Canadian Securities Course (CSC) Level 2 Practice Exam

Which key features are associated with index funds, distinguishing them from actively managed funds?

1. Highly volatile, region-specific, high management fees

2. Passive, similar performance to the market, high turnover rate

3. Specialized asset allocation, low market correlation, high trading frequency

4. Active management, varied performance, low market volatility

The correct answer is: Passive, similar performance to the market, high turnover rate

Index funds are designed to track the performance of a specific market index, making them fundamentally distinct from actively managed funds. They operate on a passive management strategy, meaning that they do not try to outperform the market but rather aim to replicate its performance. This characteristic leads to typically lower management fees compared to actively managed funds, as there is no need for extensive research or frequent trading. These funds generally exhibit performance that is closely aligned with the overall market. Because they are constructed to mirror an index, they benefit from diversification similar to that of the index they track, thereby reflecting its gains or losses. This contrasts with actively managed funds, which are subject to the discretion of fund managers and can thus experience significant variability in performance based on the managers' investment decisions. Additionally, index funds typically have a low turnover rate, as they only need to adjust their holdings in response to changes in the underlying index, leading to lower trading costs. This is opposed to the high turnover often associated with actively managed funds, which frequently buy and sell securities based on market conditions and managers' forecasts. In summary, index funds are characterized by their passive management style, performance that is closely aligned with the market, and generally low turnover rates, clearly differentiating them from actively managed funds.