Characteristics, Uses and Taxation of Investments - Pooled and Managed Investments


E. Pooled and Managed Investments: broadly defined, these are funds that pool investors' contributions to them. Professional investment managers invest the funds according to a particular strategy with certain objectives.

  1. Exchange Traded Funds (ETFs): [Noteworthy is that these are not to be confused with exchange funds, a vehicle used to unwind or monetize large concentrated stock positions. http://www.smithbarney.com/products_services/investor_education/ssb_university/exchng_funds.html. "Exchange funds allow investors a tax-free means to diversify a low-cost-basis and/or restricted stock position. Exchange funds allow investors to pool their low-cost-basis stocks in a fund. In exchange for contributing their stock to the fund, each investor owns a pro-rata share of the fund. After a set period of time - generally seven years - investors can redeem their interest in the fund. They will receive a non-taxable, distribution of a diversified pool of stock from the fund's portfolio. The value of this distribution is equal to the net asset value of their pro-rata interest in the fund at the time of the distribution. The stock distributed from the fund will retain in the aggregate the low cost basis of the stock originally contributed to the fund. There is always the possibility that the U.S. tax code could change, disallowing the favorable tax treatment of exchange funds. These changes could be retroactive, although this is believed to be unlikely." The reader will find a more detailed discussion of strategies used to diversify concentrated stock positions in Chapter Nine of the Investment Planning section of the study guide entitled "Asset Allocation and Portfolio Diversification".]: these are publicly traded, passively managed funds which track the performance of an index, sector or region. They may be purchased on margin and sold short without being subject to the uptick rule. Because these are index type funds, their expense ratio is quite low. Additionally, because of their passive nature, turnover is quite low resulting is fewer taxable distributions than most mutual funds. A form of closed end fund, redemption is accomplished through sale on an exchange rather than from tendering units to a mutual fund company. Because they throw off little income, exchange-traded funds may be more suitable for taxable accounts, though the tax decision is but one consideration of an investor's policy considerations.
  2. Unit Investment Trusts: these are registered investment companies that are liquidate themselves, are passively managed and may invest in equities, fixed income or other securities. The units generate dividend and interest income and principal as fixed income securities mature. Securities selected for inclusion in the trust are held to maturity.
  3. Mutual Funds: a mutual fund is an investment company that pools money from shareholders and invests in a diversified portfolio of securities [Pozen, Robert C. The Mutual Fund Business, The MIT Press 1998 p.16]. A type of management investment company, mutual funds manage the portfolio either actively through the selection of securities according to a specified discipline or passively by tracking an index of securities.
    1. Mutual fund essentials
      1. Mutual funds are one of three types of investment company.
        1. Unit Investment Trust
        2. Closed-End
        3. Open-End (mutual fund)
      2. Investment companies are non-taxable, conceptually similar to partnerships and subchapter S corporations in terms of their tax treatment in that they pass through interest income, dividends and capital gains to the shareholders in the fund. Qualifications for the investment company to meet to maintain favorable tax treatment include
        1. The investment company needs to earn at least 90% of its income from interest, dividends and capital gains on the securities in which it invests.
        2. The investment company must distribute at least 90% of its taxable income to its shareholders.
        3. Not more than 25% of the value of the fund's total assets may be invested in the securities of one issuer.
Mutual Fund Expenses
Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: PowerShares DB Commodity Tracking

    Find out about the PowerShares DB Commodity Tracking ETF, and explore a detailed analysis of the fund that tracks 14 distinct commodities using futures contracts.
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  3. Options & Futures

    Use Options to Hedge Against Iron Ore Downslide

    Using iron ore options is a way to take advantage of a current downslide in iron ore prices, whether for producers or traders.
  4. Mutual Funds & ETFs

    ETF Analysis: Vanguard Small-Cap Value

    Find out about the Vanguard Small-Cap Value ETF, and explore detailed analysis of its characteristics, suitability, recommendations and historical statistics.
  5. Mutual Funds & ETFs

    ETF Analysis: Vanguard Intermediate-Term Corp Bd

    Learn about the Vanguard Intermediate-Term Corporate Bond ETF, and explore detailed analysis of the fund's characteristics, risks and historical statistics.
  6. Mutual Funds & ETFs

    Top 3 Switzerland ETFs

    Explore detailed analysis and information of the top three Swiss exchange-traded funds that offer exposure to the Swiss equities market.
  7. Savings

    What Women Investors Are Doing Right

    Women's risk aversion, penchant for research – and lack of male-style "irrational exuberance" – means their investing strategies often put them ahead.
  8. Investing Basics

    Explaining Risk-Adjusted Return

    Risk-adjusted return is a measurement of risk for an investment or portfolio.
  9. Investing Basics

    Calculating the Margin of Safety

    Buying below the margin of safety minimizes the risk to the investor.
  10. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
RELATED TERMS
  1. Net Line

    The amount of risk that an insurance company retains after subtracting ...
  2. Political Risk Insurance

    Coverage that provides financial protection to investors, financial ...
  3. Maximum Drawdown (MDD)

    The maximum loss from a peak to a trough of a portfolio, before ...
  4. Gross Exposure

    The absolute level of a fund's investments.
  5. Priori Loss Estimates

    A technique used by insurance companies to calculate loss reserves.
  6. Value Of Risk (VOR)

    The financial benefit that a risk-taking activity will bring ...
RELATED FAQS
  1. Is my IRA/Roth IRA FDIC-Insured?

    The Federal Deposit Insurance Corporation, or FDIC, is a government-run agency that provides protection against losses if ... Read Full Answer >>
  2. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  3. What are common delta hedging strategies?

    The term delta refers to the change in price of an underlying stock or exchange-traded fund (ETF) as compared to the corresponding ... Read Full Answer >>
  4. How does being overweight in a particular sector increase risk to a portfolio?

    An investor who is overweight in a particular sector risks a loss in value for the portfolio if there is a downturn in that ... Read Full Answer >>
  5. What are the primary risks an investor should consider when investing in the retail ...

    The retail sector consists of companies operating in multiple industries such as specialty retail, general retail, food and ... Read Full Answer >>
  6. What risks do I face when investing in the insurance sector?

    Like all equity investments, insurance companies present investors with market risk. Insurance companies, like banks, also ... Read Full Answer >>
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!