Module 2.10: Mutual Funds and Other Investments

Types of Unit Investment Trusts (UITs)

-Equity UIT -Bond UIT -Corporate Bond UIT -U.S. Government UIT -International Bond UIT -Mortgage-Backed Securities UIT -National Municipal Bond UIT -State Municipal Bond UIT

Basis Determination Methods

-First-in, First-out (FIFO) -Specific Identification -Average Basis

Mutual Fund Operating Expenses

-Management Fee -12b-1 Fee -Other Expenses -the total of these three categories is the total "annual operating expenses" for the fund which is paid from the fund's income -the remaining income is paid to shareholders

Municipal Bond Funds: Single-State Funds

-these funds contain issues entirely or virtually entirely from within a specific state -they are purchased by residents of that state to obtain income that is free from both federal and state income tax (called double tax exempt) -residents of states other than the state where the bonds are issued generally avoid these funds because they cannot use the state-tax-free feature -advisers should compare the yields to general municipal bond fund yields on an after-state-tax basis to determine which has the better yield -these funds usually own intermediate-term and long-term bonds, and are usually investment-grade quality -may also buy securities from other states, because technically only 80% of a fund's asses must be invested in securities from within a given state in order for it to be called a xxxxx-xxxxx fund

Municipal Bond Funds: National Funds

-these funds contain various issues, mostly of investment quality, from throughout the US (thereby providing geographical diversification -therefore, most (or all) of the interest income is subject to state income tax -if any interest is exempt from state tax, the fund will indicate that to the shareholder when reporting yearly distributions for tax purposes -these funds tend to invest primarily in intermediate, or long-term bonds

GNMA Funds

-these funds hold at least 80% of their portfolios in mortgage-backed securities guaranteed by Ginnie Mae -interest and principal payments are direct obligations. of the U.S. government, although NAV can fluctuate inversely with interest rates, like any other bond fund -these funds usually provide a current income that is HIGHER than that of government securities funds in order to compensate for principal repayment uncertainty -the higher (or lower) a fund's average weighted coupon rate is, the greater (or less) the prepayment risk -thus, the prepayment risk (in effect, a call by the borrower) is an important consideration when purchasing XXXX funds because principal prepayments are usually received when interest rates (and therefore reinvestment rates) are relatively low -in general XXXX funds function best in a stable interest rate environment -xxxx funds with high prepayment risk have lower interest rate risk because of their high coupons

Unit Investment Trust (UIT): Characteristics

-XXXs are registered investment companies, just like open and closed-end funds -meaning, they pool the money of many investors in order to invest in portfolios designed to achieve certain investment objectives -regulated by the SEC and are subject to the same federal securities laws as other publicly offered investments (Securities Act of 1933/ Investment Company Act of 1940) *Difference:* -unlike open- and closed-end funds, XXXs portfolios are fixed, and are sometimes referred to as "Defined Portfolios" -that is, the securities in the portfolio, with rare exceptions, are not changed during the life of the trust, which can offer tax efficiencies since securities are not being sold -the prospectus often includes the actual securities owned by the XXX -the portfolio is not "managed" in the sense of other portfolios, which are constantly monitored and traded -rather it is "supervised," in the sense that the trust sponsors can remove and replace ("substitute") securities for a good reason *Difference* -unlike an open- or closed-end fund, a XXX has a STATED DATE OF TERMINATION

UIT: Redeeming Units

-XXXs are required by law to stand ready to buy back outstanding units at their current NAV, which is based on the market value of the underlying securities -units can be tendered to the trustee, and the price per unit is the next calculated price Ex: "Forward Pricing" -units tendered BEFORE the next pricing time of the UIT (usually 4:00 pm EST) will have that price -units tendered AFTER 4:00 pm EST will receive the price based on the NEXT 4:00 pm pricing -some UITs allow investors to exchange units for other UITs to accommodate a change in investment objective -these exchanges are often done with a reduced sales charge for the new units

UIT: Trustee

-a bank or trust company that provides safekeeping for a unit investment trust's securities On behalf of these securities, the xxxxxx is also responsible for: -collecting interest -collecting dividends -collecting principal payments -paying distributions to unit holders, and -keeping records (including annual tax reports to unit holders) -the xxxxxxx relieves the unit holder of much of the paperwork and administration normally associated with direct investments

Redemption Fee

-a fee of up to 2% of the amount redeemed and is charged if the investor redeems shares within a certain time of purchase, such as 90 days or one year -it is intended to discourage short-term trading in a fund -this fee goes back into the fund; it does NOT go back to the firm that sold the fund to the investor initially

Tax-Managed Funds

-a mutual fund for tax-conscious investors that is specifically managed to minimize taxable distributions and utilize the favorable tax rates applicable to: -qualified dividends, -long-term capital gains, and, -if holding fixed-income securities, will use tax-exempt securities

Swing Pricing

-a mutual fund pricing method -basic premise is that current shareholders of a mutual fund should not face dilution in the value of their holdings that arises from the transaction costs for either... -1.) liquidating fund portfolio holdings to meet net shareholder redemptions, or -2.) purchasing securities to put net new shareholder purchases to work in the markets This type of pricing is NOT available to: -money market funds -ETFs -or closed-end funds -this type of pricing is implemented if a fund's net inflows or outflows exceed a certain threshold that the fund provider determines -^^^this s known as the "swing threshold" -Swing Threshold = a percentage of the fund's assets under management, and once triggered, a swing factor is applied to the per share NAV

Fair Value Pricing

-a mutual fund pricing method -this method, at times, is necessary because securities in a mutual fund are not always priced correctly due to a fund's share price being calculated once a day, at 4:00 pm -for instance, at that time (4pm) international stocks and some seldom-traded securities such as certain junk bonds and small-cap stocks ay not have traded in several hours -if some significant event occurs without these prices being adjusted, investors can take advantage of the "stale prices" -in 2004 the SEC instituted a requirement that fund companies use xxxx xxxxv prices any time that market quotations for their portfolio securities are not readily available (including when they are not reliable) -a fund's prospectus must disclose when and how fair pricing will be implemented

Operation of a Trust

-a trust distributes its earnings to unit holders -when a bond matures or is called (when the issuer redeems the bond prior to maturity), or when a stock is sold, unit holders receive the proceeds from that security -when a XXX pays out earnings or principal, trust unit holders receive their proportionate share -in other words, the person who buys a single $1,000 unit of the trust gets the same return per dollar invested as an investor who buys 1,000 units

Flexible Portfolio Funds: Lifestyle Fund

-a type of flexible fund -most often these are funds of funds (one fund investing in several funds), with the xxxxxxxxx fund usually offering three portfolios with different risk levels such as conservative, moderate, and growth -the growth level is sometimes broken down further between conservative growth and moderate growth -investors then select the portfolio with the risk level they believe meets their needs

Flexible Portfolio Funds: Asset Allocation Funds

-a type of fund in the "flexible portfolio funds" category which enables the portfolio manager to invest in: -international stocks -gold stocks -real estate stocks -money market instruments, or -other financial assets depending on the fund -provide greater diversification than balanced funds because they allocate some percentage to each asset category per their prospectuses -they proportion of each asset in the portfolio is at the managers discretion, unless stated in the prospectus

Back-end Load (Class B Shares)

-aka "Contingent Deferred Sales Charge (CDSC)" -this type of load assesses shares if the investor sells them within a certain time of purchase -typically, this is a sales charge that starts at 5% or 6% for redemptions WITHIN THE FIRST YEAR of purchase...and decreases by 1% each year that the fund is held -in this way, the sales charge gradually disappears -within some fund families, the Class B shares may automatically convert to Class A shares after a certain holding period is met -this classes shares also have an extra 0.75% distribution fee embedded into the cost structure, which is how the fund company compensates the registered representative that sold the class x shares -a 0.25% "service fee" may also be imposed to cover annual trailing commissions to the salesperson... -for a total 12b-1 fee of up to 1.0%, which is included in the fund's expense ratio

Unit Investment Trust (UIT)

-aka "Fixed Trust" -this method of investing gained popularity in the 1930s, partly in response to the 1929 stock market crash -gained steam in the early 1960's as a means for investors to participate in the tax-exempt municipal bond market -today, UITs continue to evolve, but compared to the $15.7 trillion invested in mutual funds, the UIT market is very small and has been trending down in recent years

Aggressive Growth Funds

-aka "Maximum Capital Gains Funds" -these funds focus strictly on appreciation, with no concern about generating income -appeal to investors willing to take above-average risk in exchange for the potential for above-average returns -risks involve purchasing stocks of small companies, emerging growth companies, and stocks in special situations (regardless of size) where a company has a unique development opportunity -risk can vary among funds, such as using margin when buying stocks on short sales, or being "non-diversified" according to the SEC (invest heavier in assets) -in general, the volatility in NAV per share is greater in xxxxx xxxxx funds than it is in any other classification

Multisector Bond Funds

-aka "Strategic Income Bond Funds" These funds typically purchase three types of bonds: -1.) U.S. government bonds -2.) High-Yield corporate bonds -3.) Foreign bonds -the basic concept behind these funds is that by owning different types of bonds, the volatility of the fund can decrease (low correlation) while also providing high current income Each type of bond is affected by different factors: 1.) u.s. government bonds: -by interest rate changes 2.) high-yield: -by changes in the economy (u.s. economy improves, usually occurs after interest rates have fallen....high-yield perform well as possibility of default lessens) 3.) foreign bonds: -affected by their countries' interest rate changes (occur in cycles different from those of U.S. interest rates) -affected by credit quality determination -overall, these funds are both interest-rate sensitive and credit-quality sensitive -these funds pay high current income and, of course, also provide more fund diversification than would otherwise be present in three separate funds

Flexible Portfolio Funds: Lifecycle Fund

-aka "Target Retirement/Target Date" Fund -aims for a specific target date at which the investor will retire, such as 2025, and gradually adjust its mix of stocks, bonds, and cash equivalents to become more conservative over time -this is done by decreasing the percentage of stocks and increasing the percentage in bonds and cash equivalents as the investor's retirement date approaches, called its "glide path" -once the target date is reached, some funds use a "to" glide path (manager stops adjusting allocation).... -or they use a "through" glide path, where the manager continues to adjust the allocation beyond the date

UIT Distributions

-an attractive feature of fixed income UITs is the highly predictable income steam, which, because of the fixed portfolio, has more stability than can be expected from actively managed bond mutual funds

Mutual Fund

-an open-end investment management company that pools the money of many investors -the company hires an investment adviser to invest that money in an attempt to achieve one or more financial objectives, such as: -current income -capital appreciation (or growth) -capital preservation -offered through a legal document called a prospectus

UIT: Sales Charges, Transaction Costs, Fees, and Expenses

-b/c UITs do not trade their securities, there are NO PORTFOLIO TRANSACTION COSTS -there are, however, sales charges at the time of initial purchase -for UITs that have sales charges, the offering price is the [NAV] + [the up-front sales charge] (load) -for long-term bond UITs, this charge is typically 4%-5% of the total purchase amount -some UITs combine a smaller initial sales charge with a deferred charge -b/c the portfolios are unmanaged, there are NO MANAGEMENT FEES, however, the various parties providing services to the trust and its unit holders receive compensation -modest annual supervisory fee paid to cover operating expenses and compensate the sponsor for its supervisory role -trustee receives an annual fee for services rendered -is all bonds are insured, the insurance premium charged by the private insurance company is about $1.50 per $1,000 unit -the amount of fees varies from trust to trust, depending o the services required SUMMARY: -trustee fee -evaluator fee -supervisory fee

Bond Fund Rating

-bond funds can also be classified in terms of the quality of the bonds they hold -Morningstar and other investment research organizations classify bond funds in terms of high, medium and low quality Accordingly, they rate bond funds using a matrix of nine boxes, consisting of: -three durations (short, intermediate, long) and -three quality characteristics Morningstar uses duration, not average maturity, in their classifications NOTE: -one thing to check when buying a bond fund is to se what percentage of the portfolio is in nonrated bonds -***a fund with a portfolio of at least 20% in nonrated bonds should be approached with caution***

Private Activity Bonds

-bonds issued for activities such as airports, certain water and sewer facilities, student loans, and certain housing projects -interest from these types of muni bonds are subject to AMT

Public Activity Bonds

-bonds used to finance traditional state and/or local government function s and operations or to finance facilities owned and operated by governmental entities -these are NOT subject to AMT

Corporate Bond Funds: High-Yield Funds

-commonly called junk bond funds, these funds invest in bonds rated LOWER than BBB or Baa, as well as some nonrated bonds -given the funds higher coupon rate, these funds have the advantage of lower interest rate risk than higher-grade bond funds -tend to perform well during a strong (or at least improving) economy, as the likelihood of default of these bonds decreases -in other words, they are less interest-rate sensitive, and more economy-sensitive and credit-quality sensitive, than are investment-grade funds -in general, these funds are more likely to correlate with the stock market than the bond market Risks: -default risk (bad company bonds) -business/financial risk (bad company bonds) -liquidity risk -market risk (when overall confidence in bonds vvv) -long-term maturities (over 10 years) are typical of these funds, and the importance of total return rather than current yield is especially relevant for these funds

Capitalization Categories

-companies are categorized based on the size of the company, as measured by market capitalization [# of shares outstanding] x [price per share] Small Cap = capitalizations up to $2 billion Mid-Cap = capitalizations between $2-$10 billion Large Cap = capitalizations over $10 billion **Micro-Cap** = capitalizations under $500 million

Transaction Costs

-costs that include both brokerage commissions and the bid-ask spread on securities bought and sold

Mutual Fund Taxation: Accurate Reporting

-current year taxes must be paid on any distributions of shares owned on the "record date," -regardless of whether they are received in cash or reinvested into additional mutual fund shares -not adding reinvested distributions to the original cost basis results in paying tax on them twice: -one for the tax year when distributed -again when the shares are finally sold

Qualified Dividend

-dividend that qualifies for a lower tax rate vs. ordinary income -dividends subject to a maximum capital gains tax rate -these type of dividends are reported separately on form 1099-DIV

UIT: Form 1099-DIV

-each UIT provides unit holders with a Form 1099-DIV that reports the income and capital gains distributions (if any) that must be reported on their tax returns

UIT: Sponsor

-establishes, promotes, sells, and monitors the trust -a firm, or group of firms, that uses its own capital to create a portfolio of securities (usually bonds)

UIT Distributions: Bond UITs

-for these type of UITs, distributions are usually monthly, although some give the investor the option of quarterly or semiannual distributions -these distributions, as arranged by the sponsor, can be received in cash or reinvested in another trust of the sponsor or mutual fund -in some cases, arrangements can be made to deposit distributions directly into the unit holder's checking account or savings account -in some cases, distributions can be reinvested into another UIT or mutual fund of the sponsor

U.S. Government Funds

-funds purchased by investors wanting assurance that principal and interest will be paid when due -these funds are interest-rate sensitive, but they are not credit-quality sensitive -typically, the investments inside the fund to not have call risk (except GNMA)

Growth Funds

-funds that invest for capital appreciation but usually are less risky than aggressive growth funds -any income produced is incidental (yields of 1% or less are typical) -although they might purchase stocks of companies experiencing rapid growth, they also purchase stocks of growing companies that are more established -sometimes convertible bonds and foreign stocks are also purchased -sector weightings will distinguish one growth fund from another, as well as their cash position

Global (World) Bond Funds

-funds that invest in both foreign and U.S. bonds -foreign bonds have expenses that are among the highest of all bond funds

Asset Combination Funds

-funds that own a combination of common stocks, bonds, and/or other assets -Balanced Funds -Flexible Portfolio Funds -asset allocation funds -lifestyle funds -lifecycle funds

Tax Harvesting/ Loss Carry Forward

-in general First: -long-term capital losses reduce long-term capital gains -short-term capital losses reduce short-term capital gains Then: -any long-term losses remaining reduce SHORT-term gains and vice versa -if losses remain after offsetting capital gains, an investor may reduce his or her ordinary income by up to $3,000 in any one year -losses left over may be carried forward to future years until used up

Closed-End Funds: Trading at a Discount

-in most cases, closed-end funds trade at a discount from NAV after their initial public offering Reasons for Discount: -1.) Poor Performance -2.) Large unrealized capital gains -if realized, these could present shareholders with a large tax liability -3.) The presence of derivatives or illiquid securities in the portfolio: -while they may enhance returns, derivatives and illiquid securities make valuation difficult -4.) High expenses -5.) A "poison pill" provision: -makes the fund's conversion to an open-end fund unlikely

Bond Funds: Flight to Safety

-in times of financial turmoil, funds holding bonds of lesser quality than Treasury securities can be affected in a "xxxxx xx xxxxxx" such as what was seen in 2008

UIT: Evaluator

-independent of the "sponsor" of the UIT, the job of the xxxxxxxxx is to price the portfolio on a periodic basis, usually daily

Small Company Fund

-like aggressive growth funds, these funds invest for capital appreciation with no regard fo current income -the funds primarily invest in small and medium sized companies, although a portion of their assets can be in larger companies -Micro-cap Fund = subcategory of these funds which invest in companies under $500 million in market cap. These also invest in emerging growth companies and small, special situation companies

Municipal Bond Funds: High-Yield Funds

-like similarly named corporate funds, these funds invest in municipal bonds that are generally below investment grade (below BBB) in order to get higher current income -by investing in lower-rated bonds, default risk increases, but the high yields tend to cushion principal fluctuations -in general, the characteristics outlined for corporate bond high-yield funds also apply to the funds

Income Mutual Funds

-main objective of these types of funds is to provide maximum current income or to provide tax-free income -may have a secondary objective of capital growth or capital preservation

Basis Determination Methods: Average Basis Method

-method for calculating basis -the amount of money invested in the fund is divided by the number of shares Ex: -3 separate purchases of $1,000, $500, and $300 that ought, 50, 20, and 17 shares -the total amount invested ($1,800) divided by the total number of shares (87) would equal an average cost basis of $20.69 -the holding period for the shares sold is determined using the FIFO method -in cases where the shareholder does not elect one of the methods, mutual funds use as a default the average cost method

Basis Determination Methods: Specific Identification

-method of establishing basis that permits the shareholder to identify the specific shards redeemed from the fund -the basis of those specific shares is then used for purposes of measuring gain or loss -a letter should be written to the fund specifying that the shares to be redeemed are those which were purchased on a specific date -the fund must confirm these instructions in writing because the IRS requires written confirmation of shares redeemed from the fund when using this method

ETF: Annual Expenses

-most, but not all, ETFs have very low annual expense ratios, ranging from 9 to 20 basis points -more specialized ETFs can cost over 50 basis points -ETF expenses are usually slightly less than those of index mutual funds because they do not have shareholder services expenses -however, ACTIVELY managed ETFs have annual fees that typically range from 0.35% to 1.85% of assets

Taxation of Municipal Bond Funds

-municipal bond funds pass through their tax-exempt interest to shareholders -in general, this interest is free from federal taxation, but taxable at the state and local level unless the shareholder is a resident of the municipality issuing the bonds Ex: -if a general municipal bond fund's portfolio has 10% of its assets in state of New York bonds, the portion of interest from those bonds is not subject to New York state income tax for New York residents -to take advantage of this taxation, some investment companies offer municipal bond funds that concentrate in bonds issued by municipalities in a specific state such as NY or California that would appeal to high income residents of those states

Level-load Fund (Class C Shares)

-mutual fund sales charge which is asset based -uses the annual 12b-1 fee as a sales charge -under FINRA rules, the maximum portion of the 12b-1 fee that may be devoted to distribution costs is 0.75% of assets -as with Class B shares, this fee is used to recover the sales commission paid to the registered representative -a 0.25% "service fee" may also be imposed to cover annual trailing commissions to the salesperson... -for a total 12b-1 fee of up to 1.0%, which is included in the fund's expense ratio

Mutual Fund Taxation

-mutual fund shareholders are taxed on -1.) DISTRIBUTIONS by a fund of "ordinary dividends" -2.) capital gains generated from mutual fund transactions

Mutual Fund Pricing

-mutual funds are required by law to redeem their outstanding shards on any business day upon a shareholder's request -the price at which shares are redeemed is based on the next calculated "net asset value" (NAV) after receipt of the redemption order -mutual funds generally price their shares once a day, as of the close of trading on the NYSE

Growth Mutual Funds

-mutual funds with a primary objective of GROWTH OF CAPITAL, with a secondary goal of producing current income (and thereby providing capital growth through both appreciation and income) -this is achieved through the purchase of common stocks, but the approaches to attaining this growth can vary significantly among funds -unless otherwise noted, these funds pay low current income (distributions are usually ANNUALLY)

Mutual Fund Portfolio Turnover

-mutual funds with high portfolio turnover tend to be more tax-inefficient than funds with low portfolio turnover -the more often a portfolio manager trades securities in the fund, the more likely they are to generate short-term capital gains (which are taxed at ORDINARY INCOME tax rates)

12b-1 Fees

-named for a SEC rule, these mutual fund fees were originally for the purpose of paying marketing and advertising costs incurred in promoting the fund -the thinking was that, with more assets, a fund could at some point lower the operating expenses of the fund to the benefit of all shareholders -more and more, these fees have been used to compensate investment advisers on an ongoing basis for selling the funds rather than for their original purpose

Closed-End Funds: Raising Capital from Current Shareholders through Reinvestment Plans

-over 90% of xxxxxxx-xxx funds offer plans for reinvesting dividends and capital gains in additional shares -these additional shares are obtained by the fund's purchasing them in the open market or issuing additional shares -if the fund trades at a discount, the reinvestment price is usually the market price -if at a premium, the reinvestment price is the higher of the NAV or 95% of the market price

Bond Funds: Expense Ratios

-portfolio managers of bond funds with high expense ratios might be tempted to offset those expenses by investing in higher-risk securities -besides using derivatives, they might buy more exotic and complication securities or simply lower grade securities with the promise of higher returns

Bond Maturities

-short term = maturities up to 5 years -intermediate = maturities of 5 to 12 years -long term = maturities longer than 12 years -if a bond fund does not have an indication of its maturities in its name ("xyz long-term municipal bond fund")... -in most cases it will have bought long-term bonds and will have the words "INCOME" or simply "BOND FUND" in its name

Shareholder Transaction Expenses

-some mutual funds charge a sales commission referred to as a "Load" Loads can be assessed in three ways: -1.) Front-end Load (class A shares) -2.) Back-end Load (class B shares) -3.) Level-load fund (class C shares)

Portfolio Management: Blend or Core style

-some mutual funds use a combination of both value and growth investing to create a xxxxx or xxxx style -with such funds, the investment managers are looking for "growth at a reasonable price"

Closed-End Funds: Premiums to NAV

-some xxxxxx-xxx funds trade at a premium to net asset value -the most common reason for this is that such funds are in extremely popular investment segments -another reason might be that there have been few, if any, other ways to participate in a particular market -a third reason for NAV premiums might be the excellent reputation of a fund's manager

Mortgage Securities Funds

-sometimes GNMA funds contain U.S. Treasury securities as well as mortgage-based securities issued y Fannie Mae and/or Freddie Mac, whose securities are not direct U.S. government obligations and, therefore, have more risk (in theory) than GNMAs -funds that spread their holdings over GNMA, FNMA, and FHLMC are sometimes called simply xxxxxxx xxxxxxxxx funds -interest income from GNMA, FNMA, and FHLMCs is FULLY TAXABLE at BOTH the federal and state levels -the effective duration of these funds is about 8 to 12 years

Bond Fund: Derivatives

-synthetic securities that et their value from other assets, such as bonds -bond funds can use xxxxxxxx to reduce risk or increase return (with an accompanying increase in risk)

How ETFs Function

-the Exchange Traded Fund has the ability to issue new shares and redeem shares at their net asset value in large blocks, typically 50,000 shares (or multiples thereof), although blocks can be as large as 200,000 shares, depending on the ETF -these blocks are called "Creation Units" -only large institutional investors, called "authorized participants," may purchase or redeem creation units directly with the ETF -the the fund redeem shares, the authorized participant is paid with shares (called "redemption securities) of the underlying stocks -this exchange is called "IN-KIND" and is NOT a taxable transaction -this facilitates tax efficiency because the portfolio manager does not have to sell securities to redeem these blocks -in addition, the manager can exchange the securities with the lowest basis, thereby transferring out the securities that would generate the highest capital gains if instead sold

ETF: Creation Units

-the Exchange Traded Fund has the ability to issue new shares and redeem shares at their net asset value in large blocks, typically 50,000 shares (or multiples thereof), although blocks can be as large as 200,000 shares, depending on the ETF -these blocks are called "xxxxxxx xxxxx"

Non-guaranteed Government Debt

-the Farm Credit System (FCS) -Freddie Mac (FHLMC) -Fannie Mae (FNMA)

Prospectus

-the legal document given to potential buyers of the mutual fund -is intended to disclose important fund information that the investor can use in deciding whether or not to invest in that fund

Forward Pricing

-the method in which mutual funds price their shares -when an investor purchases shares of a mutual fund, he or she does not pay the price at the time of the order -instead, the price paid is the next NAV calculated by the fund after the order is received -this method of pricing shares is called xxxxxxx xxxxxxx

Basis

-the purchase price (including sales charges) of the shares being redeemed -capital gains (or losses) are generated when the shareholder redeems shares of a fund (**including an exchange from one fund to another**) -to determine if a gain or loss occurred and how much, the shareholder's xxxxx must be calculated -if the shareholder reinvests distributions from the fund, those reinvestments are purchases of new shares and, therefore, must also be included in the xxxxx -these distributions are taxed annually so that the purchase amounts from reinvestments are added to the basis in the fund -if a shareholder fails to include the reinvestments in the basis, they will be PAYING MORE TAX THAN NECESSARY when shares are redeemed -the method for calculating cost basis can be changed at any time prospectively

Expense Ratio

-the standard overall measure of annual operating expenses for a mutual fund [fund's annual operating expenses] DIVIDED BY [fund's average annual assets] -does NOT incorporate transaction costs incurred by the fund, so it does not provide a complete picture of a fund's expenses -this measurement is especially important with money market funds and bond funds because these funds generally earn lower returns than stock funds -this effect is also magnified in low interest rate periods -therefore, their xxxxx xxxxxxx can reduce returns to the investor by a larger percentage than with stock funds Ex: -a 1% xxxxxxxx xxxxx for a bond fund earning 5% is more significant, of course, than a 1% xxxxxxx xxxxx for a stock fund earning 10%

Duration

-the xxxxxxxx of a bond is defined as "the weighted-average time it takes for a bond to pay back its interest and principal" -provides a useful gauge for estimating the volatility of a bond fund -both a bonds 1.) coupon rate, and 2.) maturity -are factors in the calculation for xxxxxxx -for a rough estimate of how much a bond fund's value would change for a given change in interest rates, investors can multiply the xxxxxxxx figure by the change in interest rates Ex: -bond fund's xxxxxxxxx is 8 -interest rates fall 1/2 of 1%........ -the fund's NAV will increase about 4% -the xxxxxxxx of a bond fund can be obtained by visiting the bond fund's website or using one of the information services such as Morningstar

State Municipal Bond UITs

-these UITs contain municipal bonds issued within a single state -their attraction is that the interest, in addition to being free from federal income tax, is also free from state income tax -this "double tax-exempt advantage," however, comes with the added risk of concentrating all issues in one state

Convertible Securities Funds

-these funds USUALLY attempt to provide both capital appreciation and income in order to provide a good total return -funds that concentrate in bonds with LOW conversion premiums (difference between the bond's price and its value in terms of the underlying stock) are more GROWTH-oriented -while funds that concentrate in HIGH conversion premium bonds are more INCOME-oriented -in general, these income funds pay relatively high current income on a quarterly basis -most of their assets re invested in convertible bonds and convertible preferred stock, although some individual stock and bond issues can be owned as well -if a company experiences business difficulties, its convertible bonds can fall significantly -however, prices of convertible securities should not fall below the level of their value if they were traded as a straight bond (called the investment value)

Index Funds

-these funds are constructed to match as closely as possible the investment performance of a specific stock index such as the S&P 500, or, less common, a specific bond index -usually these indexes are cap-weighted (largest cap has the most impact on index movement) -these funds remain fully invested (do not raise or lower cash positions depending on the market outlook), so they participate fully in both bull and bear markets -fees for these funds are lower than those for managed funds "Enhanced Index Funds" = actively try to beat the market -current income tends to be low for stock index funds, and high for bond index funds

Commodity Funds

-these funds are generally regarded as inflation hedges because of the direct impact that increased xxxxxxxx prices can have on measures of inflation -also used as a diversifier to a portfolio b/c of historic low correlations with stocks and bonds, although in recent years these correlations have increased -with the increased economic growth in foreign countries, particularly in emerging market countries, the demand for commodities has increased, thereby pushing their prices higher -these funds typically contain some combination of stocks in commodity-producing companies, commodity-linked derivative instruments, and commodity futures -these funds are volatile, with standard deviations typically in the high 20s or low 30s

Growth and Income Funds

-these funds attempt to produce both capital appreciation and current income, with the priority usually given to the appreciation potential in the stocks purchased -many of these funds have low to moderate yields (1% to 3%) -high-grade stocks with steady growth often are purchased for these funds (some convertible securities and straight debt instruments might also be purchased) -generally have somewhat more volatility and a lower dividend yield than EQUITY INCOME funds, but they have less volatility than GROWTH funds Distributions: -typically quarterly These funds have one of two strategies: -1.) owning dividend-paying stocks -2.) owning growth stocks AND income stocks or bonds

Treasury Inflation-Protected Securities (TIPS) Funds

-these funds buy treasury inflation-protected securities, commonly called TIPS, and offer a rate of return that increases with inflation as measured by the Consumer Price Index for all consumers (CPI-U) -as inflation increases, the bond's principal increases semiannually at the same percentage as the increase in the CPI -the coupon rate stays fixed but is paid semiannually on that inflation-adjusted principal, so interest payments increase with inflation (but can decrease with deflation) -these are excellent funds to offset inflation risk, in contrast to traditional bond funds that are negatively affected by inflation DISADVANTAGE: -although the inflation increases are not paid out until the bond's principal is repaid at maturity, the investor must pay annual federal income taxes on the "phantom" payout (the amount of principal increase each year) in addition to the interest payments, unless, of course, they are in a tax-deferred account such as an IRA -like other bond funds, XXXX funds are subject to interest rate risk so even with inflation increasing, these funds can fall in NAV if interest rates increase

Types of Mutual Funds

**Income Funds**: -Bond Funds -corporate -municipal -US government -Foreign bond funds -Multisector bond funds -Equity income funds **Growth Funds**: -aggressive growth -sector funds -balanced funds -index funds -small cap funds -commodity funds -international funds

Creation and Issuance of Trust Units

-"trust sponsor" is a firm, or group of firms, that uses its own capital to create a portfolio of securities (usually bonds) -some broker-dealers sponsor their own XXXs and/or they sell XXXs of nationally recognized independent sponsors -the securities that compromise the XXX are selected by professional securities analysts with the intent of providing current income or capital appreciation, depending on the objective of the trust -the sponsor deposits these securities in the trust and then issues a set number of "UNITS" to the public in specific dollar denominations (typically $1,000, although sometimes at $250) -the pricing is [NAV + a sales commission] -each unit represents an equal ownership share of the trust's portfolio -units are offered through a prospectus -because the portfolio is created prior to the issuance of units, investors know precisely which securities will be in the trust

International and Global Stock Funds

-these funds invest only in stocks of foreign compnaies, while Global funds (aka World Funds) invest in both foreign and U.S. stocks -the correlation between U.S. stocks and international stocks, however, have increased in recent years, thereby providing less diversification benefits -international developed nations have the highest correlation with the U.S. markets Factors Effecting Returns: -economic outlook for foreign countries -value of U.S. dollar relative to foreign currencies -the importance of these two factors depends on the holding period of the investment -the SHORTER the holding period, the MORE IMPACT currency fluctuations can have on the return -the LONGER the holding period, the more foreign economic growth affects the performance of these funds -assume a Japanese mutual fund is up 10% but the yen falls 10% in relation to the U.S. dollar -for a U.S. investor who is already invested, there is NO GAIN at all -however, if the fund is up 10% and the yen appreciates against the dollar 10% (or the U.S. dollar weakens against the yen 10%) a U.S. investor has a gain of 20% -international stock funds are used to diversify a portfolio, but the diversification effect is greater for small-cap and emerging market funds than large-cap funds because large-cap international companies tend to earn their profits, at least in part, globally

Asset Combination Funds: Flexible Portfolio Funds

-these funds may be 100% invested in stocks OR bonds OR money market instruments, depending on market conditions -these funds give money managers the greatest flexibility in anticipating or responding to economic changes -the manager is permitted to invest in stocks of any size to achieve the fund's objective, which is usually capital growth

Money Market Mutual Funds

-these funds own money market instruments (debt instruments of one year or less) -they pay interest income tied to these short-term interest rates so theat the yields incresase as rates go up, and fall as rates go down -shares in this type of fund maintain a NAV of $1/share, although the true value may be off by a penny or two -lower yields than intermediate-term or long-term bond funds; but often have higher yields than savings accounts or money money market accounts -often used as a source of liquid funds to serve as an emergency fund and/or a temporary parking place for money to be reinvested at some point in the future -b/c of the low yields, investors should look for low expense ratios hen selecting a fund

Equity Income Funds

-these funds pay moderate current income by investing in income-producing common stocks, although some straight bonds, convertible bonds, and convertible preferred stocks might be found isn these funds as well -funds are chosen for their ability to maintain, as well as increase, dividends -therefore funds concentrate in older, well-established companies that pay above-average dividends -these companies are usually in industries such as utilities, banking, energy, and industrial cyclicals -lower interest rates are beneficial to these funds, causing stocks to increase in value -current yields on these funds usually are less than those of long-term corporate bond funds but greater than those of the average stock fund -dividends are usually paid quarterly, but some funds pay dividends monthly

Government Security Funds

-these funds purchase bonds that are fully guaranteed by the U.S. government, as well as U.S. government agency debt, and therefore these funds are considered to be of the highest credit quality -funds that have no debt except that which is fully guaranteed by the U.S. government are often called "Treasury Funds"

Corporate Bond Funds: Investment-Grade Funds

-these funds purchase investment-grade corporate bonds, meaning those in the top four bond ratings categories -S&P = AAA, AA, A, and BBB -Moody's = Aaa, Aa, A, and Bbb -these funds might also own some U.S. Treasury and mortgage-backed securities, both of which have a very low risk of default -bond maturities in these funds tend to range from 10 to 30 years

Corporate Bond Funds: General Funds

-these funds usually have the most flexibility in terms of corporate bond credit quality -as such, they can invest in both high and low quality corporate debt, U.S. government securities, and sometimes (to a minor degree) in foreign bonds -this results in funds that are less interest-rate sensitive than are investment-grade funds.... -and it results in funds that re less credit-quality sensitive than are high-yield funds -these funds tend to invest in long-term bonds

Front-end Load (Class A Shares)

-these shares have the commission added to the cost of the shares -can be up to 8.5% of the amount invested (per FINRA rules).... -however, competition has effectively eliminated the 8.5% sales charge, and the typical highest front-end load found now is around 5.5% Ex: -for an investment of $1,000 and a 5.5% front-end load, $55 is the sales charge, leaving $945 to be invested -these Class x shares will generally have a LOWER TOTAL COST STRUCTURE than other classes of shares.... -.....this may make Class x shares more SUITABLE for LONG-TERM investment HORIZONS -"Low-load" funds = are those imposing a sales charge of 3% or less

US Government UIT

-these trusts hold a variety of government securities, including U.S. Treasury bonds, Treasury notes, and federal agency securities -in terms of interest and principal repayment, these are considered the safest of all bonds -interest is generally taxable at the federal level, and interest on treasury securities is free from state income tax -these UITs have little, if any, call risk

Corporate Bond UITs

-these trusts hold bonds issued by corporations, interest on which is taxable at BOTH the federal and state levels -designed for current income -only hold high-quality bonds

National Municipal Bond UITs

-these trusts hold bonds issued by states and municipalities to finance various public projects, such as: -roads -airports, and -schools -income from these bonds is generally free from federal income tax, but subject to state income tax -for this reason, these trusts are most attractive to taxpayers in the upper income tax brackets

International Bond UITs

-these trusts hold the bonds of companies located outside the United States -provide investors with access to foreign interest rates, which may be higher than those in the US -exchange rate risk or currency risk -in general, a weaker U.S. dollar (or stronger foreign currency) is advantageous for these unit holders, and a stronger U.S. dollar is advantageous for them

UIT Distributions: Equity UITs

-these type of UITs pay income either monthly, quarterly, semiannually, or annually depending on its investment objective and the securities held -frequently offer reinvestment into additional units of the same trust -some offer "in-kind" distributions when the trust is terminated, whereby unit holders can receive a pro rate portion of equities int eh portfolio, rather than cash -"in-kind" distribution defers a taxable event -if a trust is organized as a "grantor trust," the tax on any gains on the distributed stocks is deferred until the unit holder chooses to realize those gains by selling the shares -unit holders will have to pay the brokerage costs of disposing of these securities if they are to realize cash, and they are exposed to market risk until they do dispose of them

Foreign Bond Funds

-these type of bond funds pay monthly (or sometimes quarterly) interest income by purchasing bonds (mostly foreign government bonds of AA or AAA ratings) issued in foreign currencies, such as the British pound or the Australian dollar -these funds can take advantage of higher interest rates in foreign countries -investors should be aware of potential changes in the value of the foreign currency relative to the U.S. dollar -some funds hedge against currency risk by using foreign currency options, futures contracts, etc. however, hedging will LOWER the funds RETURNS -funds that do NOT hedge against currency risk are identified with a reference to "unhedged," "local currency," or just "local"

Municipal Bond Funds

-these types of bond funds attract investors in higher income tax brackets because interest income is free from federal income tax -should make sure whether or not the fund is subject to AMT, and if so, to what extent. -The planner should also compare tax-free bond fund yields to after-tax yields on corporate or government bond funds to determine which provides the best return -National Funds -Single-State Funds -High-Yield Funds

Mutual Fund Management Fee

-this is the fee paid by a mutual fund to the investment adviser for its services relating to managing the fund, such as: -salaries of the portfolio managers -salaries of the analysts -and other related research expenses

Basis Determination Methods: First-in, First-out (FIFO)

-this method assumes the first shares into the fund are the first shards sold -the IRS assumes this method is used if no other method is specified by the shareholder

Types of Money Market Mutual Funds: Taxable

-this type of MMMF owns short-term debt, such as t-bills, short-term government agency securities, commercial paper, banker's acceptances, repos, and negotiable CDs -some funds own ONLY treasury securities, called "Treasury money market funds," -or only treasury and U.S. government agencies securities, called "Federal money market funds," and appeal to investors wanting a higher degree of safety -interest from these securities is taxable at the federal level, and usually at the state and local levels as well (the exception being t-bills; therefore, a fund that buys only these bills will offer interest free from most state and local taxation)

Bond Funds: Immunization

-to "xxxxxxxxxx" against interest rate risk, the correct strategy is to equate a bond fund's duration with the years remaining for the goal -an investor may be required to sell one bond fund and buy another each year to be certain that the bond fund's duration matches the goal -in practice, bond funds are not the best investment vehicle to use when matching goals to duration -individual bonds, especially zero-coupon bonds, are more appropriate for an xxxxxxxxxx strategy

Closed-End Funds: Raising Capital

-to raise new capital, some xxxxxx-xxx funds use rights offerings -existing shareholders are issued rihts, based onthe number of shares held, to purchase additional shres a predetermined subscription price, which is usually at a discount to the fund's market price on a particular pricing date -usually several rights are needed to purchase each new share, and these rights usually last only 30 to 45 days -the total assets grow, but the NAV decreases because there are more shares

Precious Metals/Gold Funds

-traditionally, precious metals have been a hedge against inflation -these funds seek an increase in the value of their investments by investing at least 80% of their portfolios in securities associated with gold, silver, and other precious metals -there can be a significant difference from one precious metals fund to another based on the percentage of their holdings in various precious metals or precious metals companies -funds are largely affected by the price of the precious metals -historically funds that concentrate in gold tend to do well in periods of political and economic uncertainty, when REAL (after inflation) interest rates are low, and when inflation rates increase

Government Guaranteed Debt

-treasury notes -treasury bonds -GNMAs -obligations of the Federal Financing Bank (FFB), the General Services Administration (GSA), and the Small Business Administration (BSA) -of the above, only interest from T-notes, T-bonds, and bonds issued by FFB, GSA, and FCS is EXEPT from state income taxes

Types of Money Market Mutual Funds: Tax-exempt

-type of MMMF that owns tax anticipation notes, tax-exempt commercial paper, floating rate municipal notes, and demand notes (notes with a put attached to a long-term municipal bond) These funds can be classified in 2 ways: -National -State

Equity UITs

-type of UIT -portfolios of stocks that are usually bought with the goal of capital appreciation, although they could be for income, or both -include specialty trusts, which may be in the form of index trusts designed to mirror a specific market index, such as the S&P 500 -major risk is market risk -are often demand driven, meaning if there is investor demand for a particular sector in the market, then UITs will be created by Wall Street for that sector

Corporate Bond Funds

-type of bond fund that invests primarily in bonds issued by U.S. corporations -interest income from corporate bonds is fully taxed at both the federal and state levels -the corporate bond market is less efficient than the U.S. government bond market because, with corporate bonds, there is a judgement of bond quality -investment-grade funds -high-yield funds -general funds

Interval Closed-End Funds

-type of closed-end fund that may offer to purchase from 5% to 25% of their outstanding shares from investors every 3, 6, and/or 12 months -purchases are made at NAV, subject to a maximum repurchase fee of 2%

Discretionary Closed-End Funds

-type of closed-end fund that, whether or not they repurchase shares at the intervals of a interval CEF, may offer to buy back any or all of their outstanding shares not more frequently than ONCE EVERY 2 YEARS -purchases are made at NAV, subject to a maximum repurchase fee of 2%

Closed-End Funds

-type of investment company/"fund" that are technically not "mutual funds" because they do not continually offer shares to the public Characteristics: -offer a fixed number of shares at the time of their IPO, whereas open-end funds continuously offer shares, unless the fund at some point restricts the issuing of more shares (b/c do not continuously offer shares, a prospectus is issued only with the IPO, or if they offer additional shares) -trade like common stock on one of the exchanges or in the OTC market (bought/sold from one investor to another) -shares are NOT redeemable by the fund so the SEC does not require the NAV of xxxxxx-xxx funds to be calculated on a daily basis -may, and usually do, trade at a discount or, less likely, at a premium to NAV, depending on the supply and demand for their shares -shares can be bought on margin or sold short, just like other shares -managers of these funds do not have to face redemptions because the fund's shares are sold in the open market. Therefore, xxxxxx-xxx funds can be close to 100% invested -these funds are allowed leverage in their capital structure; that is, they are allowed to issue preferred stock and debt issues -do not have the ongoing cost of marketing and distributing shares and servicing accounts that mutual funds have, so their expense ratios should be lower -these funds do NOT have 12b-1 fees, which some open-end funds have -these funds pay "dividends," but do not have a published dividend yield -instead they have an "income-only yield" consisting of net investment income for common shares after any dividends on preferred shares -they ACTUALLY pay "distributions" (dividends, net investment income, realized capital gains, and return on capital)

Bond Funds

-type of mutual fund that passes through to their shareholders the interest income from debt securities (technically called dividends), and usually do this on a MONTHLY basis -primarily purchased to provide income, but can also provide the possibility of capital gains or losses -main influence on this type of funds price is interest rates (interest rate risk), which is directly related to the maturities of the bonds in the fund

Short-term Capital Gains Taxation

-type of tax incurred if individual takes a distribution from a mutual fund on securities that were held one year or less -distribution is also reported to the shareholder under "total ordinary dividends" on IRS Form 1099-DIV -this total also includes all taxable interest income and all cash dividends (both qualified and non-qualified) Qualified Dividend: -dividends subject to a maximum capital gains tax rate; are reported separately on form 1099-DIV

Tax-Exempt Money Market Mutual Funds: National

-type of tax-exempt MMMF that invests in securities of municipalities throughout the country with relatively short maturities -no more than 5% of its assets may be invested in the securities of a single issuer -investors who use them seek interest income free from federal income tax with minimum risk

Tax-Exempt Money Market Mutual Funds: State

-type of tax-exempt MMMF that works like other tax-exempt MMF, except their portfolios contain the issues of only ONE STATE -as such, 5% single issuer limitations apply with respect to 75% of a single state fund's assets -a resident of that state has the advantage of receiving income free of both federal and state tax -again, for some taxpayers, portions of income from these securities may be subject to the federal alternative minimum tax

Limited Life of a UIT

-unlike mutual funds, which can theoretically continue indefinitely, XXXs have a limited and specific life, so investors know when to expect a return of their principal -this is particularly true with stock XXXs, which have a given date when the trust's portfolio will be liquidated -once liquidated, unit holders receive the proceeds, which may be more or less than the original principal -bond XXXs have less predictability as to a liquidation date if they contain bonds that are callable -trusts may have a provision in the prospectus that states if the aggregate principal amount of the bonds initially in the trust falls below a certain percentage, the trust can be terminated Ex: -portfolio of corporate bonds with 20-year maturities -at best, all bonds will mature in 20 years and their redemption values and interest payments will be distributed to unit holders -7 years into the life of the trust, market interest rates drop dramatically, inducing most corporate issuers to call their bonds -the trust distributes the proceeds from these redemption to unit holders -by the end of the 7th year, the remaining principal amount of the bonds in the portfolio has dropped to 20% of the original principal amount of the trust -by a provision in the trust's prospectus, this is the point at which the remaining assets can be liquidated, their proceeds distributed to unit holders, and the trust legally terminated BOND XXXs -principal is paid when the bonds mature, which can be as soon as six months, or as long as 30 years EQUITY XXXs -can be issued for one or several years

Net Asset Value (NAV)

-what the mutual fund is worth (its "price") per share based on the value of the fund's assets....... -minus its liabilities........ -and divided by the number of shares the fund has outstanding XXX per share is calculated by taking: [the amount of the fund's total assets (cash and securities)] MINUS [the funds liabilities] DIVIDED BY [# of shares outstanding] Ex: -fund has $1,000,000 in assets -$40,000 in liabilities -100,000 shares [$1,000,000] - [$40,000] //////////////////////// 100,000 shares outstanding = $9.60

Alternative Minimum Tax (AMT)

-while interest from muni bonds is generally tax-free for federal income tax purposes, interest from some muni bonds can be federally taxed through xxxxxxx xxxxxxx xxxxxxxx -interest from g.o. muni bonds is NOT subject to this tax, but interest from "private activity" muni bonds is subject -these bonds are defined by the IRS as "tax-exempt bonds issued by a state or local government, the proceeds of which are used for a defined qualified purpose by an entity other than the government issuing the bonds" -funds with the words "tax-free" or "tax-exempt" in the title must have at least 80% of assets in bonds that are not subject to the AMT tax

Bond Funds: Long-term Bonds

-xxxx-xxxx bonds have more interest rate risk than do short-term bonds Furthermore, capital losses can be generated by: -rating downgrades or defaults -by bonds being called (if call price is less than the purchase price of the bond) -and by rising interest rates, which offset some, or even all, of the interest income from the fund

Mutual Fund Taxation: Capital Gains

A mutual fund tax that is generated: -from sales at a profit of the mutual fund's portfolio securities -when the shareholder sells his or her shares in the fund -classified as "short-term" if securities are held one year or less -classified as "long-term" if securities are held for more than one year Short-term Capital Gain: -distribution is also reported to the shareholder under "total ordinary dividends" on IRS Form 1099-DIV -this total also includes all taxable interest income and all cash dividends (both qualified and non-qualified) [Qualified Dividend = dividends subject to a maximum capital gains tax rate; are reported separately on form 1099-DIV] Long-term Capital Gains: -if there is a long-term capital gain distribution, it is reported under "total capital gain distributions" on the form

Bond UITs

Bond UITs are categorized by maturities: -short term -intermediate term, and -long term As well as by issuer: -corporate -municipalities -us government, and -international

Bond Fund: Risks

Bond funds are primarily comprised of three systematic risks (since it is diversified fund and has no unsystematic risk): -1.) Interest Rate Risk: -rates go up, price goes down -can be countered by owning SHORTER-TERM bonds -2.) Purchasing Power (Inflation) Risk: -the risk that the fixed interest and principal payments will have less purchasing power over time -risk is greater with long-term funds than with short-term funds b/c the short-term have bonds that are maturing often, and so their principal can be reinvested periodically to earn current yields -this is especially important during periods of higher inflation, which are the times when interest rates also tend to increase -3.) Reinvestment Risk: -the risk that interest income and principal may have to be reinvested at a lower coupon rate when interest rates decline

Bond Fund Types

Bond funds usually concentrate in one of four types of bonds: -corporate -municipal -us government -or foreign -in general, the higher the ratings (quality) of the bonds in the bond fund, the more interest-rate sensitive it is -the lower the bond's quality, the more credit-quality sensitive it is

Open-End Funds (Mutual Funds) vs Closed-End Funds

Both are investment companies: -they pool the money of many investors and hire an investment manager to buy certain securities in order to achieve a financial objective -both have portfolio managers and research staff who decide what to buy and sell within the parameters of the fund's prospectus -in most cases, the portfolio is diversified over a wide range of securities -methods of delivering profits to shareholders are also the same: -income distributions -capital gains distributions -capital gains from increasing share values -taxation on these forms of profit are also the same

Chapter 2: Unit Investment Trusts

Chapter 2: Unit Investment Trusts

Weakening U.S. Dollar

Economic forces that tend to xxxxxx the U.S. dollar are: -1.) high inflation in the U.S. -2.) sizable U.S. trade or budget deficits -3.) lower U.S. real interest rates relative to foreign real interest rates -4.) lower U.S. productivity compared to productivity in foreign countries

Sector Funds

For testing purposes, these funds are narrowly defined as: -"those funds investing in stocks of one industry or theme, such as energy, financial services, utilities, technology, real estate, or health care" -in a broad sense, these type of funds refer to funds specializing in one geographical area, a specific type of security, a specific industry, or a specific investment theme, such as "leisure" -ignores diversification -by concentrating in one sector, an investor has increased risk and increased potential return, compared to a fund with broad industry diversification -although these funds are less diversified, a fund focused on one sector can contribute to portfolio diversification if it has a low correlation with the other investments in an investor's portfolio

Chapter 1

Mutual Funds

Mutual Fund: Other Expenses

Mutual fund fees that pay for administrative or outside services such as: -shareholder record-keeping and reports -auditing -custodial services -legal services -proxy solicitations -annual meeting costs -directors' fees -state and local taxes

Chapter 3

Other Investments

Portfolio Management: Value Investing

Portfolio management style that emphasizes stocks in companies that have: -strong balance sheets, -strong cash flows, and -perhaps undervalued assets as well as stocks in companies that are regarded as undervalued as measured by: -low P/E ratios -price-to-book value ratios, and -price-to-sales ratios

Portfolio Management: Growth Investing

Portfolio management style that emphasizes stocks in companies with above-average earnings growth -these funds are often characterized by: -short-term trading -the purchase of stocks with high P/E ratios, and -high portfolio turnover

Bond UIT: Returns

The prospectus for a bond UIT usually contains two return estimations: -**Estimated Current Return**: -based on the public offering price, which is the estimated: [net annual interest income per unit]/ [per unit offering price] **Estimated Long-Term Return**: -based on the public offering price, which factors in the: -bonds' yield -weightings in the portfolio -estimated redemptions -expenses and sales charges, and -discounts and premiums of the underlying bonds at the initial date of deposit into the trust -these two estimations will differ because the estimated long-term return reflects the estimated date and amount of principal returned..... -while the estimated current return include only net annual interest income and the public offering price -these estimate returns are intended to be used for comparative rather than predictive purposes

Bond Funds vs Individual Bonds

There are 4 major ways in which bond funds differ from individual bonds: -1.) through active management, the interest income from the bond fund changes over time, unlike fixed-interest payments from individual bonds -2.) a bond fund does not have a fixed maturity. There is no future date at which the original principal will be repaid -3.) individual bonds are quoted in a current yield, yield-to-maturity (most common), and yield-to-call. A bond fund has no maturity or call date, so its yield is based on current income relative to its NAV -specifically, the SEC has a standard method used by mutual funds to calculate a 30-day yield, which is an annualized return based on the net investment income per share earned for a trailing 30-day period -4.) bond funds usually make interest distributions MONTHLY, where as individual bonds pay interest SEMI-ANNUALLY

Asset Combination Funds: Balanced Funds

These funds generally have a three-part investment objective..........to: -1.) conserve investors' principal -2.) pay current income, and -3.) promote long-term growth of both principal and income -have a portfolio mix of bonds, preferred stocks, and common stocks -typically a 60/40 allocation -considered "total return" funds, because they provide both current income and appreciation

How are UITs Organized?

XXXs are organized under a trust agreement in one of two forms: 1.) as a regulated investment company that must pass the diversification test of Subchapter M of the Internal Revenue Code 2.) more COMMONLY, as a grantor trust that is not required to meet the diversification test (such a trust may still call itself "diversified" if it meets the 1940 Act diversification tests) -a XXX does not have a board of directors, corporate officers, or an investment advisor

Mutual Fund Taxation: Ordinary Dividends

[cash dividends from stocks] + [taxable interest income from debt instruments, WHEN DISTRIBUTED by a mutual fund] = xxxxxxx xxxxxxx -for 2019, for individuals with taxable income over $434,550 and married filers over $88,850, both.... 1.) qualified dividends, and 2.) long-term capital gains -will be taxed at the rate of 20% -for taxpayers under these amounts, dividends and long-tern capital gains will be taxed at 15% -however, for a single taxpayer below $39,375 and those married couples filing jointly with taxable income below $78,750, there is NO TAX ON DIVIDENDS OR LONG-TERM CAPITAL GAINS