An investment fund pools together capital from many investors. Each investor has partial ownership and the fund invests according to the fund’s objectives. Investment funds offer a wide range of investment opportunities. They can also benefit from diversification, lower transaction costs and management expertise. This can help mitigate some of the risk that individual investors take on.
Types of Investment Funds:
These fund types serve similar purposes, fundamentally. They allow you to invest in a diversified portfolio of assets that you might not otherwise be able to gather yourself. But it’s important to understand the features that make each fund type unique.
Open-End vs Closed-End Funds
Open-end funds, like those offered by Fidelity, Vanguard and other leading mutual fund groups, continuously offer and redeem shares based on each day’s closing net asset value. Share’s are priced each day based on their net asset value (NAV).
Closed-end funds are different. They raise money on an IPO (initial public offering), just like a company going public, and then begin trading on an exchange.
Because these funds trade like stocks, you buy them through a brokerage account. And you can trade them intra-day using market orders, limit orders, or stop orders. They are marginable like stocks, too.
A closed-end fund’s market price at any given time may be higher or lower than its net asset value. If it is trading above the net asset value, it is said to be trading at a premium. If it is trading below the net asset value, it is trading at a discount.
Mutual Funds
Mutual funds are the oldest type of investment fund. Like the other types, they’re vehicles that pool money from investors to buy securities. The basket of assets is priced and sold to the public on a daily basis.
The daily basis part is an important distinction. Unlike the other fund types that we’ll discuss in a moment, the price of a mutual fund changes exactly once a day. In an actively managed mutual fund, the managers may trade the assets insidethe fund throughout the trading day. But you can’t make money trading shares of the fund intraday.
That’s part of the reason mutual funds are more popular for retirement planning. They’re not good for day traders, but they’re great for savers who want to grow their money over a long period of time.
Mutual funds come in a few flavors. Closed-end mutual funds are the simplest type. They have a fixed number of shares that can be bought or sold only when they’re available on the market. There are also open-end funds, which can create and retire new shares based on investor demand. And then there are unit investment trusts (UITs), which are static portfolios of securities with no management.
Mutual funds have many advantages. They allow investors to buy into a diversified portfolio of high-value assets without having to manage that portfolio. However, that convenience comes at a price… Mutual funds (especially actively managed ones) often charge fees that may eat away at returns.
Another disadvantage of mutual funds is their tax inefficiency. Money in a mutual fund is usually tax-exempt as long as it stays invested. But when a mutual fund sells some of its portfolio at a profit, it is required by law to distribute those profits to shareholders. Those payments are taxable.
ETFs (Exchange-Traded Funds)
An ETF is a listed security that tracks an index consisting of a portfolio of individual securities. As with mutual funds, when you buy an ETF, you don’t pick a specific security. Instead, you choose a particular asset class, sector, theme, country or investment strategy.
Two notable types of ETFs are leveraged ETFs (which track some multiple of the price of their underlying assets) and inverse ETFs (which track the opposite of their underlying assets). These funds give traders the ability to amplify or hedge their bets without using complex instruments like derivatives.
The ability to trade ETFs intraday can be an advantage in some situations. If the market crashes, for example, you can sell before the end of the trading day. With a mutual fund, you’re stuck waiting until 4 p.m. to sell, at which point the fund may have shed significant value.
But the ability to trade actively can also be a handicap. Those who trade frequently risk trading on impulse or anxiety. And that’s a recipe for buying high and selling low. Mutual funds don’t give you the option of making reckless intraday trading decisions.
With ETFs, you can invest in everything from stocks, bonds and the U.S. technology sector to Dividend Aristocrats, Russian small caps and even timber. ETFs also offer distinct advantages over traditional mutual funds…You can buy and sell ETFs as easily as you buy a share of Apple (Nasdaq: AAPL).
Finally, ETFs tend to be a bit cheaper than mutual funds. They don’t have to distribute realized capital gains to shareholders, so they tend to come with a smaller tax bill. Also, many ETFs are passively managed, which means a lower expense ratio.
ETFs don’t have big investment minimums. They’re generally more tax-efficient. And you can invest in ETFs that offer leverage or even profit when markets go down. No wonder ETFs have come to dominate stock exchanges over the past decade.
Hedge Funds
Hedge funds pool huge amounts of money from wealthy investors, Wall Street banks, and, yes, other hedge funds. Their goal is to make money regardless of which way the stock market goes. Some of them invest in bonds, some in commodities, some in foreign markets, some in futures and options. Some short stocks, betting their prices will fall, not rise.
Others turn almost any kind of cash flow – including credit card payments, home mortgages, corporate loans, plane leases, and even movie theater revenue – into securities and trade them. Hedge funds hold unparalleled sway over the world’s financial markets today. They are responsible for a good chunk of all stock trading in the market.
Much of what they are doing is good. For example, hedge funds help spread investment risk among many partners. In some ways, this “risk dispersion” has acted like a safety valve for investment banks and other lenders. However, with so much leveraged money sloshing around in these funds, the potential for catastrophe is increasing. Also, hedge funds are struggling to beat the market but still charge higher fees.
Index Funds
Index funds aren’t their own type of fund. For example, there are both ETFs and mutual fund index funds. Still, they’re worth discussing because they have a unique asset profile.
As the name implies, index funds are baskets that try to contain all the securities in a particular index. You could spend a fortune buying a weighted amount of stock in the 500 largest public companies in America… or you could just buy a few shares of an S&P 500 index fund.
Index funds represent some of the most diversified investment vehicles on the market. Instead of picking and choosing different securities, you get a piece of everything. This strategy can generate a steady returns with lower risk.
Index funds can be valuable to long-term investors because of their simple strategy. Betting on the market’s long-term trends can be a great move.
Few active managers and traders outperform the benchmark indexes over a period of decades. However, an actively managed fund may earn bigger short-term gains than an index fund would.
Types of Investment Funds Summarized
As you can see, mutual funds, ETFs, hedge funds and index funds are all similar concepts, but there are a number of nuanced differences between them. These are important to understand for any investor.
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NEW YORK (AP) — Shares of Tesla soared Wednesday as investors bet that the electric vehicle maker and its CEO Elon Musk will benefit from Donald Trump’s return to the White House.
Tesla stands to make significant gains under a Trump administration with the threat of diminished subsidies for alternative energy and electric vehicles doing the most harm to smaller competitors. Trump’s plans for extensive tariffs on Chinese imports make it less likely that Chinese EVs will be sold in bulk in the U.S. anytime soon.
“Tesla has the scale and scope that is unmatched,” said Wedbush analyst Dan Ives, in a note to investors. “This dynamic could give Musk and Tesla a clear competitive advantage in a non-EV subsidy environment, coupled by likely higher China tariffs that would continue to push away cheaper Chinese EV players.”
Tesla shares jumped 14.8% Wednesday while shares of rival electric vehicle makers tumbled. Nio, based in Shanghai, fell 5.3%. Shares of electric truck maker Rivian dropped 8.3% and Lucid Group fell 5.3%.
Tesla dominates sales of electric vehicles in the U.S, with 48.9% in market share through the middle of 2024, according to the U.S. Energy Information Administration.
Subsidies for clean energy are part of the Inflation Reduction Act, signed into law by President Joe Biden in 2022. It included tax credits for manufacturing, along with tax credits for consumers of electric vehicles.
Musk was one of Trump’s biggest donors, spending at least $119 million mobilizing Trump’s supporters to back the Republican nominee. He also pledged to give away $1 million a day to voters signing a petition for his political action committee.
In some ways, it has been a rocky year for Tesla, with sales and profit declining through the first half of the year. Profit did rise 17.3% in the third quarter.
The U.S. opened an investigation into the company’s “Full Self-Driving” system after reports of crashes in low-visibility conditions, including one that killed a pedestrian. The investigation covers roughly 2.4 million Teslas from the 2016 through 2024 model years.
And investors sent company shares tumbling last month after Tesla unveiled its long-awaited robotaxi at a Hollywood studio Thursday night, seeing not much progress at Tesla on autonomous vehicles while other companies have been making notable progress.
TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.
The S&P/TSX composite index was up 103.40 points at 24,542.48.
In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.
The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.
The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.
The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.
This report by The Canadian Press was first published Oct. 16, 2024.
TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.
The S&P/TSX composite index was up 205.86 points at 24,508.12.
In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.
The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.
The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.
The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.
This report by The Canadian Press was first published Oct. 11, 2024.
