II. INVESTMENTS -- A. Investment Vehicles Flashcards
SMAs
A separately managed account is a portfolio of individual securities, such as stocks and bonds that is owned by a single investor and managed by a portfolio manager of a professional asset management firm. Gives investor the ability to maintain an individual cost basis in the securities within the portfolio, which allows the portfolio manager to manage tax consequences better.
Mutual funds
A form of pooled investments - single portfolio that contains investments from multiple investors. Total net value/shares = net asset value (NAV). Types: money market, bonds, stocks, index, actively managed. Advantage is diversification; disadvantage is that one doesn’t have control over tax consequences of the fund. Open-end fund: Buy newly issued shares and redeem at NAV. No-load: No additional fees for purchasing (up-front fees) or redeeming (redemption). Load: Charge up-front fees, redemption fees, or both.
ETPs
Exchange-traded products (ETP) are types of securities that track underlying security, index, or financial instrument. ETPs trade on exchanges similar to stocks. The price of ETPs fluctuates from day-to-day and intraday. The share price of ETPs come from the underlying investments that they track. ETPs are usually a low-cost alternative to mutual funds and actively-managed funds. (Source: https://www.investopedia.com/terms/e/exchange-traded-products-etp.asp)
ETFs
Exchange traded funds are most often invested to match a particular index, so passively managed. Purchases and sales are made in the market rather than with the fund itself. Can be sold short, purchased on margin, traded at intraday prices. Pay brokerage commissions. Receive dividend income in cash, not in shares. May produce less capital gains liability compared with open-end funds. Investor sales of ETF don’t require the fund to sell any shares.
UITs
A unit investment trust functions as a holding company. Purchase other investment company shares or government/municipal bonds. Then issue redeemable shares in their portfolio, where each share is an undivided interest in the portfolio. Since not managed, if a security is sold proceeds distributed to share “unit” holders. Fixed UIT purchases a portfolio of bonds and terminates when bonds mature. Nonfixed purchases shares of a MF. Can be structured to meet different investment objectives, e.g., growth, income, balanced, etc.
CEFs
Closed-end funds are professionally managed pools of money that do not take new investments in the fund or redeem investor shares. Trade on the secondary market. Often sell at a premium or discount to NAV. Capitalization fixed. Some closed end funds use leverage to increase the current yield within the portfolios. Don’t have to worry about cash redemptions. But doesn’t have additional sources of funds.
REITs
A real estate investment trust is publicly traded equity shares invested in a portfolio of real estate holdings. Can be an equity REIT (own property), debt REIT (own mortgages) or hybrid (property and mortgage). Invest without liquidity risk; hedge price movements in equity markets; income from dividends and capital appreciation due to appreciation of assets in the trust. Disadvantage: no control over portfolio, bad loans in mortgage portfolio, dividends taxed at full ordinary income tax rates.
MLPs
Master limited partnerships are publicly traded investments that generally focus on the energy section in areas such as oil, gas and pipelines. Generally invested in commodities, which are more volatile than traditional stocks and bonds so higher risk. Possible conflict of interest due to sponsor/GP structure.
