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.
- 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.
What Are Capped Funds?
Some funds 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 many capped indexes which can be used for passive investment benchmarks. Capped indexes from S&P include the following:
- S&P/TSX 60 Capped
- S&P/TSX Capped Composite
- S&P/TSX Capped Energy
- S&P Russia BMI Capped
- S&P Italy Large and Mid-Cap Capped
- S&P All Africa Capped
- DJCI Gas & Oil Capped Component
- S&P GSCI Cap Component
BlackRock is one investment manager providing exchange-traded funds (ETFs) managed to capped indexes. The iShares Core S&P/TSX Capped Composite Index is a passively managed index fund that seeks to replicate the holdings and performance of the S&P/TSX Capped Composite Index. In 2017, the fund closely tracked the benchmark’s performance with a return of 9.05% versus 9.10% for the benchmark. The fund has total assets of CAD 4.256 billion. It trades on the Toronto Stock Exchange with a net asset value of CAD 25.74.