Chartered Financial Analyst (CFA) Practice Exam Level 2

How does the management fee of an ETF change over time?

1. The fee remains constant

2. The fee decreases with holding period

3. The fee increases with holding period

4. The fee fluctuates randomly

The correct answer is: The fee increases with holding period

The management fee of an ETF typically remains constant over time as it is generally a percentage of the fund's net asset value (NAV). This means that as the assets of the ETF grow or shrink, the dollar amount of the fee will change, but the percentage remains fixed. This is why the choice claiming that the fee increases with the holding period may not accurately reflect typical ETF fee structures. In practice, management fees are set at the fund's inception and can change only if the fund manager decides to alter the fee structure, which is not based on the holding period of the investor. Funds may offer lower fees to attract investors, but this is generally a strategic decision and not a feature tied to the length of holding. Thus, among the options, the idea that the management fee fluctuates randomly or changes with the holding period lacks a foundational basis in how ETFs operate. Management fees are predetermined and disclosed in the fund's prospectus, making it critical for investors to understand these costs when choosing an ETF.