Compare an ETF to an index fund
- Both: basket of securities that mirror an index (low expense)
- ETF: may be traded in secondary market, trades involve commission, intra-day pricing, leveraged and inverse ETFs exist
- IF: shares are redeemed by the fund, cannot be sold short, there is usually no sales load, they settle once daily, and they don't allow leverage
What is an ETN?
- ETNs are structured products that are issued as unsecured debt. They trade on exchanges, have low fees, and provide access to challenging areas of the market. An ETN is linked to the performance of a market index or other benchmark.
- They are backed by the full faith and credit of the issuer (credit risk)
- They're not principal protected, but their return is linked to the performance of an asset
- They may be purchased on margin, sold short, and exchange traded
- The issuer is obligated to deliver performance at maturity
- Like a 0 coupon bond
What is a hedge fund?
- Investment fund for wealthy investors
- Not a registered investment company
- Uses exotic strategies
- May place restrictions on money withdrawals
- Not required to publish a NAV
How are hedge fund expenses often structured?
- 2% of all assets
- 20% of capital gains
What is the maximum sales charge for a mutual fund?
8.5% of POP
What is a private equity fund?
- A hedge fund that raises capital through sales of limited partnership units under the Reg D exemption
- Typically only available to accredited investors
- Unregulated with limited opportunities
What is a REIT?
- Real Estate Investment Trust
- A company that manages a portfolio of real estate investments in order to earn profits for its shareholders
What are the types of REITs?
- Mortgage/debt: these issue secured loans backed by real estate purchases
- Equity: these own and operate income-producing real estate
- Hybrid: a combination of the two
What is the tax benefit of a REIT?
- There is no taxation on income if 90% of it is distributed.
- They don't passes through losses (unlike LPs)
- 20% of distributed income is taxable
What are the characteristics of a REIT?
- Subject to the registration requirements of Securities Act of 1933
- Shares trade in the secondary market (can be traded on margin)
- Distributions don't qualify for the dividend exclusion rule
- They're attractive for investors seeking current income
- They're subject to interest rate risk.
What is a limited partnership?
- A business venture that is designed to pass through both income and losses to investors.
- Can be Sec Act of 1933 or Reg D placement.
How does income flow work in an LP?
- Income flows through as passive income
- A portion is taxed as ordinary income (20% is deductible)
- Partners are only liable for the amount they have invested and any loans assumed.
LP (income) -> shareholders (who pay tax)
C Corp (income) -> tax paid -> (dividends go to) shareholders -> tax paid
What is the difference between a general and limited partner?
- General partner: day to day manager, unlimited personal liability, must have 1% interest, fiduciary responsibility to limited partner, and last at liquidation
- Limited partner: passive investor, who contributes capital may not negotiate/hire/fire/lend name to assist in raising capital, but they can lend money, inspect books, and compete
What is a DPP?
Direct participation program (i.e. a limited partnership)
What are some risks of DPPs?
- The general partner's ability
- Lack of control
- loss of capital
- Unpredictable income
- Potential future mandatory assessments
- Rising operating costs
- Changes in tax laws/gov't regulations
- RRs cannot exercise discretion when investing a client in a DPP