many ETF’s to guess what they’re talking about. Closed end is a better answer than open, though. If you had some India ETF, the value of it on NAV depends on the Indian names in there and how they perform. The mutual fund will track the NAV. the closed end trades during US hours so the price of the stock is going to maybe be a bit off of NAV by a discount or premium- I’d buy into the fact that depending on the US markets, the price of the CEF would move in more correlation to the US mkts than the open ended fund. I just think the vague-ness of ETF is crap in this question.
bannisja etf in general are not a good answer just because they are so many an eaf etf has nothing to do with us markets so an s&p500 is only a special case you are saying that a closed fund will trade a little bit of the Nav but from previous readings I have learned that closed funds can trade at major premiums or discounts. sometimes because you are not allowed to directly buy the stocks sometimes or because of liquidity reasons etc etc. I still believe that open end would have been a better ans. the only thing is that they are priced just once a day so that might be why
INP recently traded 20%+ premium to its NAV b/c Barclays had some issues with India in terms of creating new shares of the ETF. But you’re right- most ETF’s trade closer to NAV than do CEF’s (in general). But the question was about diversification. I just thought the question was too vague because in my US portfolio if I added an ETF that tracks midcaps or healthcare or energy or whatever, I’m not convinced that it’s going to give me better diversification benefits than choosing the korea fund or malaysia fund or whatever country fund if I’m all domestic. Maybe it would, maybe it wouldn’t. Depends on what was in my portfolio and what ETF or country fund I chose.
the premium or discount of a veg doesn’t necessarily impact its correlation as long as the premium or discount holds fairly steady which they tend to.
it’s not the open fund because of the cash they need to hold to make redemption. I think that is the reason
i don’t like tons of questions… i think it’s assumed because he wants to diversify his domestic stock portfolio that he’s not looking to buy domestic ETF’s (i do agree the language is poor, but that’s true for at least 30%+ of questions in my opinion) that question though isn’t really a figure it out one. that closed end funds oddly correlated with S&P500 is complete red herring from the material. gosh, if i started a questions i don’t like thread, i’d be here an entire week writing out questions. something to get used to i think.
Here is a great question I got on a qbank this weekend: How does the value of a callable bond compare to a noncallable bond? The bond value: A) decreases B) increases C) remains the same D) increases or decreases And the answer was not D.
wandering, good lord the wording on that question is horrible. i think it should be greater or less than… the wording on so many questions blows me away. it’s like alot of them are written by “english as second language” people.