An investor is choosing between an S&P 500 index fund with an expense ratio of 0.03% and an actively managed large-cap fund with an expense ratio of 1.2%. Over a 30-year holding period with identical gross returns of 10% annually on a $100,000 investment, approximately how much more would the investor pay in cumulative fees with the actively managed fund?
ARoughly $35,100, because the fee difference is 1.17% times $100,000 times 30 years — fees are paid on the original principal, not on the growing balance
BThe difference is negligible over 30 years because fund performance, not fees, is the dominant factor in long-term returns
CRoughly $300,000 to $350,000 more, because the compounding effect of the 1.17 percentage point annual fee difference over 30 years creates an enormous drag — the index fund would grow to approximately $1,720,000 while the active fund would grow to roughly $1,370,000, a gap far larger than simply multiplying the fee difference by the investment amount
DThe actively managed fund would actually cost less overall because its higher fees are offset by tax-efficient management strategies that index funds cannot employ
What is the primary structural difference between an exchange-traded fund (ETF) and a traditional open-end mutual fund in how shares are bought and sold?
AETFs can only be purchased directly from the fund company during a narrow subscription window each quarter, while mutual funds are available for purchase at any time
BETF shares trade on a stock exchange throughout the trading day at market-determined prices that can differ from the fund's net asset value (NAV), while mutual fund shares are bought and redeemed directly with the fund company at the NAV calculated once at the end of each trading day
CMutual fund shares trade on a stock exchange just like ETFs, but mutual funds can only be purchased in round lots of 100 shares whereas ETFs can be bought in any quantity
DThere is no structural difference — both ETFs and mutual funds are priced once daily at NAV and neither trades on an exchange during market hours
An S&P 500 index fund aims to replicate the performance of the S&P 500 index. Which of the following best explains why the fund's actual return typically trails the index's published return by a small amount each year?
AThe shortfall only exists in theory; in practice, index funds routinely outperform their benchmark index because of securities lending revenue and dividend timing advantages
BThe S&P 500 index itself deducts a management fee before publishing its returns, so the fund actually matches the true gross return of the index
CIndex funds deliberately underperform the index to create a performance buffer that protects investors during market downturns
DTracking error from fund expenses (the expense ratio), cash drag from holding a small reserve for redemptions, and minor timing differences in rebalancing when index constituents change — these frictions mean the fund earns slightly less than the index it copies