Trading Effect

AAA

DEFINITION of 'Trading Effect'

A measure of performance that examines the difference in returns between a bond portfolio and a chosen benchmark. This difference occurs as a result of short-term alterations in the portfolio's composition. The trading effect reveals whether trading activities benefited or hindered a portfolio's return.

BREAKING DOWN 'Trading Effect'

The trading effect serves as a way for investors to quantify a portfolio manager's performance. It answers the simple question of whether the manager (or investor) added value by making adjustments to the portfolio. If the benchmark, such as the Dow Jones Corporate Bond Index, outperforms the actively managed bond portfolio, then the manager subtracted value for the investor. If the bond portfolio earns more than the bond index, then the changes in portfolio composition have increased investor value, indicating a good management strategy.

RELATED TERMS
  1. Bond

    A debt investment in which an investor loans money to an entity ...
  2. Index

    A statistical measure of change in an economy or a securities ...
  3. Manager Universe (Benchmark)

    A peer group of investment managers who have the same investment ...
  4. Benchmark Bond

    A bond that provides a standard against which the performance ...
  5. Fund Manager

    The person(s) resposible for implementing a fund's investing ...
  6. Benchmark

    A standard against which the performance of a security, mutual ...
Related Articles
  1. Investing Basics

    How To Create A Modern Fixed-Income Portfolio

    Exposure to different asset classes is required to generate income, reduce risk and beat inflation. Find out how bonds can help.
  2. Mutual Funds & ETFs

    Will A New Fund Manager Cost You?

    Learn how a change in leadership could mean more taxes for you.
  3. Mutual Funds & ETFs

    Evaluating Bond Funds: Keeping It Simple

    Discover some of the key factors for determining a fund's risk-return profile.
  4. Mutual Funds & ETFs

    Should You Follow Your Fund Manager?

    Learn how to tell if a fund in flux is still a suitable investment.
  5. Professionals

    Preparing For A Career As A Portfolio Manager

    Find out what it takes to win a spot in one of the most coveted financial careers.
  6. Mutual Funds & ETFs

    Your Mutual Fund: It's Riskier Than You Think

    Fund managers often take on more risk than they should, putting business ahead of fund holders' interests.
  7. Investing Basics

    What's a Treasury Note?

    A treasury note is a U.S. government debt security that offers a fixed interest rate and a maturity date that ranges between one and 10 years.
  8. Investing

    Five Things to Consider Now for Your 401(k)

    If you can’t stand still, when it comes to checking your 401 (k) balance, focus on these 5 steps to help channel your worries in a more productive manner.
  9. Economics

    Explaining the Balanced Scorecard

    A balanced scorecard is a metric that measures a business’ performance.
  10. Mutual Funds & ETFs

    ETF Analysis: Guggenheim Enhanced Short Dur

    Find out about the Guggenheim Enhanced Short Duration ETF, and learn detailed information about this fund that focuses on fixed-income securities.
RELATED FAQS
  1. What are the maximum Social Security disability benefits?

    The maximum Social Security disability benefit amount for a single eligible person in 2015 is $1,165 per month, but you can ... Read Full Answer >>
  2. What is the relationship between the current yield and risk?

    The general relationship between current yield and risk is that they increase in correlation to one another. A higher current ... Read Full Answer >>
  3. What is a 'busted' convertible bond?

    In finance, a convertible bond represents a hybrid security that offers debt and equity features and risks. While a convertible ... Read Full Answer >>
  4. Who or what is backing municipal bonds?

    Municipal bonds are backed by dedicated taxes or revenue sources related to specific projects, or by the full faith and credit ... Read Full Answer >>
  5. What are the differences between debt and equity markets?

    The basic differences between the debt and equity markets include the type of financial interest they represent, the way ... Read Full Answer >>
  6. What does it signify if the term structure of an interest rate's curve is positive?

    When the term structure of interest rates is positive, it is a signal to economists the short-term yields on similar bonds ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  2. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
  3. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
  4. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
  5. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
  6. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
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!