Question

(Chapter 4) Chloe is an individual investor who is bullish on the finance sector of the US equity market. Rather than purchase stock in several individual finance firms, Chloe decides to reduce trading costs by purchasing XLF, a US finance sector equity ETF. How can Chloe be confident that the price of XLF will closely track the net asset value (NAV) of the underlying shares of stock in the XLF benchmark index?

Answer 1

Exchange traded fund are the index fund which are complete replication of an index.

Exchange traded funds are tradable in nature but the main composition of such funds are index funds because they completely reflect the structure of the underlying index and they have shares in the same proportion as the underlying index so so return are almost close to similar.

it is just the way to provide liquidity to the investors to trade so these exchange traded funds are traded continuously.

Chloe can be confident that the price of XLF would be completely replicating the price of the index because it is an index fund which is traded..