Unit 5 (Alternatives)
For a customer interested in buying an inverse exchange-traded fund (ETF) tracking the performance of the Standard & Poor's 500 Index, which of the following market views would make that purchase most inappropriate?
Bullish Inverse (short) ETFs are designed to deliver returns that are opposite of the benchmark index they are tracking. Therefore, buying an inverse ETF that tracks the S&P 500 Index at a time when the market outlook is bullish would be most inappropriate. If the index rises with the anticipated bullish market, the fund that delivers returns that are the opposite of the index would fall in value.
What is an exchange traded note?
Like an ETF, which tries to mimic an index, but does not actually invest in the securities in the index. Big credit risk (if default)
Direct Participation Program (DPP)
a business entity, maybe a limited partnership, that passes through all gains and losses to investors, therefore avoiding double taxation of earnings. Passive losses can be used to offset passive gains. Highly illiquid and generally suitable for sophisticated investors.
Viatical/Life Settlements
An individual selling an owned insurance policy to a third party for less than the death benefit but more than the cash values in order to obtain funds when no other sources are readily available. Generally have 24 months to live (terminally ill) Viatical Life Settlement age 65 and in fair health Moral dilemma because your banking on someone dying sooner
What are commodities?
agricultural items. industrial metals. animals. NOT:consumer durables.
What is a leveraged fund?
A fund that objective is to achieve returns that are a multiple of the returns of the benchmark index, the result could be a multiple of any loss incurred by the benchmark index as well. In addition, because these funds utilize derivatives products to achieve their stated objectives, they may not be suitable for anyone who derivatives products are not suitable for, given the additional risks associated with those products.
What is a leveraged ETF?
A leveraged exchange-trade fund would be suitable if the customer anticipated an increase in the S&P 500 and wanted a multiple of that increase. Leveraged-inverse ETF would be suitable if the customer wanted a return that was a multiple or higher return and anticipated a decrease in the S&P 500
One of your clients approaches you and is looking for an investment that will provide ready marketability and income. Which of the following would be the least appropriate recommendation?
A limited partnership in rental real estate The key is meeting both needs—marketability and income; each of the choices supplies both except the limited partnership. The client could expect income from a direct participation program (DPP) investing in rental real estate, but the liquidity would be missing.
Flow-through is one of the features of:
direct participation plans. Flow-through is the term commonly used to describe that any income or loss generated by a direct participation program flows through to the owner(s). In the case of a real estate investment trust (REIT), the only thing that passes through is income or gains, never losses.
Which of the following is not a feature of owning a limited partnership?
Tax-free income The income from limited partnerships is not tax exempt. An investor, however, may use a tax loss from a partnership to offset the income from another passive investment. In limited partnerships, the investor enjoys the advantages and disadvantages of owning a business without actually having actually manage one. Limited partnerships are vulnerable to legislative changes that adversely impact ownership of such investments.
Your customer is asking if either exchange-traded funds (ETFs) or exchange-traded notes (ETNs) might be suitable investments for his portfolio. The customer makes several statements regarding his understanding of the products, but only one of them is accurate. Which is it?
ETNs are issued by financial institutions; therefore, I should be concerned about the credit worthiness of the issuer. The only accurate statement is the one expressing that ETNs are issued by financial institutions and, therefore, the credit worthiness of the issuer should be a concerning factor. ETNs are debt instruments, not equity instruments. ETNs have a final payment at maturity based on the return of a single stock, a basket of stocks, or an equity index. Although ETF prices fluctuate based on the value of the securities within the fund portfolio throughout the trading day, they are priced by supply and demand, like all exchange-traded products. They are not forward priced like open-end mutual fund shares are.
A client was reading an offering document for an oil and gas drilling limited partnership program and noticed that one of the features was flow-through benefits. How would you explain this?
Rather than being a separate taxable entity, the program's income or losses pass-through directly to the investors. The philosophy behind flow-through is that any income or losses generated by a program of this type (a direct participation program or DPP) flow directly to the investors; there is no tax at the entity level. If there are losses, they may be deducted only against passive income (e.g., income from other partnerships). No assurances can ever be given.
