Chartered Financial Analyst (CFA) Practice Exam Level 2

What characterizes the beta ETF design?

1. Intended for short-term tactical trading

2. Focused on high-frequency trading strategies

3. Structured around fundamental factors

4. Exclusively for low-budget investors

The correct answer is: Structured around fundamental factors

The beta ETF design is characterized by being structured around fundamental factors, which typically refers to the investment strategy that seeks to capture the performance of a particular market index or benchmark by providing broad exposure to a specific asset class. This design is based on the idea of generating returns in line with market movements, emphasizing systematic risk or beta. By replicating the performance of a specific range of assets, these ETFs allow investors to take positions reflecting overall market trends without engaging in active management. This approach contrasts sharply with other strategies that focus on short-term trading or high-frequency trading, which prioritize price fluctuations and market inefficiencies over long-term fundamental growth. Similarly, beta ETFs are not inherently designed with a focus on catering exclusively to budget constraints; rather, they appeal to a wider range of investors looking for passive investment options without the complexity of fundamental analysis. Overall, the focus on replicating benchmarks and providing broad market exposure is what's central to the character of beta ETF design.