Answer: Statement 3

## Explanation **Statement 3** is correct: Both security lending and tracking error are implicit costs for ETF investors. ### Analysis of Each Statement: **Statement 1 - INCORRECT** - For **active short-term ETF investors**, commission and spreads are actually MORE significant than management fees and tracking error - Short-term traders frequently enter and exit positions, making transaction costs (commissions, bid-ask spreads) the primary cost consideration - Management fees and tracking error matter more for long-term buy-and-hold investors **Statement 2 - INCORRECT** - An ETF's **daily price is NOT set to its NAV** - this is a fundamental misunderstanding - ETF prices are determined by market supply and demand throughout the trading day - While arbitrage keeps ETF prices close to NAV, they can and do trade at premiums or discounts **Statement 3 - CORRECT** - **Security lending**: ETF issuers can lend out portfolio securities to generate revenue, but this introduces counterparty risk and operational complexity - **Tracking error**: The difference between ETF performance and its benchmark index represents an implicit cost to investors - Both are **implicit costs** that investors bear without direct payment Therefore, Statement 3 accurately identifies two important implicit costs of ETF ownership.

Author: LeetQuiz Editorial Team