Compare Packaged Products - Series 7

1. What is the major cost difference between ETF investing and mutual fund investing?

   ETFs may have commissions and bid-ask spreads; mutual funds may have sales loads. ETFs expose investors to transactional frictions like spreads and commissions, while mutual funds primarily involve load fees without intraday trading costs.

2. What fee in a variable annuity covers insurance guarantees and distribution costs?

   Mortality and expense (M&E) risk charge. M&E fees compensate insurers for mortality risks, administrative expenses, and profit, while funding sales commissions for variable annuity distribution.

3. What are the two common UIT charges called?

   Creation and development (C&D) fee and a sales charge (often a deferred load). UIT fees compensate sponsors for initial setup and ongoing sales, with deferred loads spreading costs over time rather than upfront.

4. What is the key trading difference between an open-end mutual fund and an ETF?

   Mutual fund trades once daily at NAV; ETF trades intraday on an exchange. Mutual funds are priced and traded at the end-of-day NAV via forward pricing, whereas ETFs trade continuously on exchanges like stocks.

5. What is the typical sales charge pattern of Class A mutual fund shares?

   Front-end load with lower ongoing 12b-1 fees than other load classes. Class A shares suit long-term holders by imposing upfront loads that decrease with breakpoints, paired with minimal annual distribution fees.

6. What is the primary feature that makes a variable annuity a "variable" product?

   Account value varies with separate account (subaccount) investment performance. The variable nature stems from linking contract values to the returns of underlying investment options in subaccounts, exposing owners to market fluctuations.

7. What is the typical sales charge pattern of Class B mutual fund shares?

   No front-end load; CDSC applies and 12b-1 fees are higher; may convert to A. Class B shares appeal to smaller investors avoiding initial loads, but impose declining back-end charges and elevated ongoing fees until conversion.

8. What is a mutual fund breakpoint and what does it reduce?

   A sales charge discount based on purchase size; reduces the front-end load. Breakpoints incentivize larger investments by tiering sales charges, lowering the percentage load as purchase amounts meet specified thresholds.

9. What does a Contingent Deferred Sales Charge (CDSC) apply to in mutual funds?

   A back-end sales charge assessed when shares are redeemed within a period. CDSC discourages short-term trading by imposing fees on early sales, typically declining over 5-7 years until elimination.

10. What is Rights of Accumulation (ROA) for mutual fund breakpoints?

    It combines current holdings with new purchases to reach a lower breakpoint. ROA permits combining existing shares' value with new investments to achieve higher breakpoints, applying retroactively for discounted loads.

11. What is the primary diversification limitation of a UIT compared with a mutual fund?

    UIT portfolio is fixed; it cannot change holdings to respond to markets. UITs lack active management, preventing portfolio rebalancing or security replacements, thus offering less adaptability to market changes than mutual funds.

12. What is a variable annuity surrender charge triggered by?

    Early withdrawals during the surrender period (a declining back-end charge). Surrender charges penalize liquidity to recover insurer costs, declining over 5-10 years to encourage long-term holding of the contract.

13. What is a Letter of Intent (LOI) used for with mutual fund breakpoints?

    It lets an investor qualify for a lower load by committing to future purchases. LOIs allow investors to aggregate intended future buys within 13 months to qualify for reduced front-end loads based on total committed amount.

14. Which option best describes why variable products require a prospectus delivery?

    They are securities with investment risk and must be sold by registered persons. Variable products' security status under federal law mandates prospectus disclosure of risks and requires sales by FINRA-registered representatives.

15. What is the primary market risk exposure for a variable annuity separate account?

    Market risk is borne by the contract owner, not the insurer. In variable annuities, owners assume investment risks as contract values fluctuate with subaccount performance, unlike fixed products where insurers bear the risk.

16. What is the primary difference between an annuity separate account and general account?

    Separate account is not insurer assets; general account backs fixed guarantees. Separate accounts hold policyholder-directed investments segregated from the insurer's general account, which supports fixed obligations using company assets.

17. What is a 12b-1 fee and where is it charged in a mutual fund?

    An annual distribution/marketing fee charged to the fund's assets. 12b-1 fees cover promotional and servicing costs, deducted annually from fund assets to compensate distributors without direct investor charges.

18. What is the key structural difference between an ETF and a UIT?

    ETF is open-end with creation/redemption; UIT is fixed and terminates on a date. ETFs continuously issue and redeem shares through in-kind baskets, allowing indefinite life, while UITs have a static portfolio that dissolves at a predetermined date.

19. What is the primary tax advantage often associated with ETFs versus mutual funds?

    ETFs often distribute fewer capital gains due to in-kind redemptions. In-kind redemptions allow ETFs to avoid realizing gains when shares are redeemed, reducing taxable distributions compared to mutual funds' cash redemptions.

20. What is the creation/redemption mechanism designed to help an ETF manage?

    It helps keep the ETF market price close to its NAV. Authorized participants arbitrage discrepancies by creating or redeeming ETF shares in-kind, minimizing premiums or discounts to underlying NAV.

21. What is the Public Offering Price (POP) formula for a mutual fund with a front-end load?

    POP $= \frac{\text{NAV}}{1 - \text{sales charge rate}}$. The formula adjusts NAV upward to incorporate the sales load, ensuring the fund receives full NAV after deducting the charge percentage.

22. What is the typical sales charge pattern of Class C mutual fund shares?

    Level load with higher ongoing 12b-1 fees; often a $1\%$ CDSC if sold early. Class C shares provide no upfront load but charge consistent annual fees, with short-term CDSC to discourage early redemptions.

23. What is the bid-ask spread and which product commonly exposes investors to it?

    The trading price gap between buyers and sellers; common with ETFs. Bid-ask spreads represent liquidity costs in exchange-traded products like ETFs, reflecting the difference between highest buy and lowest sell prices.

24. Identify which product typically involves a brokerage commission: mutual fund or ETF.

    ETF (typically bought and sold with a brokerage commission). ETFs trade on exchanges like stocks, incurring standard brokerage fees, unlike mutual funds transacted directly with the fund company.

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