Question

Why could two index funds that have the objective to track the S&P 500 index have different return performance?

i. Different replication strategy

ii. Closet indexing

iii. Differences in expense ratios

iv. Transaction cost variation

v. Different sales commissions

vi. Style drift

A) i, ii, & iv

B) i., iii, iv, & v

C) All are correct

D) iii, iv, & v

E) iii & iv

Answer 1

Answer-

The correct option is C. All are correct.

The two index funds that have the objective to track the S&P 500 index have different return performance is due to

i. Different replication strategy - this is correct as the replication strategy that is different can cause different returns

ii. Closet indexing- in this strategy the two index funds claim to actively purchase investments but wind up with a portfolio which causes the difference in returns

iii. Differences in expense ratios- this is the annual fee that all funds or exchange-traded funds (ETFs) charge the shareholders which causes difference in return performance.

iv. Transaction cost variation - which is the cost of collecting market information which causes the difference.

v. Different sales commissions - These are the commissions charged on two index funds which differs the difference in performance.

vi. Style drift - It is the deviation of a fund from its investment style or objective which causes different return performance.