Question

"Exchange-Traded Funds"

1. What is meant by financial innovation? Identify and explain the main forces that motivate the search for financial innovations.
2. How does a closed-end mutual fund differ from an open-end fund?
   1. What advantages and disadvantages does each type of mutual fund have?
   2. What advantages of ETFs relative to both types of mutual funds explain ETFs rapid growth?
   3. How does Amaral use the data on corporate bond spreads to distinguish alternative explanations for the sharp credit downturn? What does he conclude? Why?

Answer 1

Question: What is meant by financial innovation? Identify and explain the main forces that motivate the search for financial innovations?

Answer: Financial Innovation- It is the advancement in financial instruments. It also refers the payment system of investing and borrowing funds. It is the up gradation and ease in buying the financial instruments. Earlier, traditional financial products were there, banking products such as fixed deposits, recurring deposits, pension schemes and insurance etc. Nowadays many new financial instruments are being introduced and people are aware about those instruments such as ETFs, Mutual funds, NCDs, Derivatives, crowdfunding, crypto currency etc.

Identify and explain the main forces that motivate the search for financial innovations- There are many factors that motivate the search for financial innovation. These are:

1. New technology and research have played an important role in financial innovation, there are many new techniques have come through which companies and individuals can perform extensive research for financial products.
2. Internet banking, Online buying and selling of the financial products also contribute in financial innovations. It saves time and energy of people as they can buy and sell financial instruments, even sitting at home or office.
3. Federal reserve and Securities exchange commission (SEC) make the policies and laws for secure financial transactions, they assure investors that their investment is safe.

Question: How does a closed-end mutual fund differ from an open-end fund?

Answer: Difference between closed end and open ended funds: as following

S.No	Closed ended	Open ended
1	Closed ended funds are sold through Initial public offer in primary market.	Open ended funds are directly sold to investors through exchange.
2	Its price keeps on changing and updating throughout the trading session like shares.	Its price is fixed once a day at the Net asset value (NAV).
3	Number of shares are fixed.	Number of shares are not fixed.

Question: What advantages of ETFs relative to both types of mutual funds explain ETFs rapid growth?

Answer: Advantages of ETFs: Are as following:

1. Exchange traded funds are the funds that trade on stock exchange like shares, these can be easily bought and sold through exchange.
2. It has the basket of stocks so gives the benefit of diversification, it reduces the risk for investors.
3. ETFs have lower fee than mutual funds and equities.
4. ETFs are passively managed funds so they have lower expense ratio than other mutual fund schemes.
5. It provides flexibility and tax advantage too.