Challenge Your Exam Readiness With Our Free Series 65 License Practice Questions

ETFs typically rely on an in-kind creation/redemption mechanism with authorized participants (APs). Rather than selling portfolio securities to meet redemptions, the fund can transfer a basket of securities in exchange for ETF shares, or receive a securities basket when creating new shares. This process can reduce realized capital gains within the fund, potentially improving after-tax outcomes for investors compared with many open-end mutual funds that must sell holdings to meet cash redemptions. Hence, B is correct. Option A reverses pricing mechanics: mutual funds transact once daily at next computed NAV, while ETF shares trade on exchanges throughout the day at market prices that track (but may slightly deviate from) NAV. Option C is incorrect—ETFs can be sold short and traded with limit/stop orders; mutual funds cannot be shorted or traded intraday. Option D is not universally true: while passive ETFs often have low fees, some mutual funds (especially institutional index share classes) can be as cheap or cheaper, and some ETFs carry higher costs due to strategy complexity. Series 65 expects familiarity with structure, liquidity, tax efficiency, and trading features when recommending pooled vehicles.