Mutual Funds and Other Investment Companies Flashcards
once established, the portfolio composition is fixed; hence, these trusts are referred to as unmanaged.
unit investment trust
To form a unit investment trust, a sponsor, typically a brokerage firm, buys a portfolio of securities that are deposited into a trust. It then sells shares, or “units,” in the trust, called redeemable trust certificates. All income and payments of principal from the portfolio are paid out by the fund’s trustees (a bank or trust company) to the shareholders.
do not redeem or issue shares. Investors who wish
to cash out must sell their shares to other investors.
closed-end funds
Shares of closed-end funds are traded on organized exchanges and can be purchased through brokers just like other common stock; their prices, therefore, can differ from NAV. In 2021, about $280 billion of assets were held in closed-end funds.
ETFs were first issued in the United States in ____ and until about 2008, offered exclusively portfolios designed to track various market indexes.
ETFs were first issued in the United States in 1993 and until about 2008, offered exclusively portfolios designed to track various market indexes.
The ETF market has experienced tremendous growth: By early 2022, ETFs with over $5.4trillion in assets under management traded in the United States.
are partnerships of investors that pool funds.
The management firm that organizes the partnership, for example, a bank or insurance company, manages the funds for a fee.
Commingled Funds
Typical partners in a commingled fund might be trust or retirement accounts with portfolios much larger than those of most individual investors, but still too small to warrant managing on a separate basis.
Commingled funds are similar in form to open-end mutual funds. Instead of shares, though, the fund offers units, which are bought and sold at net asset value. A bank or insurance company may offer an array of different commingled funds, for example, a money market fund, a bond fund, and a common stock fund.
Shareholders do not receive an explicit bill for these ___________; instead, the expenses periodically are deducted from the assets of the fund. Shareholders pay for these expenses through the reduced value of the portfolio.
Operating expenses.
What are Class A shares in mutual funds?
Class A shares typically charge a front-end sales load, meaning a percentage of the investment is used to pay a commission at the time of purchase. They have lower annual expenses and 12b-1 fees compared to other classes and may offer discounts for larger investments, known as breakpoints
What are the key characteristics of Class B shares?
Class B shares do not have a front-end load but impose a back-end load, or Contingent Deferred Sales Charge (CDSC), if shares are sold within a certain period (usually six years). The CDSC decreases over time and is eventually eliminated, at which point Class B shares often convert to Class A shares. They typically have higher annual expenses and 12b-1 fees compared to Class A shares
What are Class C shares in mutual funds?
Class C shares generally do not have a front-end load but may have a small back-end load if shares are sold within a year. They charge a level annual fee, including higher 12b-1 fees, making them more suitable for short-term investors (1-3 years). They do not convert to another class, and their higher ongoing fees can reduce returns over the long term
When should an investor consider Class A shares?
Investors should consider Class A shares if they plan to hold the investment for a long term and can benefit from lower annual expenses and potential breakpoint discounts for larger investments
What is the main advantage of Class B shares?
The main advantage of Class B shares is the absence of a front-end load, allowing the entire investment to be put to work immediately. They are suitable for investors planning to hold the shares for several years until the back-end load is eliminated and the shares convert to Class A shares
Why might an investor choose Class C shares?
An investor might choose Class C shares if they have a short-term investment horizon (1-3 years) and want to avoid front-end loads. However, they should be aware of the higher annual fees and the potential small back-end load if sold within a year
the ratio of the trading activity of a portfolio to the assets of the portfolio. It measures the fraction of the portfolio that is “replaced” each year.
Turnover
For example, a $100 million portfolio with $50 million in sales of some securities and purchases of other securities would have a turnover rate of 50%. High turnover means that capital gains or losses are being realized continually, and therefore that the investor cannot time the realizations to manage his or her overall tax obligation.
These are nominally debt securities, but with payoffs linked to the performance of an index. Often that index measures the performance of an illiquid and thinly traded asset class, so the ETF gives the investor the opportunity to add that asset class to his or her portfolio. However, rather than invest in those assets directly, the ETF achieves this exposure by entering a “total return swap” with an investment bank in which the bank agrees to pay the ETF the return on the index in exchange for a relatively fixed fee. These products are a bit controversial, as the ETF is then exposed to risk that in a period of financial stress the investment bank will be unable to fulfill its obligation, leaving investors without thereturns they were promised.
Exchange traded notes (ETN)
or Exchange traded vehicles (ETV)
investors in these firms must believe that the firm will experience rapid growth to justify the prices at which the stocks sell.
Growth stocks.
puts stocks on a growth-value continuum based on the ratios of stock price to the firm’s earnings, book value, sales, cash flow, and dividends.
those with a low price relative to these measures of value Are often considered.
Value stocks.
An open-end fund has a net asset value of $10.70 per share. It is sold with a front-end load of6%. What is the offering price?
If the offering price of an open-end fund is $12.30 per share and the fund is sold with a frontend load of 5%, what is its net asset value?
