Medical Savings Account (MSA)

What is a ‘Medical Savings Account (MSA)’

Medical Savings Accounts (MSA) are the predecessors of Health Savings Accounts (HSA) and have similar deductibles, tax treatment, and may act as a retirement account. 

First created by several states in the early 1990s, by 1996, these plans became a Federal pilot program within the Health Insurance Portability and Accountability Act (HIPPA). MSAs required annual Congress reauthorization and ended in 2003.

BREAKING DOWN ‘Medical Savings Account (MSA)’

Medical savings accounts (MSAs) could be funded by the individual or by the employer but not by both. MSAs were limited to the self-employed or employer groups with 50 or fewer employees who were enrolled in a high deductible health insurance plan (HDHP) and met other eligibility requirements. 

MSAs and later Health Savings Accounts (HSA) were tax-deductible savings accounts which the owner could use for qualified health expenses without incurring taxes or penalties. Both require the coupling of the account with an HDHP. Also, both serve as retirement accounts which could be drawn from without penalty at age 65 and older.

Self-employed individuals could create Medical Savings Accounts, known as Archer MSAs, which would have worked in the same way as a group MSA. The name honors Bill Archer, the congressman who sponsored the amendment which created them. The program to create an Archer MSAs expired in 2007. However, existing accounts may have continued funding and use.

The Replacement of Medical Savings Accounts 

In 2003, the Medicare Prescription Drug Improvement and Modernization Act allowed the creation of Health Savings Accounts (HSA). These accounts became a permanent feature of the tax code. 

Accounts contributions reduce the federal income tax adjusted gross income and are allowed for both standard and itemized deductions. Also, similar to an IRA, funding can be anytime between the beginning of that calendar year and before the tax deadline for that year.

The HSA is a fully vested tax-advantaged account and not subject to forfeiture if funds remain unspent at the end of the year. Using an HSA, an individual can pay for medical and dental expenses. MSA qualified health insurance plans generally had to have a minimum deductible level of $1,700 for an individual and $3,450 for families. HSA qualified HDHP deductibles are updated each year. 

HSAs are available to any eligible individual with an HDHP regardless of whether they are currently working, self-employed or employed by a small or large company. 

The employee and the employer will fund the account, and account funds cannot pay for insurance premiums. Annual contributions may not exceed more than 65% of the health plan deductible for individuals and 75% for families. Contribution levels readjust each year, and eligible individuals and families may contribute up to 100% of the allowable contribution. Also, HSAs allow for catch-up contributions for qualified individuals age 55 to 65 years old.

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Concurrent Causation

What is ‘Concurrent Causation’

Concurrent causation is a method of handling losses or damages which occur from more than one cause. The roots of concurrent causation are from legal rulings and opinions, which form a body of precedent and becomes useful when parties in a dispute require the decision of a court. In insurance, concurrent causation happens when a property experiences a loss from two separate causes when one has policy coverage, and the other does not. Depending on the specific situations, the type of policy in effect, and the state court in which disagreements will be heard, the damages from both causes are likely to be covered.

Concurrent causation may also be a factor in liability insurance policies. 

BREAKING DOWN ‘Concurrent Causation’

With a concurrent causation loss, the events which cause the loss may happen one after the other or be simultaneous events. Today, most policies will include anti-concurrent causation (ACC) provision. 

A concurrent causation example is when a tropical storm hits a commercial warehouse. Strong winds cause damage to structures while the heavy rain causes flooding. The door leading into the warehouse lobby is blown open by high winds. Flood waters further damaged the floor of the front lobby.  It is impossible to separate the damage caused by the flood from the damage caused by wind. The building has a commercial property policy which covers damage from wind but excludes damage from floodwaters. Under concurrent causation, coverage benefits will be due to the policyholder.

Concurrent causation legal precedents resulted from California lower court decisions in the 1980s. These courts ruled that claims for damages from concurrent events were valid. The judgment said if a covered hazard added to the losses from an excluded risk, the entire loss is claimable by the policyholder. As an example, an earthquake causes a split in the foundation of a home, and a fire begins from a candle which fell onto the floor during the shaking. The property has a policy covering fire damage but excludes damage from an earthquake. According to the court’s ruling, the entire claim is valid. 

Insurance Policies Adapt to Concurrent Causation

Insurance providers disagreed with this view, claiming the ruling increased their liability and cost. Also, they argued, the decision ignored the existing exclusion clauses. In response, the Insurance Services Office (ISO) and commercial insurers revised the wording in homeowners and commercial property policies adding anti-concurrent causation.

The added anti-concurrent causation wording would exclude damages from listed perils even if a second, covered peril contributed to the damages. Also, the exclusion applies whether the two hazards happen at the same time or one occurred in sequence. 

Many commercial property policies apply anti-concurrent causation language to specific exclusions including law and ordinance, earth movement, government action, nuclear hazard, utility services, water, and flood or fungus and mold.

Not all state courts will apply concurrent causation. Instead, they determine which peril was the proximate or predominant cause of a loss. Returning to our warehouse example, if the court decides the proximate cause was the wind, then the damage should be covered. 

The doctrine of concurrent causation applies primarily to an all-risk policy, which covers a broader scope of perils than a named perils policy. Named perils policy covers losses from only those perils listed in the policy. However, a named perils policy may still contain wording for anti-concurrent causation.

Concurrent Causation and Liability Insurance

Liability insurance protects against claims resulting from injuries and damage to people and property and pays legal costs and adjudged payouts for events where the policyholder is found legally liable. Some complaints may have two or more actions by the policyholder, which, by themselves, make them liable. Even if the insurance policy does not include coverage for all of the policyholder’s actions the insurance provider must still defend the entire claim.

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Investors Remain Cautious as China Talks Resume

Stocks moved higher last week after China’s Commerce Ministry announced that it accepted an invitation from the United States to resume trade talks. China’s Commerce Vice Minister Wang Shouwen will meet with U.S. Treasury Department Undersecretary for Internal Affairs Davis Malpass. The meeting will be the first high-level meeting since late June.

While the market reacted positively to the news, many analysts believe that a breakthrough is unlikely given the growing divide over the trade imbalance and the realization that the confrontation has become more political than economic. The United States is expected to impose another $16 billion of tariffs on Chinese goods this week, and China has indicated that it will retaliate.

The good news is that corporate earnings have remained very strong. According to FactSet’s Earnings Insight, nearly 80% of S&P 500 companies reported a positive EPS surprise, and more than 70% reported a positive sales surprise. Blended earnings growth rates reached 24.6% for the quarter, which is the second highest pace since the third quarter of 2010. (For more, see: Stock Market Nears Longest Bull Run in History.)

Unfortunately, most S&P 500 companies (55) have issued negative EPS guidance versus positive EPS guidance (19). The 12-month forward P/E ratio of 16.6x is also higher than the five-year average of 16.2x and the 10-year average of 14.4x. These indicators suggest that stocks could see a bit of a correction, especially given the risk of an escalating trade war.

Next week, traders will be closely watching several key economic indicators, including the FOMC minutes on Aug. 22, jobless claims and new home sales on Aug. 23, and Fed Chairman Jerome Powell’s comments on Aug. 24. China’s response to potential U.S. tariffs on Aug. 23 will also be closely watched by the market given the potential for further trade disruption.

Broad Market Remains Range Bound

Technical chart showing the performance of the SPDR S&P 500 ETF (SPY)

The SPDR S&P 500 ETF (SPY) moved higher last week within a price channel that has been in place since early April. Traders should watch for a move higher to retest upper trendline and R1 resistance at $287.39 or a move lower to retest pivot point and 50-day moving average support at $278.77. Looking at technical indicators, the relative strength index (RSI) appears relatively neutral with a reading of 59.89, but the moving average convergence divergence (MACD) could see a near-term bullish crossover. (See also: Goldman Sachs Sees S&P 500 at 2,850 at Year’s End.)

Industrials Recover from Breakdown

Technical chart showing the performance of the SPDR Dow Jones Industrial Average ETF (DIA)

The SPDR Dow Jones Industrial Average ETF (DIA) rebounded from its pivot point and 50-day moving average at $249.43 last week to retest its reaction highs. Traders should watch for a breakout from trendline resistance to R1 resistance at $259.25 or a breakdown from these levels to retest the pivot point and 50-day moving average levels at $249.43. Looking at technical indicators, the RSI appears a bit lofty at 62.79, but the MACD could see a near-term bullish crossover.

Tech Stocks Approach Key Support

Technical chart showing the performance of the Invesco QQQ Trust (QQQ)

The Invesco QQQ Trust (QQQ) moved lower last week toward key trendline and 50-day moving average support levels at $177.33. Traders should watch for a breakdown from these levels toward S1 support at $169.77 on the downside or a rebound to retest R1 resistance at $183.03. Looking at technical indicators, the RSI appears neutral at 52.81, while the MACD has been trending sideways throughout most of the month. (See also: Why Alibaba, Tencent, Baidu Can Rise 20%.)

Small Caps Approach Key Decision Point

Technical chart showing the performance of the

The iShares Russell 2000 ETF (IWM) shares moved slightly higher last week but remained within a tight trading range inside of an ascending triangle chart pattern. Traders should watch for a breakout from upper trendline and R1 resistance at $169.86 or a breakdown from lower trendline, 50-day moving average and pivot point support at around $166.00. Looking at technical indicators, the RSI appears neutral at 55.06, but the MACD continues to trade sideways.

Charts courtesy of StockCharts.com. The author holds no position in the stock(s) mentioned except through passively managed index funds.

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Any-Occupation Policy

What is an ‘Any-Occupation Policy’

An any-occupation policy is a type of disability insurance which categorizes the kind of work for coverage purposes. Any-occupations coverage provides for when the insured is unable to work in a job that is reasonably suitable for them based on their education, experience, and age. 

An any-occupation policy terminology, as used in disability insurance policies, identify the conditions under which a policyholder receives benefits. 

BREAKING DOWN ‘Any-Occupation Policy’

The any-occupation terms in policy specify the type or nature of work that a policyholder is able to perform. If they are capable of still working, even if it is at a lower-paying job, an any-occupation policy would not pay benefits. In contrast, the own-occupation policy is one that would consider the policyholder disabled if they are unable to perform the same job as they did before an accident or injury.

For example, under an any-occupation policy, a surgeon who injured their hands would not receive benefits if they could still work as a doctor in the medical field, but not as a surgeon. Under the own-occupation, they would continue to receive benefits until they could return to practicing surgery again. However, if their disability prevents the policyholder from performing any-occupation for which they are reasonably qualified, they would qualify for benefits. Returning to the example of the surgeon, if they could not function in a hospital setting without specialized equipment or assistance the benefits will continue.

Employer-provided disability insurance may only be available as an any-occupation policy. Employees may purchase a supplemental disability policy for additional protection.

Own-occupation coverage is for the insured’s specific occupation with no other stipulations. If they are unable to perform the material and substantial duties of their pre-injury occupation, the benefit is paid, regardless of whether they choose to work elsewhere. For example, if the pre-disability surgeon found a new profession as a marketing director for a software company, they would still receive the full benefit. If the insured meets the definition of totally disabled and becomes employed in a new occupation, their total disability benefit will not be affected or lessened by any income from the new profession, regardless of the amount.

Additional Any-Occupation and Own-Occupation Hybrid Policies

Transitional own-occupation coverage is own-occupation with an adjusted benefit. If the insured chooses to work in any other occupation, the earnings from the new profession might reduce the benefit amount. If the surgeon’s full benefit amount was $8,000 each month and their new marketing position paid $6,000, the benefit could decrease to $2,000.

Some insurers offer a bonus-hybrid version of disability insurance. At the beginning of receiving benefits, the own-occupation definition guides payments. After a defined period of months or years, the coverages changes to a stricter definition of occupation. For example, it may only continue to pay the benefit if the insured remains unable to work at a profession for which they are qualified and does not work at any other occupation.

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Typical Debt/Equity Ratios for the Real Estate Sector

The real estate sector comprises different groups of companies that own, develop and operate properties, such as residential land, buildings, industrial property and offices. Since real estate companies usually buy out the entire property, such transactions require large upfront investments, which are quite often funded with a large quantity of debt.

One metric that investors pay attention to is the degree of leverage the real estate company has, which is measured by the debt-to-equity (D/E) ratio.

Debt/Equity Ratios in the Real Estate Sector

The D/E ratio for companies in the real estate sector on average is approximately 352. Real estate investment trusts (REITs) come in a little higher at around 366, while real estate management companies have an average D/E at a lower 164.

Real estate companies represent one of the most attractive investment options due to their stable revenue stream and high dividend yields. Many real estate companies are incorporated as REITs to take advantage of their special tax status. A company with REIT incorporation is allowed to deduct its dividends from taxable income.

Real estate companies are usually highly-leveraged due to large buyout transactions. A higher D/E ratio indicates a higher default risk for the real estate company.

How to Evaluate the Debt/Equity Ratio

The D/E ratio is a metric used to determine the degree of a company’s financial leverage. The formula to calculate this ratio divides a company’s total liabilities by the amount of equity provided by stockholders. This metric reveals the respective amounts of debt and equity a company utilizes to finance its operations.

When a company’s D/E ratio is high, it suggests the company has taken an aggressive growth financing approach with its debt. One issue with this approach is additional interest expenses can often cause volatility in earnings reports. If earnings generated are greater than the cost of interest, shareholders benefit. However, if the cost of debt financing outweighs the return generated by the additional capital, the financial load could be too heavy for the company to bear.

D/E ratios should be considered in comparison to similar companies within the same industry.

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Garage Liability Insurance

What is ‘Garage Liability Insurance’

Garage liability insurance is specialty insurance targeted to the automotive industry.  Automobile dealerships, parking lots or parking garages operators, tow-truck operators, service stations, and customization and repair shops will add garage liability insurance to their business liability coverage. The policy protects property damage and bodily injury resulting from operations.

This insurance is not the same thing as garage-keepers coverage.

BREAKING DOWN ‘Garage Liability Insurance’

​​​​​​​Garage liability insurance is a type of umbrella policy which provides coverage for the day-to-day operations of the businesses in the automotive industry. This insurance will add a layer of protection to the business’ general liability policy. Coverage includes bodily injury and property damage from direct garage operations, not covered under most commercial or business liability insurance. 

Before buying a policy, the business owner should verify that the garage liability coverage will add to, and not merely replace, their basic business liability coverage.

Coverage will include injuries to customers while on the business grounds up to the chosen limits of the policy. Also, most garage insurance will consist of an employee dishonesty provision for theft or vandalism done by an employee of a customer’s car. For an added premium, any autos used in the conducting of business, such as courtesy vans and parts delivery trucks, may be added. Additional protections can include damages from parts or products sold by the company and coverage for loss from faulty parts installed on a client’s vehicle. 

Garage liability insurance will not cover the tools, building, personal or business property of the policyholder. It does not provide coverage for vandalism, stolen vehicles, or damage from events such as hail. The policy does not cover accidents or damage to the customer’s cars on site for service. Also, all policy basic and additional items will have a listed maximum liability coverage amount and may have aggregate limits by claim or by year. 

Commercial general liability (CGL) insurance policies have varying levels of coverage. This insurance may include coverage for the premises, which protects the business from claims on location during regular business operations. It may also include coverage for bodily injury and property damage resulting from finished products.

Garage Liability is Not Garage-Keeper Coverage

Garage-keepers insurance is a separate policy which covers the property damage to a client’s car while it is in the care of the policyholder. This can include damage during road test drives and while storing the vehicle during non-working hours. The keeper’s insurance will cover vandalism and theft of a customer’s car. Business with multiple locations require policies for each site. 

Other Business Insurance Products

Businesses may purchase coverage for other business risks as well.

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Pipeline Theory

DEFINITION of ‘Pipeline Theory’

Pipeline theory is the idea that an investment firm that passes all returns on to clients should not be taxed like regular companies. Pipeline theory includes capital gains, interest and dividends as returns that should be considered. Also referred to as “conduit theory.”

BREAKING DOWN ‘Pipeline Theory’

Most mutual funds qualify as a regulated investment company, which gives them pipeline status and requires them to be exempt from taxes at the corporate level

According to pipeline theory, the investment firm passes income directly to the investors, who are then taxed as individuals. This means that investors are already taxed once on the income. Taxing the investment company is addition would be akin to taxing the same income twice.

The theory is based on the idea that companies passing all capital gains, interest and dividends to their shareholders are considered conduits, or pipelines. Rather than actually producing goods and services in the way that regular corporations do, these companies serve as investment conduits, passing through distributions to the shareholders and holding their investments in a managed fund.

When distributions to shareholders are made, the firm passes untaxed income directly to the investors. Taxes are only paid by the investors who incur income tax on the distributions. Conduit theory suggests that investors in these types of firms should only be taxed once on the same income, unlike in regular companies. Regular companies will see double taxation on both the income of the company and then income on any distributions paid to shareholders, which is an issue of considerable debate.

Pipeline Companies

Most mutual funds are pipelines that qualify for tax exemption as regulated investment companies. Other types of companies that may also be considered conduits include limited partnerships, limited liability companies and S-corporations. These companies are exempt from income taxes.

Real estate investment trusts (REITs) also have special provisions that allow them to be taxed as partial pipelines. In most cases, real estate investment trusts are allowed to deduct the dividends they pay to shareholders, reducing their taxes paid through the deduction.

Pipeline Mutual Funds

Mutual funds register as regulated investment companies in order to benefit from tax exemptions. This is an important aspect of consideration for all managed funds that pass through income and dividends to their shareholders. Fund accountants serve as the primary managers of fund tax expenses. Regulated investment companies that are exempt from taxes have the benefit of lower annual operating expenses for their investors. Funds will include details on their tax-exempt status in their mutual fund reporting documents.

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Focus List

DEFINITION of ‘Focus List’

A focus list is a list of recommended stocks published by an investment firm’s research department. Focus lists generally consist of a small number of stocks that the firm believes are the most attractive opportunities at the time.

BREAKING DOWN ‘Focus List’

A focus list is a virtual portfolio that research departments use to battle it out against other firms for bragging rights in stock picking. Analysts’ recommendations are the fountainhead of equity research reports and should be used in tangent with proprietary research and investment methodologies in order to make investment decisions.

How Analyst Recommendations Work

Analyst stock recommendations are determined by taking an average of all analyst recommendations and classifying them as Strong Buy, Buy, Hold, Underperform or Sell. In order to reach an opinion and communicate the value and volatility of a covered security, analysts research public financial statements, listen in on conference calls and talk to managers and the customers of a company, typically in an attempt to come up with findings for a research report. The definitions of the analyst ratings vary from firm to firm, but largely adhere to the following criteria:

  • Buy: Also known as strong buy and “on the recommended list.” Needless to say, buy is a recommendation to purchase a specific security.
  • Sell: Also known as strong sell, it’s a recommendation to sell a security or to liquidate an asset.
  • Hold: In general terms, a company with a hold recommendation is expected to perform at the same pace as comparable companies or in line with the market.
  • Underperform: A recommendation that means a stock is expected to do slightly worse than the overall stock market return. Underperform can also be expressed as “moderate sell,” “weak hold” and “underweight.”
  • Outperform: Also known as “moderate buy,” “accumulate” and “overweight.” Outperform is an analyst recommendation meaning a stock is expected to do slightly better than the market return.

Example of a Focus List

Charles Schwab clients can find stocks with extensive screening tools, stock lists and guidance from Schwab and six independent research firms. All Schwab clients can access Schwab Equity Ratings, their proprietary method for identifying stocks they believe will outperform or underperform the market over the next 12 months.

A focus list made public by Credit Suisse in 2017 recommended the following stocks:

  • Apple
  • Affiliated Managers Group
  • Blackstone
  • Celgene
  • Facebook
  • Twenty-First Century Fox
  • Hormel Foods
  • JPMorgan Chase
  • KLA-Tencor
  • Pioneer Natural Resources
  • Walgreens Boots Alliance
  • Whole Foods Market
  • Zoetis
  • Johnson Controls

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Fund Overlap

DEFINITION of ‘Fund Overlap’

Fund overlap is a situation where an investor invests in several mutual funds with overlapping positions. Fund overlap can be caused by owning several mutual funds or exchange-traded funds (ETFs). Fund overlap reduces the benefits of diversification for the investor.

BREAKING DOWN ‘Fund Overlap’

While small amounts of overlap are to be expected, extreme cases of fund overlap can expose an investor to unexpectedly high levels of company or sector risk, which can distort portfolio returns when compared with a relevant benchmark.

It can be very difficult for a retail investor to keep track of individual fund holdings, but a quarterly or annual check can help investors understand the strategy of each individual fund and provide an opportunity to compare top holdings from one fund with another.

If, for example, two separate mutual funds both have overweighted the same stock, it might be worth replacing one of the funds with a similar fund that does not carry that stock as a top holding. If a specific sector is overweighted in two funds (such as an overweight position in technology relative to the S&P 500), the investor will need to weigh the benefits and risks of this increased exposure.

Overweighting Sectors

Overweight is a situation where an investment portfolio holds an excess amount of a particular security when compared to the security’s weight in the underlying benchmark portfolio. Actively managed portfolios will make a security overweight when doing so allows the portfolio to achieve excess returns. Overweight can also refer to an investment analyst’s opinion that the security will outperform its industry, its sector or the entire market.

Securities will usually be overweight when a portfolio manager believes that the security will outperform other securities in the portfolio. An example of having a security being overweight in an investment portfolio would be when a portfolio normally holds a security at a weight of 15%, but the security’s weight is raised to 25% in an attempt to increase the return of the portfolio. Another reason for overweighting a security in a portfolio is to hedge or reduce the risk from another overweight position.

The alternative weighting recommendations are equal weight or underweight; equal weight implies that the security is expected to perform in line with the index, while underweight implies that the security is expected to lag the index in question.

Fund Overlap and Diversification

Fund managers and investors often diversify their investments across asset classes and determine what percentages of the portfolio to allocate to each. These can include stocks and bonds, real estate, ETFs, commodities, short-term investments and other classes. They will then diversify among investments within the asset classes, such as by selecting stocks from various sectors that tend to have low return correlation, or by choosing stocks with different market capitalizations. In the case of bonds, investors select from investment-grade corporate bonds, U.S. Treasuries, state and municipal bonds, high-yield bonds and others.

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Mutual-Fund Advisory Program

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DEFINITION of ‘Mutual-Fund Advisory Program’

A mutual fund advisory program is a portfolio of mutual funds that are selected to match a pre-set asset allocation. The pre-set asset allocation model is based on the investor’s objectives and offered in a single investment account together with the services of a professional investment adviser. Typically, investors will not be charged separate transaction fees, but periodic (i.e., monthly/quarterly/yearly) asset-management fees based on the average value of assets held within the account. Also known as a “mutual fund wrap.”

BREAKING DOWN ‘Mutual-Fund Advisory Program’

Unlike managed accounts, where the financial adviser has full discretion over any investment decisions, mutual-fund advisory programs allow the investor to work with the adviser in developing the optimal asset-allocation strategy. The adviser will help determine which model is best based on various factors such as the investor’s goals, risk tolerance, time horizon and income, while providing ongoing guidance and investment support.

Benefits of Mutual-Fund Advisory Programs

Investors in mutual-fund advisory programs can benefit from lower trading costs and a professionally advised portfolio based on their personalized investing interests. The annual wrap fee is usually tiered based on assets in the program. It can range from approximately 0.25% to 3%, depending on the program, and is in addition to the annual operating fees charged by the funds in the portfolio.

Robo-Advisers

Mutual-fund advisory programs can be a good investment option for investors. However, the increasing presence of robo-advisers has created competition for these programs. As a result, many full-service brokerage firms have begun to offer robo-adviser alternatives for their customers. Schwab’s Intelligent Portfolios are one example.

Robo-adviser platforms typically provide the same investment profiling and portfolio building services. They offer some additional benefits in that the service is automated, fees can be lower and investment minimums are usually lower. With the lower minimum investments, robo advice wrap programs can be offered to investors seeking to build a managed portfolio with only $5,000. Currently most robo advice wrap programs use exchange-traded funds (ETFs) rather than mutual funds.

Example of a Mutual Fund Advisory Program

UBS offers PACE (Personalized Asset Consulting and Evaluation), a fee-based, nondiscretionary mutual fund advisory program utilizing a disciplined approach to selecting and building a diversified portfolio of mutual funds. Here’s how PACE works:

  • A financial adviser creates an investor profile that contains information about your investing goals, time frames and comfort level with risk.
  • You and your financial adviser select from a list of mutual funds
  • You may choose PACE Multi Adviser (a broad range of no-load or load-waived mutual funds at net asset value) or PACE Select Advisers (a refined list of leading no-load funds brought to you by UBS Global Asset Management)
  • Your mutual funds will be continually monitored by UBS research professionals
  • You’ll receive monthly statements

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What Forex Strategies Use Fibonacci Retracements?

A:

Forex traders use Fibonacci retracements to pinpoint where to place orders for market entry, taking profits and stop-loss orders. Fibonacci levels are commonly used in forex trading to identify and trade off of support and resistance levels. After a significant price movement up or down, the new support and resistance levels are often at or near these trend lines.

What Are Fibonnacci Retracements?

Fibonacci retracements identify key levels of support and resistance. Fibonacci levels are commonly calculated after a market has made a large move either up or down and seems to have flattened out at a certain price level.

Traders plot the key Fibonacci retracement levels of 38.2 percent, 50 percent and 61.8 percent by drawing horizontal lines across a chart at those price levels to identify areas where the market may retrace to before resuming the overall trend formed by the initial large price move. The Fibonacci levels are considered especially important when a market has approached or reached a major price support or resistance level.

The 50 percent level is not actually part of the Fibonacci number sequence, but is included due to the widespread experience in trading of a market retracing about half a major move before resuming and continuing its trend.

Forex Strategies by Traders Using Fibonacci Levels

  • Buying near the 38.2 percent retracement level with a stop-loss order placed a little below the 50 percent level.
  • Buying near the 50 percent level with a stop-loss order placed a little below the 61.8 percent level.
  • When entering a sell position near the top of the large move, using the Fibonacci retracement levels as profit taking targets.
  • If the market retraces close to one of the Fibonacci levels and then resumes its prior move, using the higher Fibonacci levels of 161.8 percent and 261.8 percent to identify possible future support and resistance levels if the market moves beyond the high/low that was reached prior to the retracement.

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VTIVX: Overview of Vanguard Target Retirement 2045 Fund

The Vanguard Target Retirement 2045 Fund (“VTIVX”) is one of The Vanguard Group’s well-known series of life-cycle funds, also known as target-date funds. Each of these funds targets a specific segment of the mutual fund investor market based on retirement windows.

This fund should grow with the typical investor’s need to start with an equity focus and shift toward a more balanced approach when the investor reaches retirement age.

Company Overview

Vanguard is the premier name in low-cost passively managed mutual funds and exchange-traded funds (ETFs). Its passive S&P 500-tracking mutual fund, introduced in 1976, revolutionized the way investment companies approach pooled products. Still relying on the guiding principles established by founder John Bogle, the company remains one of the more unique and trusted names in finance.

As of August 2018, Vanguard was the second-largest asset manager in the United States, after BlackRock, with more than $5.1 trillion in total assets under management (AUM). Structurally, the company is an odd private/public hybrid. As a privately held company, investors cannot directly purchase shares of The Vanguard Group. Instead, shareholders of its mutual funds are the actual owners of the company. Therefore, an investment in a Vanguard fund doubles as a direct investment in the larger company.

Investment Management Team

Chief Investment Officer and Managing Director Gregory Davis is in charge of Vanguard’s equity, quantitative equity and fixed income groups. Davis joined the company in 1999 after working at Merrill Lynch as an associate in global debt markets. He earned a B.S. in insurance from The Pennsylvania State University and an M.B.A. in finance from The Wharton School of the University of Pennsylvania. All Vanguard target-date funds are additionally managed by the Vanguard Equity Investment Group.

Fund Overview

Vanguard’s Target Retirement 2045 Fund is suitable for investors who plan to retire between 2043 and 2047. The company explicitly markets it to anyone who plans to retire between 2043 and 2047. The fund is large and cheap, with $23.7 billion in AUM and an expense ratio of 0.15%. Under Morningstar’s style boxes, it ranks as a large blend with high credit quality and moderate interest rate sensitivity.

Vanguard touts the fund’s “sophisticated portfolio construction methodologies and efficient trading strategies,” although the fund really just tracks near a few well-known benchmarks. Its primary benchmark is the Target Retirement 2045 Composite Index, but it also closely tracks the Dow Jones US. Total Stock Market Index.

Investment Philosophy

Vanguard’s philosophy is centered on low costs. All of its mutual funds are no-load and carry no 12b-1 fees, regardless of their portfolio or target investor base. No commissions are paid out to brokers, financial advisors or other Vanguard intermediaries. The company advertises its dedication to lower fees as the only reliable way to control returns for shareholders.

Target-date funds are a major portion of Vanguard’s product pool. The concept is simple: over the long term, equities outperform bond funds. However, short-run volatility tends to favor bonds. A target-date fund adjusts to these conflicting realities by starting with a lopsided equity exposure and slowly trimming equities in favor of bonds as the fund approaches its set target date.

Portfolio and Selection Process

Vanguard’s 2045 Retirement Fund is a fund of funds, meaning its portfolio is comprised of the shares of four other Vanguard index funds. As of August 2018, it consisted of approximately 90% stocks and 10% bonds, with a smattering of assets in cash or other instruments. Approximately 54% of its equity holdings were domestic and the rest were foreign. Most foreign stocks come from developed countries such as Japan, the United Kingdom, France, Germany and Canada.

Like all Vanguard target-date mutual funds, the Target Retirement 2045 Fund evolves and molds along a glide path, which is an illustration of the gradual shift from equities to bonds as the fund approaches de facto maturity. With 27 years remaining between 2018 and 2045, the Vanguard Target Retirement 2045 has a long enough window to remain equity focused. By 2040, just five years until its target, the bond portion of the portfolio will climb past 40% of total assets.

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Best Stock Broker for Day Trading

When choosing an online broker, day traders place a premium on speed, reliability, and low cost. Features designed to appeal to long-term infrequent traders are unnecessary for day traders, who generally start a trading day with no positions in their portfolios, make a lot of transactions, and end the day having closed all of those trades.

Day traders may place their trades manually, often from a chart, or set up an automated system that generates orders on their behalf.  Fundamental data is not a concern, but the ability to monitor price volatility, liquidity, trading volume, and breaking news is key. 

Day traders often prefer brokers who charge per share (rather than per trade).  They also need real-time margin and buying power updates.  All the brokers ranked here give their day-trading customers the ability to enter orders very quickly by customizing the size of trades and turning off the trade confirmation screen.  We sought brokers who let traders place multiple orders simultaneously, designate which trading venue will handle the order, and customize trading defaults.

This ranking focuses on online brokers and does not consider proprietary trading shops. 

Investopedia’s Top Brokers for Day Traders

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  • Commission: Flat fee of $5 per trade, or per-share pricing at $0.01/share
  • Account Minimum: $500, or $5,000 for IRA
  • Best for Trade Automation

Open Account

The longtime leader in low-cost trading, Interactive Brokers is geared for very active traders.  Though they have been adding features for less frequent traders over the last few years, their priority is keeping fees down.  The speedy downloadable platform, Trader Workstation (TWS), includes dozens of professional-grade trading algorithms, such as the Adaptive Algo, which finds better prices for filling orders.  You can customize the algorithm to fill your market order at the midpoint between bid and ask, thereby seeking opportunities within the spread to chisel a fraction of a penny more for your profits.

IB’s margin rates are about the lowest you will find, especially for traders who use more than $100,000 of margin.  You can automate a trading strategy using an API plug-in, or by subscribing to a strategy on their Investors’ Marketplace.

✓  Pros

 

❌  Cons

•  Very low fees.   •  The learning curve to become proficient using TWS is relatively steeps.
•  Extremely customizable platform, with watchlists that can display over 450 columns.   •  Accounts with less than $100,000 in assets are subject to monthly inactivity fees, should the frequent trader choose to take a break.
•  More than 120 technical indicators available for charting.   •  Several other brokers offer deeper technical analysis toolsets.
•  Terrific market scanner to stay on top of current conditions.   •  Streaming real-time quotes are restricted to one device at a time
•  Algorithmic trading with automated trading capabilities available via API. Paper trading capability lets you test strategies without risking money: a great way to familiarize yourself with the algorithm.    
     

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  • Commission: Flat fee of $5 per trade, or per-share pricing at $0.01/share
  • Account Minimum: $500, or $5,000 for IRA
  • Best for Trade Automation

Open Account

TradeStation’s downloadable trading platform is packed with features for frequent traders.  The platform originated as a technical analysis and charting package which evolved into a brokerage in 2001.  You can route your orders yourself, selecting a trading venue, or use TradeStation’s smart order routing engine.  One of the strengths of this broker is the ability to build, backtest, and deploy an automated trading strategy based on technical triggers.  The streaming real-time data is clean, so your strategies don’t send trades to market based on an erroneous feed.

✓  Pros

 

❌  Cons

•  Excellent charting and technical analysis capabilities.   •  No forex trading.
•  A massive collection of historical data for building a trading model, then backtesting and tweaking for additional profitability.   •  Cannot develop trading systems on mobile or web.
•  Portfolio Maestro feature shows which strategies are successful and which need improvement.   •  The language used to develop trading systems is difficult to learn.
•  Flexible and customizable real-time market scanners.    
•  Web-based and mobile access synched to the desktop platform with extensive charting capabilities.    
•  TradingApp Store features in-house and third-party tools, many of which are free, to add to your platform.    
     

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  • Commission: $1.00-$1.50 minimum depending on platform
  • Account Minimum: $10,000 for Web Trader, $25,000 for Lightspeed Trader
  • Best for Platform Stability

Open Account

Lightspeed Trader, the downloadable platform for day traders, is exceptionally stable, and had no issues weathering the many trading surges of the last year.  It’s customizable and includes streaming real-time quotes on all of the assets you can trade. The charts display and update rapidly and let you apply technical studies and Level II quotes, among other powerful features. Lightspeed Trader is highly secure. The login process includes a virtual private network (VPN), especially crucial for those with wireless Internet connections. A soft token is offered for those who use the web platform. Customers can set up complex order entry defaults that can be invoked with hot keys to expedite orders.

✓  Pros

 

❌  Cons

•  Very fast data feeds with flexible order routing.   •  No mutual funds or forex available.
•  Excellent support.   •  Low balance accounts must generate a minimum of $25/month in commissions, or pay an inactivity fee.
•  Livevol X, a free platform available to Lightspeed customers, has terrific options analysis tools.   •  Futures trading available only on the RealTick Pro platform, which costs $325/month.
     

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  • Commission: $6.95. High velocity traders can negotiate lower rates
  • Account Minimum: $0
  • Best for Customizable Charting

Open Account

The thinkorswim platform from TD Ameritrade provides customers with dazzling charting tools that can be customized to your heart’s content.  Streaming real-time quotes power the intra-day charts, and you can send orders from a chart with a mouse click.  If you’re following multiple stocks, you can tile charts on your monitor. If you want to automate a trading strategy, the thinkScript language allows you to use one of 300 built-in strategies, or set up your own from the hundreds of technical indicators included in the platform.  The trading simulator, paperMoney, lets you work out your strategies without risking money. 

✓  Pros

 

❌  Cons

•  Strong customizable charting package.   •  Standard commissions are very high for day traders, but frequent traders can negotiate their own fees.
•  Streaming real-time quotes can be utilized on multiple devices simultaneously.   •  The standard margin rates are also very high.
•  The Fast Beta study, which overweighs more recent prices, is useful for analyzing stocks with increasing volatility.   •  Smaller than average “Easy to Borrow” list for short sellers.
•  A variety of scanners help you filter stocks, options, futures, and forex for trading opportunities.    
•  You can set up defaults for order entry to speed sending an order to market.    
     

  • Commission: $5 to open a stock/ETF position, $0 to close
  • Account Minimum: $0
  • Best for Frequent Options Trading

Open Account

Tastyworks is a fast, reliable platform focused on options analysis and trading, but there are also plenty of tools for stock/ETF traders.  The dashboard layout is easily customizable. Unlike other brokers, the browser platform has almost every feature as the downloadable one.  This is key for people who aren’t always at their home base.  Even the mobile apps are power-packed. The tools are oriented to people who visualize their trades rather than looking at a flow of time and sales data.  They focus on liquidity, volatility, and the probability of a profit.  On quote pages, implied volatility appears before a quote in order to help customers understand market opportunity.

✓  Pros

 

❌  Cons

•  Innovative pricing structure results in fairly low costs, especially when trading options.   •  Commissions are fixed. There’s no negotiating for more active trader.
•  The platform is new (launched 2017) and built on the latest technology, so it’s fast and stable.   •  Margin fees are higher than average for frequent traders, but can be negotiated.
•  Scanners help you find securities that are becoming more volatile.   •  Cannot place multiple orders simultaneously, or stage orders for later entry.
•  Watchlists are sortable by up to 50 data points.    
•  Quotes are not throttled, so they load quickly.    
     

About Our Methodology

At Investopedia, we started from scratch to build a better brokerage recommendation tool and objective reviews of self-directed brokerages. Our mission is to provide an unbiased and accurate analysis – so you can make smarter investing decisions.

We want to help find you the best online stock broker so we examined over 100 variables, from pricing and fees to trading platforms to special features. No single online broker was the best in every category, so you should review the complete list to identify the firm that best matches your priorities.

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Stewardship Grade

DEFINITION of ‘Stewardship Grade’

Stewardship grade is an evaluative data point in Morningstar‘s fund and stock reports. Stewardship grade assesses the quality of a company’s governance practices. Stewardship grades for both funds and stocks range from A (excellent) to F (very poor) based on criteria that measures the effectiveness of fund and corporate managers to consistently act with their shareholders’ best interests in mind.

BREAKING DOWN ‘Stewardship Grade’

Morningstar initiated its stewardship grades for both the funds and stocks covered by its investment research services in 2004 in response to the mutual fund and corporate scandals at that time. Morningstar sees a high level of managerial stewardship as an important investment quality for investors to seek out in their selection of funds and stocks.

Morningstar Stewardship Grade Criteria

Morningstar’s stewardship grade for funds goes beyond the usual analysis of strategy, risk and return. The stewardship grade allows investors and advisers to assess funds based on factors that they believe influence the following:

  • The manner in which funds are run
  • The degree to which the management company’s and fund board’s interests are aligned with fund shareholders
  • The degree to which shareholders can expect their interests to be protected from potentially conflicting interests of the management company.

Funds are graded on an absolute basis. There is no “curve.”

Morningstar analysts’ evaluation of five factors determine the grade for each fund:

Morningstar’s stewardship grade for funds is entirely different from the Morningstar Rating for funds, commonly known as the Star Rating. There is no relationship between the two.

For stocks, three broad areas are examined: transparency in financial reporting, shareholder friendliness, and incentives, ownership and overall stewardship.

The stewardship grade tries to capture some of the intangibles associated with making an investment decision. While the grades are not intended to serve as buy/sell signals in isolation, when combined with other Morningstar analyst commentary—such as an assessment of a fund’s strategy and management—they can help determine the difference between a good investment and one to avoid. The grades are primarily based on information compiled from public filings and the expertise of Morningstar’s fund analysts.

Corporate Governance

Corporate governance is the system of rules, practices and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community.

Bad corporate governance can cast doubt on a company’s reliability, integrity or obligation to shareholders — which can have implications on the firm’s financial health.

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Best for Roth IRA or Standard IRA 2018

Your online broker lets you open a variety of accounts, but for those taking advantage of the tax benefits of an Individual Retirement Account (IRA), a few other features come in handy.  A standard or traditional IRA shares many characteristics with a Roth IRA; the main difference is when you can take the tax benefits. With a traditional IRA, many investors can make their contributions tax-free: there are restrictions based on income and whether you are eligible for an employer’s pension plan. With a Roth IRA, your withdrawals during retirement are not taxed. For both types of IRAs, any income you generate during your years of contributing is not taxed.  You can convert a traditional IRA to a Roth IRA at any point, but you cannot convert back.

Once you reach the age 70 ½, you are required to withdraw money from your IRA. The amount you must withdraw every year, called the RMD (required minimum distribution) depends on your age and the balance in the account.  It’s important that your broker keep you informed of your withdrawals, as there are significant tax consequences for those who do not take their RMD. 

The winners in this category have excellent retirement planning tools as well as reporting. We looked for help determining how much to save for retirement as well as clear reports. We also made sure these brokers do not apply an annual fee for managing your IRA, so you can keep that money growing for your retirement. 

Investopedia’s Top Brokers for Roth or Standard IRA

TD Ameritrade customers can analyze the holdings in their retirement plans, via the company’s partnership with financial consultant FeeX, and are encouraged to get rid of expensive mutual funds and ETFs in favor of lower-cost ETFs in order to generate higher returns. You can go it alone and make your own investing decisions, or partner with one of TD Ameritrade’s financial planners, to set goals and track your progress. TD Ameritrade’s retirement calculator is available to the general public, so non-customers can check out the planning tools before opening an account.

✓  Pros

 

❌  Cons

•  Extensive educational resources.   •  Commissions are slightly higher than most other brokers.
•  Wide availability of commission-free ETFs.   •  Platform has suffered some outages during high trading volume days.
•  A variety of annuities available at relatively low cost.   •  Tools are spread out over several websites, downloadable platforms, and mobile apps, and you may have trouble finding your favorites.
•  Numerous tools for fixed-income investing, including over 40,000 bonds and more than 400 bond ETFs, of which approximately 300 can be traded commission free.    
•  Income Estimator tool shows interest and dividends coming up in the next 12 months.    

Merrill’s Portfolio Story feature is a terrific tool for retirement planning and investing for goals. It’s personalized to each customer, and displays your asset allocation and your progress towards your goal in an inviting layout. You can drill down for more information about a particular holding using Merrill’s Stock Story feature, which also provides details on a company’s environmental, social, and governance (ESG) ratings. A hypothetical trade calculator projects how a trade could impact your entire portfolio. 

Merrill has made a huge investment in their mobile apps, reflecting the number of customers who access their services using smartphones and tablets.  The mobile apps also include a wealth of guidance and retirement planning content.

✓  Pros

 

❌  Cons

•  Personalized portfolio analysis.   •  Cannot automate a trading strategy for stocks.
•  Customizable news feed with more than 35 providers.   •  No commission-free ETF trades, though customers with high account balances qualify for {FC: up to] 30-100 free stock/ETF trades monthly.
•  Retirement planning tools are top-notch.   •  Complex options trading is limited.

Fidelity is improving its retirement planning tools intended to engage millennials with a game called Five Money Musts, which encourages new investors to get into the markets using exchange-traded funds. For those who are further down the road towards retirement, there are tools to help get organized as one’s retirement date approaches, including a clear explanation of how and when to take Social Security payments. Fidelity offers everything from managed accounts to self-service, and their robo-advisory, Fidelity Go, can be used for IRAs. 

Rolling an employer’s 401(k) balance into an IRA is a process that can be cumbersome and full of twisty passages, but Fidelity spells out the necessary steps clearly. Their retirement calculators and goal-setting tools are written in plain English and are easy to use.

✓  Pros

 

❌  Cons

•  Fidelity offers everything from stocks and options to annuities and life insurance.   •  Automatic dividend reinvestment is set for the entire account; to change it for a particular security, you must call customer service.
•  Low transaction fees, plus terrific order-routing technology that lowers the cost of a transaction by seeking out price improvement.   •  On heavy trading days, the platform can be unreliable.
•  Abundant online help, including a chatbot that can answer most customer queries.   •  High account balances or frequent trading is required to access Active Trader Pro, the more advanced platform.

Schwab offers a wide range of assets in which to invest, and after integrating the optionsXpress platform, also has some terrific options trading tools. Their Retirement and Planning section of the web platform helps customers understand the types of accounts available, including how to roll an old 401(k) over to an IRA. You can go it alone, or sign on with a professional advisor to guide you on your journey.

Schwab’s robo-advisory, Intelligent Portfolios, can be used with any kind of IRA, if you’d prefer to use their no-fee automated service. As retirement nears, Schwab’s site is full of ways to design an approach to generating income safely. Their Retirement Income Quiz is worth taking just to see what areas of financial freedom you might want to study further.

✓  Pros

 

❌  Cons

•  No-cost robo-advisory, Schwab Intelligent Portfolios, is a good place to start investing for retirement.   •  Certain mutual funds incur a $76 fee when purchasing.
•  More than 200 ETFs can be traded without incurring transaction fees.   •  There is no report spelling out expected dividend income.
•  ETF research center also has a screener for closed-end funds, which can be used to generate income in retirement.   •  $0 to open an account only applies if you also open a Schwab One checking account simultaneously.

 

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  • Commission: $6.95 for stock trades
  • Minimum to open an IRA account: $5,000
  • Best for Post-Retirement IRA Account
Open Account

E*Trade has made a concerted effort over the last 2 years to improve its retirement planning services.  To that end, they offer their E*Trade Complete IRA account for those who are eligible to begin withdrawing cash, including the ability to write a check and have that amount counted towards the client’s RMD. All of the options capability built in to the OptionsHouse platform is available, including the education and guidance.  E*Trade was one of the few larger brokers that survived the trading surges of 2017 and 2018 relatively smoothly as well. 

✓  Pros

 

❌  Cons

•  Terrific guidance, with dozens of short videos, available in the Planning section.   •  No forex or international investments (besides targeted ETFs) available.
•  Mobile apps include all of the retirement planning tools, including tracking progress towards your goal.   •  Certain advanced trading capabilities are only available on Power E*Trade, which has volume and balance restrictions.
•  200 ETFs that can be traded without incurring a commission.   •  Automatic dividend reinvestment requires broker assistance

About Our Methodology

At Investopedia, we started from scratch to build a better brokerage recommendation tool and objective reviews of self-directed brokerages. Our mission is to provide an unbiased and accurate analysis – so that you can make smarter investing decisions.

We want to help find you the best online stockbroker so we examined more than 100 variables, from pricing and fees to trading platforms to special features. No single online broker was the best in every category, so you should review our complete list of broker reviews to identify the firm that best matches your priorities.

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Elephants

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DEFINITION of ‘Elephants’

Elephants is slang for large institutional investors that can move markets on their own. Elephants have the funds to make high-volume trades. Due to the large volumes of securities that elephants deal in, any investment decisions that they make could have a large influence on the price of the underlying financial asset.

BREAKING DOWN ‘Elephants’

Think of a swimming pool: If an elephant steps into the pool (buys into a position), the water level (stock price) increases; if the elephant gets out of the pool (sells a position), the water level (stock price) decreases. In comparison to the elephant’s influence on stock prices, the effect of an individual investor is more like that of a mouse.

Examples of elephants are professionally managed entities like mutual funds, pension plans, banks and insurance companies.

Contrarian investors specialize in doing the opposite of the elephants — that is, buying when institutions are selling, and selling when institutions are buying.

Institutional Investors

An institutional investor is a nonbank person or organization that trades securities in large enough share quantities or dollar amounts that it qualifies for preferential treatment and lower commissions.

An institutional investor is an organization that invests on behalf of its members. Institutional investors face fewer protective regulations because it is assumed they are more knowledgeable and better able to protect themselves. There are generally six types of institutional investors: endowment funds, commercial banks, mutual funds, hedge funds, pension funds and insurance companies.

Because institutions are the largest force behind supply and demand in securities markets, they perform the majority of trades on major exchanges and greatly influence the prices of securities.

Retail investors buy and sell stocks in round lots of 100 shares or more; institutional investors buy and sell in block trades of 10,000 shares or more. Because of the larger trade volumes, institutional investors avoid buying stocks of smaller companies and acquiring a high percentage of company ownership.

Money Managers

A money manager is a person or financial firm that manages the securities portfolio of an individual or institutional investor. Typically, a money manager employs people with various expertise ranging from the research and selection of investment options to monitoring the assets and deciding when to sell them.

In return for a fee, the money manager has the fiduciary duty to choose and manage investments prudently for his or her clients, including developing an appropriate investment strategy, and buying and selling securities to meet those goals.

Largest Pension Fund and Money Manager

The largest pension fund in the world, as of March 2018, was the U.S. Federal Old-Age and Survivors Insurance Trust Fund (Social Security), with nearly $2.9 trillion in assets under management.

The largest money manager, as of the end of 2017, was BlackRock, with nearly $6.3 trillion in assets under management.

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Country Fund

DEFINITION of ‘Country Fund’

A country fund is a mutual fund that invests in one country. A country fund holds a portfolio of securities, generally stocks, of companies located exclusively in a given country. Also called a “single-country fund.”

BREAKING DOWN ‘Country Fund’

A single-country fund for Russia, for example, will only invest in assets based in that country, such as the stocks of Russian companies, Russian government debt and other Russia-based financial instruments.

Country funds can demonstrate fantastic results because of their concentrated holdings. However, along with this type of performance also comes a high level of risk and price volatility, especially in developing countries, which are usually categorized as emerging markets. In emerging markets, a fund’s portfolio may be concentrated in a small number of issues with very low market liquidity.

Even in developed markets like Europe, putting investment funds in a single-country fund means that you are subjecting your risk-return expectations to a relatively narrow market environment.

Example of a Country Fund

The Voya Russia A fund seeks long-term capital appreciation through investment primarily in equity securities of Russian companies. It normally invests at least 80% of its assets in equity securities of Russian companies, is not constrained by investment style or market capitalization and seeks companies undervalued by the market because their pace of development or earnings growth has been underestimated.

It had $83 million in assets under management, as of May 22, 2018. It had a one-year annualized return of 16.94% and a 10-year annualized return of -3.94%.

Global Funds vs. Country Funds

Country funds and global funds can both be used to add geographic diversification to a portfolio. A global fund is a fund that invests in companies located anywhere in the world, including the investor’s own country. A global fund often seeks to identify the best investments from a global universe of securities.

A global fund provides investors with a diversified portfolio of global investments. Investing in international securities can often increase an investor’s potential return with some additional risks. A global fund can help to mitigate some of the risks and fears investors may have when considering international investments through its diversified portfolio structure.

An investor could, in theory, construct a geographically diverse portfolio using individual country funds. This would require a great deal of research and effort and could be accomplished simply by selecting a global fund. However, country funds can easily be used to supplement a global portfolio and concentrate a bet on a region, in effect overweighting a single country, while the global fund maintains diversification.

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Top Preferred Stock ETFs for 2018

Preferred stocks pay dividends to shareholders before they pay dividends to holders of common stock. The dividend rate is fixed. In the event a company liquidates, holders of preferred stock receive distributions first. (See also: What’s the Difference Between Preferred and Common Stock?)

One way to invest in preferred stocks is through exchange-traded funds (ETFs ) that specialize in this type of equity. You receive the income from multiple stocks, and you have the comfort of having your investment spread across several companies.

We have chosen four preferred stock ETFS based on year-to-date performance. All of the ETFs on our list yielded above 7% in 2017, but have struggled in 2018.

ETFs are easy to buy and sell because they trade like stocks. That said, these ETFs should be considered long-term investments for a well-diversified portfolio. The ETFs on our list represent a way to invest part of your funds in income-producing instruments, and may serve as an alternative to bonds.

All information is current as of August 17, 2018.

1. iShares International Preferred Stock (IPFF)

This fund keeps 90% of its assets in stocks that are on the S&P International Preferred Stock Index, or in securities that are similar to stocks on that index. Some of the assets may be invested in futures contractsoptions and swap contracts. IPFF invests in markets outside the United States, but only in developed markets. This is an ETF for investors who think stocks will perform well internationally.

  • Avg. Volume: 30,435
  • Net Assets: 67.74M
  • PE Ratio (TTM) N/A
  • Yield: 3.54%
  • 2017 Return: 22.88%
  • 2018 YTD Return: -3.05%
  • Expense Ratio (net): 0.55%

2. SPDR Wells Fargo Preferred Stock ETF (PSK)

PSK tracks the performance of the Wells Fargo Hybrid and Preferred Securities Aggregate index. Because the index is weighted by market capitalization, the underlying holdings in the fund tend to be similarly weighted. The fund may invest in securities that are not preferred stock, but are considered equivalent to preferred stock based on the way they function.

PSK aims to keep 80% of its assets in securities that are on the index. Note that the fund does not attempt to buy all securities on the index, but instead uses a sampling strategy whereby it purchases a portion of the index’s securities that are likely to produce results that are like the index. All stock and securities are purchased with the express purpose of representing the behavior of preferred stock.

  • Avg. Volume: 101,746
  • Net Assets: 662.88M
  • PE Ratio (TTM) N/A
  • Yield: 5.75%
  • 2017 Return: 10.51%
  • 2018 YTD Return: 0.77%
  • Expense Ratio (net): 0.45%

3. Invesco Preferred ETF (PGX)

The benchmark for PGX is the BofA Merrill Lynch Core Plus Fixed Rate Preferred Securities Index. All holdings are fixed-rate securities that are denominated in U.S. dollars. Note that the underlying index is weighted by capitalization, and PGX attempts to replicate the performance of the index by weighting holdings based on capitalization. 

  • Avg. Volume: 1,736,309
  • Net Assets: $5.36B
  • PE Ratio (TTM) N/A
  • Yield: 5.71%
  • 2017 Return: 10.47%
  • 2018 YTD Return: 0.78%
  • Expense Ratio (net): 0.50%

4. Invesco Financial Preferred ETF (PGF)

If you buy this ETF, you are tracking the Wells Fargo Hybrid & Preferred Securities Financial Index. The fund attempts to stay close to the index’s performance by keeping 90% of its assets in securities that are on the index. The securities are weighted by market capitalization. However, the fund may also invest in non-index instruments that function similarly to the preferred stocks in the index. All preferred stocks in the fund are traded on exchanges that are based in the U.S.

  • Avg. Volume: 199,596
  • Net Assets: 1.56B
  • PE Ratio (TTM) N/A
  • Yield: 5.46%
  • 2017 Return: 10.81%
  • 2018 YTD Return: 0.40%
  • Expense Ratio (net): 0.63%

The Bottom Line

Preferred stocks offer income to investors that is reliable because the rates are fixed. However, preferred stocks can lose value in an environment where interest rates are rising. If interest rates go higher than the rate the stocks are paying, they will be less attractive to investors and share prices could drop. ETFs help mitigate this risk by buying several stocks. 

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Diamonds

DEFINITION of ‘Diamonds’

Diamonds is an informal term for an index-based exchange-traded fund (ETF) known as the SPDR Dow Jones Industrial Average ETF. The Diamonds ETF trades on the NYSE Arca exchange under the ticker symbol DIA. The ETF’s objective is to provide returns that mirror the price and yield performance of the Dow Jones Industrial Average (DJIA). Diamonds are also an extremely hard gemstone used mainly for jewelry, tools and as an investment in precious stones.

BREAKING DOWN ‘Diamonds’

Launched in 1998, the Dow Diamonds exchange-traded fund is managed by State Street Global Advisors. Since its launch, it has become popular among investors as a way of achieving approximately the same returns as owning the individual stocks in the underlying Dow Jones Industrial Average. Investors can buy and sell shares of the ETF, just like with common stocks. The fund’s holdings consist of the 30 stocks in the DJIA, in the same price-weighted proportion as they appear in the DJIA, as well as some cash holdings.

The Popularity of the Diamonds ETF

Diamonds is a popular and generally well-regarded fund. Owning shares of Diamonds allows investors to attain the diversity of the DJIA with relatively low transaction fees. The fund is highly regarded for its relatively low gross expense ratio, which was 0.17% as of the first quarter of 2016. Diamonds, like other ETFs, may offer some investors tax advantages over owning mutual funds. The fund’s large size provides ample share liquidity, and investors can buy or sell shares any time the exchange is open. The ETF’s high market capitalization and liquidity has spawned a variety of options chains from which traders can choose. The NYSE allows investors to trade Diamond shares using margin, as well as to short-sell Diamond shares.

Diamonds ETF Statistics

As of April 30, 2018, the fund had total net assets of more than $21.3 billion, with about 85 million shares outstanding. The fund’s weighted average market cap was about $238 billion, at a price earnings ratio of about 23.64. Since its inception, the fund has yielded investors an annualized return of about 8.08%.

Diamond Gemstones as an Investment

Diamonds as gemstones are generally considered a poor investment vehicle, mainly due to the illiquidity of the market, a lack of price transparency, high transaction fees and high risk related to quality assurance. Investors who want exposure to diamonds could reduce some of the risk by owning GEMS, an ETF that invests in the diamond and gemstone industry. Many wealthy individuals consider diamonds a good investment because they can buy high-priced stones with relatively low transaction costs, and they can enjoy the diamonds while their value grows, as with antiques or art.

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Reforming the Fiduciary Standard

Although the Department of Labor’s (DOL) fiduciary rule has officially been shelved, many in the financial sector are still pushing for implementation of an industry-wide fiduciary standard. The DOL, as well as the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA) and several state attorneys general are all seeking solutions that protect investors and maintain regulatory clarity.

Interested parties are awaiting the fine tuning and adoption of the SEC’s proposed “Regulation Best Interest (Reg BI),” which recently concluded a 90-day comment period. Meanwhile, many are looking also to post-fiduciary-rule guidance from the DOL, which is expected soon, as well as state-level legislation. With so much going on, a comprehensive overview of reform efforts may be in order.

SEC Regulation Best Interest

The SEC’s Regulation Best Interest is the best bet for those hoping for a broad-based fiduciary standard since it would apply to all securities transactions, including those in Employee Retirement Income Security Act (ERISA) plans and IRAs. The downside of this is that the standard falls somewhere between “suitability” and “fiduciary” and is not clearly defined by the proposed regulation.

Reg BI prevents broker-dealers and related persons from using the term “adviser” or “advisor” when communicating with investors. The regulation also clarifies the fiduciary duties of Registered Investment Advisors (RIAs), sets new and amended rules and forms that require RIAs and broker-dealers to provide relationship summaries to clients and establishes rules requiring broker-dealers, RIAs and related persons to disclose both registration status and their relationship to retail investors.

Almost as soon as the SEC’s Reg BI became public, questions about the lack of clarity regarding the definition of “best interest” arose. Others have questioned the suitability of the current definition of the term “retail customer,” pointing out that it appears to apply to individuals, including their accounts in retirement plans, IRAs, custodianships, guardianships and personal trusts, but not to business accounts or to retirement plans. This raises concerns about the applicability of the “best interest” standard.

In theory, the regulation is still set to change. The SEC’s 90-day comment period allowed interested parties to voice concerns and propose fixes, which the SEC will take into consideration before implementing the regulation. (For more see: Next Target for Lobbyists: SEC Best Interest Rule.)

Reg BI Comment Period Ends

By the time the SEC Reg BI comment period ended on August 7, the regulation received more than 3,800 comments. SEC officials also held public meetings and conducted investor roundtables to seek advice and input.

One prominent commenter, Ken Fisher, founder of Fisher Investments, called for the SEC to enforce the existing Investment Advisers Act of 1940 instead of creating a new rule. Fisher proposed that the SEC strictly enforce the “solely incidental” language in the Act for a broker’s brokerage activities and providing a distinct “broker-adviser” title for those who are dually registered.

Current Reg BI language allows dual registrants to keep the title of adviser but requires that they clearly inform the client when they are acting in either role. Fisher wants to retain language providing role clarity (or by requiring different colored disclosure documents or through other disclosure mechanisms) and would further mandate that insurance salesmen, financial planners and others be prevented from calling themselves “advisers.”

Other commenters called for simplification of best interest guidelines, the customer relationship summary form and other documents in the legislation. Additional suggestions included requiring brokers to call themselves “salespersons” and allowing exemptions for small broker-dealer firms. Still others suggested scrapping the proposed best interest regulation altogether.

Now it’s up to agency staff to review comments and other feedback and make a recommendation to SEC commissioners about possible next steps. Although a specific timeline for implementation of the regulation has not been establishe –  SEC chairman Jay Clayton stated simply that the agency, “is not going to take forever” – Blaine Aikin, executive chairman of Fi360, has suggested it will likely be another year before a final rule is adopted. “Under the best circumstances,” Aikin told advisers, “after the deadline for comments, there will be a reassurance of the proposed rule, another comment period is most likely, and then further revisions.”

The Role of FINRA and the SEC

Parts of the proposed SEC standards were taken from the suitability standards reflected in the rules imposed by FINRA on its members. In general, these standards are more flexible than those of the DOL fiduciary rule. The “best interest” section is new and controversial in the sense that by not providing a concrete definition of “best interest,” the SEC elected to let the facts and circumstances of each case decide the outcome. Because of this, both the SEC and FINRA will play a huge role when it comes to interpretation and compliance with Reg BI. Broker-dealers have been urged to examine FINRA’s 2013 Report on Conflicts of Interest to provide some guidance on how that organization may view implementation of the new SEC rule.

Meanwhile, pressure from Democrats in the House and Senate, especially if the party takes over either (or both) chamber(s) this fall, could influence how both the SEC and FINRA interpret Reg BI. Democrats believe the SEC proposal is too weak and top Democrats on the Senate Banking Committee call it “confusing and ambiguous.” They argue in favor of a uniform true fiduciary standard for all retail investment advice and want to hear more from FINRA about how it would interpret and apply the new rule. While chances of Democratic legislation and enforcement standards making their way through both chambers is considered slim, observers believe the effort alone would be enough to get the SEC’s attention.

Additional DOL Fiduciary Rule Guidance Coming

Meanwhile, the vacating of the DOL’s fiduciary rule on June 21 by the U.S. Court of Appeals for the Fifth Circuit resulted in the removal of the fiduciary rule from federal law while still allowing financial institutions to rely on the Best Interest Contract exemption (BIC exemption). Otherwise, the result signals a return to pre-fiduciary rule conditions.

With the original implementation of the DOL fiduciary rule, many financial institutions changed their business models and sales practices to comply with the new law. Now these institutions find themselves revisiting their changes. As with implementation of SEC Best Interest, the “nature and timing” of DOL’s new guidance is uncertain, according to George Michael Gerstein, co-chair of Stradley Ronon’s Fiduciary Governance Group. (For more see: DOL’s Fiduciary Rule Officially Shelved)

State-Level Legislation

DOL and SEC efforts notwithstanding, several states have attempted to enact fiduciary standards of their own. While some states began working on their own legislation well before the DOL fiduciary rule was adopted, others have joined in more recently.

Among the states that have already enacted legislation is Nevada, where lawmakers passed a law last year extending the state’s existing fiduciary law to include financial planners, stockbrokers and other commission-based representatives. Connecticut has also adopted legislation, while New York and New Jersey are considering state-based fiduciary laws. Similarly, the Maryland state senate recently asked its consumer protection agency to weigh in on whether the state should enact its own fiduciary law.

Meanwhile, courts in California, Missouri, South Carolina and South Dakota have imposed fiduciary standards on broker-dealers, and the state of Minnesota has expressed interest in enacting some type of fiduciary protection. Observers expect more state-level action in coming months, especially if Democrats win majorities in statehouses or take over more governors’ mansions in upcoming elections.

According to fiduciary law expert James Watkins, federal law does not supersede the rights of states to pass fiduciary law. “So long as states enact fiduciary laws that don’t impact [ERISA plans] like 401(k)s,” Watkins said, “they have every right to act.” Many in the financial services industry oppose state-level action claiming different rules for each state would make training, supervision and implementation too complicated.

Bottom Line

The demise of the DOL fiduciary rule and the rise of SEC Best Interest and state-level fiduciary legislation, coupled with an evolving political landscape have all created a climate of confusion for financial institutions, advisors and investors. What is certain is that public attention is more focused on financial service providers and how they do business than ever before.

Despite current regulatory uncertainty, securities regulators, FINRA and state attorneys general have plenty of tools available to investigate and deal with those who engage in questionable sales practices. Responsible practitioners will continue to follow a best interest guideline as they have always done and eventually clarity will come.

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