The tendency for a stock that is newly added to the S&P index to temporarily increase in price.
When the S&P 500 makes adjustments to the list of companies within the index, fund companies and portfolios that follow the index also make adjustments to their held stocks. Since these entities are all trading large blocks of the same stock, its share price temporarily increases.
A commission or fee paid by an investor at the time of purchasing mutual fund shares. The charge is paid to a mutual fund salesperson or financial advisor and is intended to provide compensation for the financial salesperson's efforts in assisting their client select the mutual fund best suited to their needs. The term is also used when referring to fees associated with stock and real-estate transactions.
The amount of a sales charge represents the difference between the purchase price per share paid by the investor and the net asset value per share of the mutual fund. Although these fees are subject to investor criticism, they also provide an effective deterrent to short-term mutual fund trading. If sales charges didn't exist, mutual funds would likely incur more frequent short-term trading (investors buying into the fund and then quickly selling), which would increase the costs of operating the fund and weigh on the profits of all the fund's investors.
An investment fund that makes investments solely in businesses that operate in a particular industry or sector of the economy.
Because the holdings of this type of fund are in the same industry, there is an inherent lack of diversification by sector associated with these funds. These funds tend to increase substantially in price when there is an increased demand for the product or service offering provided by the businesses in which the funds invest. On the other hand, if there is a downturn in the specific sector in which a sector fund invests, the fund will face heavy losses due to the lack of diversification in its holdings.
The action of a mutual fund or portfolio manager shifting investment assets from one sector of the economy to another.
Not all sectors of the economy perform well at the same time. Sector rotation is a portfolio manager's attempt to profit through timing a particular economic cycle.
A securities license entitling the holder to sell mutual funds and variable annuities.
The Series 6 exam is administered by the NASD, covering topics such as mutual funds, variable annuities, regulations, retirement plans, and insurance products.
Mutual fund units that charge service fees to their shareholders. The purpose of these fees is to compensate individuals who answer investor inquiries and provide information to the public or investors about the fund. The NASD limits funds from charging service fees in excess of 0.25% of their average net assets per year.
Some mutual funds charge investors front-end or back-end loads. Others charge service fees to cover internal expenses for people that answer shareholder questions and inquiries. Because these fees occur consistently year after year, they can have a significant adverse impact on returns over time.
A ratio developed by Nobel Laureate William F. Sharpe to measure risk-adjusted performance. It is calculated by subtracting the risk-free rate from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns.
The Sharpe ratio tells us whether the returns of a portfolio are due to smart investment decisions or a result of excess risk. This measurement is very useful because although one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been.A variation of the Sharpe ratio is the Sortino ratio, which removes the effects of upward price movements on standard deviation to instead measure only return against downward price volatility.
A system that allows firms making an issue to produce a short form prospectus. The short form prospectus must contain any material changes not previously reported.
There are some issuers who continuously disclose information, and they have the opportunity to use the SFPDS. This system is quicker and more cost effective than the conventional means of distributing a prospectus.
A type of fund that invests in short-term investments of high quality and low risk. The goal of this type of fund is to protect capital with low-risk investments while achieving a return that beats a relevant benchmark such as a Treasury bill index.
Short-term investment funds comprise cash, bank notes, corporate notes, government bills and various safe short-term debt instruments. These types of funds are usually used by investors who are temporarily parking funds before moving them to another investment that will provide higher returns. These funds traditionally have low management fees, usually well below 1% a year.
A mutual fund that restricts its investment to the assets of one country and is able to allocate its funds only within the range of investment instruments available in the specified country. This restriction is based on the mutual fund prospectus. If the fund's prospectus states that it is only investing in one country, the fund is bound by this statement.
For example, a single-country fund for Russia will only invest in assets based in that country, such as the stocks of Russian companies, Russian government debt and other Russia-based financial instruments.
A type of open-ended investment fund in which the amount of capital in the fund varies according to the number of investors. Shares in the fund are bought and sold based on the fund's current net asset value. SICAV funds are some of the most common investment vehicles in Europe.
A SICAV fund, considered a legal entity, will have a board of directors to oversee the fund. Each individual shareholder receives voting rights and has the right to attend the annual general meetings. The term Société d'investissement à Capital Variable is most well known and used in France, Luxembourg, and Italy where it's called Societa' di Investimento a Capital Variable.
A means of paying brokerage firms for their services through commission revenue, as opposed to through normal payments (hard-dollar fees).
For example, a mutual fund may offer to pay for research from a brokerage firm by executing trades at the brokerage. Let's say that Cory's Large-Cap Value Fund wants to buy some research from XYZ brokerage firm. Cory's may agree to spend at least $10,000 in commissions at the firm in return for research from the brokerage. This would represent a soft dollar payment. Alternatively, if Cory's wanted to simply buy the research and not agree to any kind of soft dollar fee, he might have to pay the brokerage $7,000 in "hard dollars" (cash) for the transaction.
Shares in a trust that owns stocks in the same proportion as that represented by the S&P 500 stock index. Due to the acronym SPDR, Standard & Poor's Depository Receipts are commonly known as "spiders". Each share of a spider contains one-tenth of the S&P 500 index, and so trades at roughly one-tenth of the level of the S&P 500. Spiders trade on the American Stock Exchange (AMEX) under the ticker symbol SPY.
SPDRs are exchange-traded funds and, therefore, they trade like ordinary shares on the stock market. By trading like a stock, spiders have continuous liquidity, can be short sold, provide regular dividend payments and incur regular brokerage commissions when traded. Spiders are used by large institutions and traders as bets on the overall direction of the market. They are also used by investors who believe in passive management - those who don't try to beat the market. In this respect, spiders compete directly with S&P 500 index funds.
A fee-payment structure applicable to mutual funds in which the sales charge or commission (load) is not entirely paid at the time the investor first contributes funds to the mutual fund (or in the first several contributions either). Instead, the mutual fund load is dispersed across an extended time period, so that the load is more accurately applied to each contribution.
This type of load payment plan allows greater portions of the investor's initial contributions to the account to be applied to actual investments, instead of sales charges. By doing so, the investor is able to gain a relatively larger position in the mutual fund in the short term, but their future contributions to the fund will be marginally smaller than they would have been without such a plan.
A ratio used mainly in the context of hedge funds. This risk-reward measure determines which hedge funds have the highest returns while enduring the least amount of volatility. The formula is as follows:
This formula uses the average for risk (drawdown) and return over the past three years. Drawdown is calculated at the maximum potential loss in the given year.
Just like the Calmar ratio, a higher Sterling ratio is generally better because it means that the investment(s) are receiving a higher return relative to risk.The Sterling ratio is similar to the Sharpe ratio and the Sortino ratio, as it also produces a risk-adjusted return measurement. The Sterling ratio, along with the Sortino ratio, is primarily used by hedge funds as a way of advertising superior risk management.
A portfolio strategy that involves periodically rebalancing the portfolio in order to maintain a long-term goal for asset allocation.
At the inception of the portfolio, a "base policy mix" is established based on expected returns. Because the value of assets can change given market conditions, the portfolio constantly needs to be re-adjusted to meet the policy.
The investment approach an investment manager takes to reach his/her objectives.
There are an endless number of styles. Examples include focusing on blue-chips, growth stocks, or particular industries.
A tool showing a fund's characteristics such as the investment philosophy, underlying investments and risks. This helps investors and investment companies easily understand and convey information about the fund.
The above mutual fund style box illustrates that the mutual fund is a large-cap, value-oriented fund. This conveys to investors that the fund is investing in well-established companies that are under- or fairly valued. The company will not be invested in small-cap, mid-cap or growth stocks.
The style box consists of shaded boxes signifying where the asset falls in relation to the factors included in the style box. Depending on the style box, the vertical and horizontal axes will illustrate factors such as capitalization, investment style, maturity, credit quality or goals that the asset may or may not help the investor or investment company achieve. By classifying funds into style box categories, investors can easily find which funds meet their investment criteria. For example, an investor looking for very safe market exposure will not look at small-cap growth funds, but will restrict him or herself to funds that fall into the large value fund.
The tendency of a broker or investment portfolio manager to alter his or her investment style over time.
This occurs for any number of reasons, but one main force is changing trends in the general investing environment. During the dotcom boom, for example, many managers - regardless of the strategies they were initially bound by - were able to justify tech stocks in their portfolio because everybody was buying them.
An atypical fund structure in which a fund, such as a hedge fund or mutual fund, is managed by another management team or firm than where the assets are held. Sub-advised funds are often found in wrap programs or variable annuities.
Sub-advised funds are often smaller versions of larger mutual funds and hold the same stock proportions as the larger mutual fund. Because there are two management companies being paid, sub-advised funds can often have layered fees, so these funds should be examined closely before deciding to invest.
An account created in 1982 that offers a higher interest rate than a NOW account but lower interest than a money market account.
Specific requirements, such as minimum deposits and interest rates, for super NOW accounts vary between banks. This is due to the 1986 deregulation of bank deposit accounts. Today, banks can charge interest based on their costs and competitive requirements.
Specifically in the context of mutual funds, the tendency for poor performers to drop out while strong performers continue to exist. This results in an overestimation of past returns. Also known as "survivor bias."
For example, a mutual fund company's selection of funds today will include only those that have been successful in the past. Many losing funds are closed and merged into other funds to hide poor performance. This is an important issue to take into account when analyzing past performance.
1. In mutual funds, the process of transferring an investment from one fund to another. 2. In securities, the process of liquidating a position in exchange for other securities with better prospects for growth, yields or capital gains.
1. Investors may switch their assets between funds in the same family or into a different family entirely. Generally, no-load funds do not charge for these transactions. However, some brokerages may charge a commission. 2. When investors switch securities, they essentially use the cash received from the liquidation of their initial securities to purchase new securities. In futures, an investor will switch futures contracts by closing an open position and simultaneously entering a new, similar futures contract with a longer maturity.
A service offered by a mutual fund that provides a payout to the shareholder at predetermined intervals.
Two main reasons for using a SWP are to meet living requirements (usually when retired) or to accomplish tax planning purposes.
An active management portfolio strategy that rebalances the percentage of assets held in various categories in order to take advantage of market pricing anomalies or strong market sectors.
This strategy allows portfolio managers to create extra value by taking advantage of certain situations in the marketplace. It is as a moderately active strategy since managers return to the portfolio's original strategic asset mix when desired short-term profits are achieved.
The name given to institutions that sell or distribute mutual funds to investors for fund management companies without direct relation to the fund itself.
Essentially a middleman, third-party distributors receive a portion of the trailer fees associated with mutual fund sales for acquiring new business. This arrangement works well for fund companies that don't have the necessary resources to enter new markets, deciding instead to outsource to existing companies.
A measure of the total costs associated with managing and operating an investment fund such as a mutual fund. These costs consist primarily of management fees and additional expenses such as trading fees, legal fees, auditor fees and other operational expenses. The total cost of the fund is divided by the fund's total assets to arrive at a percentage amount, which represents the TER:
The size of the TER is important to investors, as the costs come out of the fund, affecting investors' returns. For example, if a fund generates a return of 7% for the year but has a TER of 4%, the 7% gain is greatly diminished (to roughly 3%).
A type of mutual fund that provides the same returns as an index. The fund invests in all the companies within the index according to a market value weighting.
A tracker fund is virtually the same as an index fund.
A fee that a mutual fund manager pays to a salesperson who sells the fund to investors.
The trailer fee pays the salesperson for providing the investor with ongoing investment advice and services. It is important to know whether your mutual fund salesperson is receiving a trailer fee because it may cause him or her to try to sell you a particular fund not because it is a good investment but because selling it to you will make him or her money. Also known as a "trailer commission," this fee is paid annually for as long as the investor holds shares in the fund.
1. A formal document which outlines the terms of a trust agreement.2. A common way to structure real estate purchases, where the title to a property is held in trust until the loan for the property is paid.
1. A trust deed is often used when mutual funds are set up as a trust. Information that may be documented includes the powers of the trustee and any restrictions on investment vehicles. 2. Used to add security to a property purchase, the trustee does not get involved in the agreement unless there is a default on the loan, at which time the trustee would sell the property.
For a mutual fund or other investment vehicle, the turnover ratio measures the percentage of holdings that have been "turned over", or replaced with other holdings, in the past year. A higher turnover ratio could lead to more short-term gains for the investor (assuming the fund appreciates), as more of the assets are only held for a short time, but it also causes the fund to incur greater transaction costs.
The investment style of the mutual fund will play an important role in its turnover ratio. For example, a conservative (such as index-matching) fund will have a lower turnover ratio than an aggressive growth fund, which would look to quickly turn profits and look for new opportunities. Turnover ratios at a mutual fund will vary from year to year, but the general range can be assessed by looking at the figure over a few consecutive years.
A public limited company that coordinates the distribution and management of unit trusts amongst countries within the European Union.
These funds can be marketed within all countries that are a part of the European Union, provided that the fund and fund managers are registered within the domestic country. The regulation recognizes that each country within the European Union may differ on their specific disclosure requirements.
1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's weight in the underlying benchmark portfolio. This often occurs when a portfolio is actively managed and underweighting a security may allow the portfolio manager to achieve returns greater than that of the benchmark 2. An analyst's opinion regarding the future performance of a security. Underweight will usually mean that the security is expected to underperform either its industry, sector, or even the market alltogether.
1. Portfolio managers will generally underweight the securities that they believe will underperform when compared to other securities in the portfolio. For example consider a security in the benchmark portfolio with a weight of 10%. If the manager believes the security will underperform over a certain time period, they will allocate the security a weight of less than 10% for that period, in hopes of increasing the portfolios expected return.2. An example of an analysts underweight definition is "The stock's return is expected to be below the average return of the industry over the next 8 - 12 months." Analyst's definitions vary regarding the time frame used and the benchmark the security is compared against.
A registered trust in which a fixed portfolio of income-producing securities are purchased and held to maturity. Commonly used with municipal bonds, investors receive an undivided interest of the portfolio's principal as well as income proportionate to the amount they invested.
Each unit typically costs $1,000 and is sold to investors by brokers. UITs can be resold in the secondary market.
An unincorporated mutual fund structure that allows funds to hold assets and pass profits through to the individual owners, rather than reinvesting them back into the fund.
In the U.K. the term "unit trust" is synonymous with "mutual fund" as it is used in North America.
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