Table of Contents
Table of Contents

Capped Fund Definition

What Is a Capped Fund?

A capped fund is a pooled investment fund that has imposed specified maximum limitations included on its investing or expense structure. Capped funds will often have a set cap on fees or holdings associated with the fund’s management.

Fund companies can have broad latitude for adjusting expense levels and holdings caps.

Key Takeaways

  • A capped fund imposes an upper limit on the amount of fees it can charge investors in any given year.
  • Capping the expense ratio on a fund can keep fees in check and attract cost-conscious investors.
  • A capped fund may also refer to an upper limit placed on the weight of any particular asset in its portfolio.
  • A capped index likewise puts a limit on the weight of any single security in an equity index.

What Are Capped Funds?

Some mutual funds and ETFs may choose to limit the expense ratio of the fund by detailing a capped expense level. This capped expense level provides investors with a fee ceiling, which effectively limits the investors' costs. It is the maximum percentage a fund can charge its shareholders annually for total operating expenses.

Fund companies provide details on capped expense levels in their prospectus documents. Typically, capped expense levels will be instituted for a specified period of time. To renew or revise a capped expense level, the fund must obtain approval from its board of directors. Fund companies may add, revise, or revoke expense caps at their discretion; however, documentation and disclosure must be provided.

Expense cap changes will affect the annual return of a fund. Any increase in expense cap levels could lead to lower returns, while decreases would help to increase performance.

Examples of Funds with Capped Holdings

Investment companies may also choose to cap holdings levels of fund constituents. This can be done at their discretion or it may be part of an investing objective that relies on a capped index. Capped funds and indexes adhere to a maximum level of investment per constituent. This can provide for broader dispersion and keeps a single holding from overly influencing the performance of the fund.

A number of capped funds, as well as capped indexes, exist for investors in the market. Standard & Poor's (S&P) manages several capped indexes which can be used for passive investment benchmarks. Capped sector indexes from Standard & Poor's include the following (among others):

  • S&P Select Sector Capped 20% Consumer Discretionary Index
  • S&P Select Sector Capped 20% Consumer Staples Index
  • S&P Select Sector Capped 20% Energy Index Energy
  • S&P Select Sector Capped 20% Financials Index
  • S&P Select Sector Capped 20% Health Care Index
  • S&P Select Sector Capped 20% Industrials Index
  • S&P Select Sector Capped 20% Materials Index
  • S&P Select Sector Capped 20% Real Estate Index
  • S&P Select Sector Capped 20% Technology Index
  • S&P Select Sector Capped 20% Utilities Index 

For each of these sector indexes, the weight of each stock is based on its float-adjusted market cap but is modified such that no stock has a weight of over 20% of the index as of each rebalancing.

Article Sources
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  1. S&P Gobal. "S&P U.S. Indices Methodology." P. 26.

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