Mutual Funds and Exchange-Traded Funds FINANCIAL MARKETS AND INVESTMENTS SERIES H Kent Baker and Greg Filbeck, Series Editors Portfolio Theory and Management Edited by H Kent Baker and Greg Filbeck Public Real Estate Markets and Investments Edited by H Kent Baker and Peter Chinloy Private Real Estate Markets and Investments Edited by H Kent Baker and Peter Chinloy Investment Risk Management Edited by H Kent Baker and Greg Filbeck Private Equity: Opportunities and Risks Edited by H Kent Baker, Greg Filbeck, and Halil Kiymaz Mutual Funds and Exchange-Traded Funds: Building Blocks to Wealth Edited by H Kent Baker, Greg Filbeck, and Halil Kiymaz Mutual Funds and Exchange-Traded Funds BUILDING BLOCK S TO WEALTH EDITED BY H KENT BAKER GREG FILBECK and HALIL KIYMAZ 3 Oxford University Press is a department of the University of Oxford It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries Published in the United States of America by Oxford University Press 198 Madison Avenue, New York, NY 10016, United States of America © Oxford University Press 2016 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, by license, or under terms agreed with the appropriate reproduction rights organization Inquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this work in any other form and you must impose this same condition on any acquirer Cataloging-in-Publication Data is on file at the Library of Congress 9780190207434 Printed in the United States of America on acid-free paper Contents List of Figures ix List of Tables xi Acknowledgments xiii About the Editors xv About the Contributors Abbreviations xxviii Par t One xvii BACKGROUND Mutual Funds and Related Investment Vehicles: An Overview H K E N T B A K E R, G R E G F I L B E C K, A N D H A L I L K I Y M A Z The Economics of Mutual Funds: Rewards and Risks 21 DAV I D M S M I T H The Role of Mutual Funds in Retirement and Education Savings 44 SARAH A HOLDEN The Structure and Regulation of Mutual Funds 65 ROBERT GROHOWSKI AND SEAN COLLINS Par t Two MUTUAL FUNDS AND OTHER FUND T YPES Open-End Funds 87 CONRAD S CICCOTELLO Target-Date Funds and Other Funds-of-Funds 103 A L I S TA I R B Y R N E A N D T R E V O R O L I V E R v vi CONTENTS Closed-End Funds 119 Z J AY WA N G Non-U.S Closed-End Funds 137 D I M I T R I S A N D R I O S O P O U L O S, M A R Y F L E T C H E R, A N D A N D R E W M A R S H A L L Exchange-Traded Funds 153 E H S A N N I K B A K H T, K E I T H PA R E T I, A N D A N D R E W C S P I E L E R 10 Leveraged and Inverse Exchange-Traded Funds 169 B E N J A M I N A G U I L A R, M I C H A E L B I A N C O, C H R I S T O P H E R M I L L I K E N, A N D A N D R E W C S P I E L E R CLASSIFICATION OF FUNDS BY PRINCIPAL INVESTMENTS Par t Three 11 Money Market Mutual Funds 195 A N N A A G A P O VA 12 Bond Mutual Funds 215 SANDEEP SINGH 13 Stock Mutual Funds 233 GRADY PERDUE 14 Socially Responsible Mutual Funds 248 E D D Y J U N A R S I N, E N R I C O L I B E R T, A N D F R E N D Y 15 Mutual Funds: Management Styles, Social Responsibility, Performance, and Efficiency 268 TA M A S B A R K O A N D L U C R E N N E B O O G Par t Four ASSET ALLOCATION AND PERFORMANCE OF MUTUAL FUNDS 16 Strategic Asset Allocation and Rebalancing 291 L AURA ANDREU AND JOS É LUIS SARTO 17 Building and Monitoring Mutual Fund Portfolios L A R R Y J P R AT H E R, H A N-S H E N G C H E N, A N D Y I N G-C H O U L I N 307 CONTENTS 18 Analyzing Mutual Funds vii 329 B R U C E A C O S TA A N D K E I T H J A K O B 19 Predicting Mutual Fund Performance 349 M AT T H E W R M O R E Y 20 Evaluating Mutual Fund Performance within the Stochastic Discount Framework 364 J O N AT H A N F L E T C H E R 21 Mutual Fund Risk 380 R O B E R T O S AV O N A, O R E S T E A U L E TA, A N D F I L I P P O S T E FA N I N I Par t Five FUND STRUCTURE 22 Organization, Structure, and Services of Mutual Funds 399 MARK POTTER 23 Selected Topics in Mutual Fund Distribution 417 JOHN A HASLEM 24 Mutual Fund Disclosure and Related Fund Investor Protection Features 432 JOSEPH A FRANCO 25 New Developments in Exchange-Traded Funds 449 O J WA N G’ G E O R G E O M O N D I 26 Ethical Standards in Mutual Funds 470 R O S A A DA M O Par t Six MUTUAL FUNDS WORLDWIDE 27 Mutual Funds in Emerging and Developing Markets PA R V E Z A H M E D 28 Performance of Global Mutual Funds 507 TA R I K B A Z G O U R, L A U R E N T B O D S O N, A N D DA N I E L L E S O U G N É 487 viii CONTENTS 29 Performance of Exchange-Traded Funds 524 PA N A G I O T I S S C H I Z A S 30 Issues, Trends, and Future Developments in the Mutual Fund Industry 546 HUNTER M HOLZHAUER Discussion Questions and Answers Index 599 561 List of Figures 2.1 2.2 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 4.1 4.2 4.3 4.4 4.5 6.1 6.2 6.3 9.1 9.2 10.1 11.1 11.2 11.3 11.4 11.5 11.6 Number of U.S Mutual Funds and Total Assets Under Management 24 Assets Under Management for Various Types of U.S Mutual Funds 25 Growth of U.S Retirement Assets 46 Share of Near-Retiree Households with Retirement Accumulations 47 Degree of Participant Direction of 401(k) Account Investments 49 Relationship of Asset Allocation to Equities among 401(k) Plan Participants 51 Traditional Individual Retirement Accounts Held at Financial Services Firms 53 Mutual Funds and Retirement Accounts 56 Expense Ratios over Time 59 401(k) Equity Mutual Fund Assets and Expense Ratios 60 Changes in Section 529 Plan Assets over Time 61 Net Assets of Registered Investment Companies, by Type 68 Ownership of Mutual Funds by Household Income Category 70 The Most Popular Forms of Mutual Fund Organization 72 Organization of a Mutual Fund 74 Leverage Ratios of Banks and Mutual Funds 78 Equity Allocations of Major U.S Target-Date Providers 109 Landing Point Date of U.S Target-Date Funds 109 Glidepath for NEST 2058 Target-Date Fund 110 Total Net Assets and Number of Exchange-Traded Funds, 2002 to 2013 154 Net Issuance of Exchange-Traded Fund Shares by Investment Classification in Billions of Dollars, 2011 to 2013 158 Global Growth of Leveraged and Inverse Exchange-Traded Funds 172 The Growth of Total Net Assets for Money Market Mutual Funds, 1975 to 2013 197 Mutual Funds Market Composition, 2000 to 2013 197 Mutual Fund Market Share, 2000 to 2013 198 The Total Net Assets of Money Market Mutual Funds by Investment Category, 1984 to 2013 201 Retail versus Institutional Money Market Mutual Funds, 1996 to 2013 207 Percent of Businesses’ Short-Term Assets in Money Market Mutual Funds, 2000 to 2013 207 ix 614 INDEX measuring exchange-traded funds (ETFs) performance (continued) management fees, 529–530 tax attribution, 530–531 tracking cost efficiency, 528–529 transaction costs, 529–530 Mexico mutual funds, 22t Monday effect, 324 money market funds liquidity and redemption rules, 80–81 mutual fund investment in, statistics, 67 money market mutual funds (MMMFs), 13, 195–213 definition of, 195 development of, 195–196 Europe, 197, 198–200, 208, 212 France, 197, 208 Germany, 199, 201, 208 governing bodies, 198–199 European Union regulation of, 198–199 Investment Company Act, Rule 2a-7, 80–81, 198–200, 212, 558–559 historical background, 195–198 growth of total net assets, 196, 197f mutual fund market share, 196, 198f mutual funds market composition, 196, 197f Regulation Q limitations, 196 household holdings, share of mutual funds, 552–553 Investment Company Act, Rule 2a-7, 80–81, 198–200, 212, 558–559 investment restrictions, 198–199 Ireland, 199, 200 management fees, 209 performance, 209–211 fees waived by fund managers, 209–210 financial crisis of 2007-2008, 210 role in financial system, 211–212 runs on funds, 212 structure, 198–201 trends prime MMMFs (general purpose funds), 558–559 retail and institutional classes of MMMFs, 558 role and regulation of, 557–559 systemic risk concerns, SEC 2014 rules addressing, 558–559 institutional MMMFs, floating NAV, 558 prime MMMFs (general purpose funds), 558–559 redemption gate, 558 SEC Rule 2a-7, 558–559 shareholder liquidity fees, 558 types of funds, 201–208 institutional MMMFs by investment category, 207–208 MMMFs by investment category, 201 percent of businesses’ short-term assets in MMMFs, 204, 207f prime MMMFs, 201, 202t–203t retail MMMFs by investment category, 207–208 retail versus institutional MMMFs, 204, 207f taxable government MMMFs, 204, 205t–206t tax-exempt MMMFs, 204 valuation methods, 199–201 Europe, constant and variable NAV, 199–201 $1 valuation, 199–201 penny rounding, 200 moral tension, ethical standards in mutual funds, 470–471 Morningstar grades for stewardship, corporate culture, and board quality among fund families sponsors, 38–39 Morningstar products, 312, 337–338, 345–347 Morningstar Rating system, 337–338, 346–347 Morningstar Stewardship rating, 39t, 357–358 Morningstar Style Box, 337, 345–346 M-squared (M2 ), analyzing mutual funds, 332–333, 346 multi-factor models portfolio evaluation, determining alpha, 235–238, 240–244 multi-factor regression models analyzing mutual funds, 335–336 municipal bond mutual funds, 225–226 mutual funds, 3–20, 551–552 See also headings under open-end funds (OEFs) active versus passive fund management, 5–6 advantages and disadvantages, 4–5 creation of first mutual fund, Massachusetts Investors Trust, 72, 400, 450, 547 definition of, distinguished from exchange-traded funds (ETFs), 450–451 ethics See ethical standards in mutual funds exchange-traded funds (ETFs), differences in tax treatment, 165 expenses and fees, classification, fees and expenses, types of, historical perspective, 547 investment objective, management active versus passive fund management, 5–6 number of funds world-wide, statistics, open-end investment company, regulation See regulation of mutual funds statistics U.S funds, 4, worldwide, strategic asset allocation (SAA) methods of determining, 297–298, 303–304 rebalancing analysis, 298, 304 INDEX Spanish equity mutual funds, 298–301 empirical findings, 302–304 types of investment companies, 4, 6–8 closed-end funds (CEFs), exchange-traded funds (ETFs), 6–7 open-end investment company, unit investment trusts (UITs), 7–8 U.S funds, statistics, 4, worldwide funds, statistics, mutual fund dynamics, theoretical framework mutual fund risk, 381–383 mutual fund industry, 268–272 active mutual funds and total nets assets by region, 269–270 active versus passive management, 271–272 competing fund types, open-end funds (OEF), 548–550 closed-end funds (CEFs), 548–549 exchange-traded funds (ETFs), 550, 551 strategies for competing with exchange-traded funds (ETFs), 551–552 unit investment trusts (UITs), 549 cumulative flows to U.S domestic equity mutual funds and exchange-traded funds (ETFs), 271, 272f global mutual fund industry, 21–23 global mutual funds, increased demand, 553 global perspective of mutual funds, 548 indexed investing (passive management), 271–272, 275 inflows, steady rise of, 553 management active versus passive management, 271–272 indexed investing (passive management), 271–272, 275 money market mutual funds (MMMFs), steady rise of inflows, 553 net new cash flows to U.S mutual funds, 270–271 net new flow to and market share of U.S indexed mutual funds, 271–272 renewed reliance on mutual funds, 552–553 growth of IRAs and defined contribution plans, 552 households holdings, share of mutual funds, 552–553 registered investment companies (RICs), 552 size of industry and expenses charged worldwide, 21–23 sponsors, changes in, 554 trends, 552–559 renewed reliance on mutual funds, 552–553 sponsors, changes in, 554 U.S mutual fund industry, structure of, 23–26 AUM for various types of U.S mutual funds, 24, 25f investment advisor/subadvisor, 24 investment fund managers, 23–24 615 number of U.S mutual funds and total AUM, 24 statistics, 24–26 target-date funds, 24, 26 top 10 U.S advisory firms, AUM and market share of mutual funds, 24–26 mutual fund outperformance, prediction factors, 15–16, 349–360 activeness of mutual funds, 354–355 active shares, 354–355 closet index funds, 356 expense ratio, 350 fees, 350–351 fund family size, 357 fund size, 355–357 governance, 357–358 incentive fees, 351 load fees, 351 luck versus skill, 349–350 manager characteristics, 358–360 age, 359–360 education, 358–359 tenure, 360 momentum stocks, 353 Morningstar Stewardship rating, 357–358 mutual fund ratings, 353–354 past risk-adjusted performance, 352–353 redemption, 351, 357, 360, 362 trading cost, 352 turnover ratio, 351–352 mutual fund performance, analysis metrics, 15, 329–347 capital asset pricing model (CAPM) quantitative performance metrics, key aspects, 333–334, 335, 336, 346 real-world analysis example, 341, 342t Carhart model quantitative performance metrics, 329, 335–336, 341, 343t, 346 real-world analysis example, 341, 343–344 Morningstar products, 337–338, 345–347 quantitative performance metrics, key aspects, 330–336 capital asset pricing model (CAPM), 333–334, 335, 336, 346 Carhart model, 329, 335–336, 341, 343t, 346 Jensen’s alpha, 334–335, 346 multifactor regression models, 335–336 ratios and related measures, 330–333 ratios and related measures, 330–333 coefficient of variation formula (CV formula), 330–331, 345 M-squared (M2 ), 332–333, 346 Sharpe ratio, 331–332, 345 Treynor ratio, 332, 345 real-world analysis example, 338–345 CAPM and Treynor ratio, 341, 342t 616 INDEX mutual fund performance, analysis metrics (continued) Carhart model regression, 341, 343–344 monthly return data and risk factors, 338, 339t–340t Morningstar Star Rating and Style Box, 345 return and risk metrics, 341 sources of information, Morningstar products, 337–338, 345–347 Treynor ratio ratios and related measures, 332, 345 real-world analysis example, 341, 342t mutual fund performance evaluation See stochastic discount factor framework mutual fund portfolios, building and monitoring, 15, 307–325 assessing risk aversion and utility, 321 basics, building satisfying portfolio, 313–325 correlations of major asset classes, 315–316, 317 creating utility-maximizing portfolios, 321–322 fees and expense, 309–310 investor choices, 307–313 active versus passive management, 308–309 fund turnover, 311, 312 load funds, no-load funds, and exchange-traded funds (ETFs), 309–311 management structure, 311 tax efficiency and fund turnover, 311 investor decisions, 307 management active versus passive management, 308–309 management structure, 311 management turnover, 323 optimization of risky portfolios, 316–320 arbitrary portfolio, 318, 320f creating utility-maximizing portfolios, 321–322 creation of optimal portfolio without short sales, 318, 320f efficient frontier, 318 mutual fund separation theorem, 321–322 statistics for selected funds, 318, 319f pitfalls to avoid when constructing portfolio, 312 rebalancing, 323–325 day-of-the-week effects, 324 Monday effect, 324 mutual fund twins, 323 strategies, 323–324 returns, 315–316 risk, 315–316 risk and return of mutual fund portfolios, 313–315 risk averse investors, 321 screening, 307 sources of information about mutual funds, 311–313 sources of information about mutual funds, 311–313 Kiplinger mutual fund finder, 312 Lipper leaders, 312 Morningstar, 312 mutual fund prospectus and annual shareholder report, 311 take-away tips, 325 mutual fund prospectus and annual shareholder report, 311 mutual fund risk, 16, 380–395 agency problem, 380 background, 380–381 decomposing mutual fund risks ex post tracking analysis (TEV analysis), 388 portfolio weight-based analysis, 389–390 return-based analysis, 387–388 risk decomposition of a U.S equity mutual fund, example, 391–393 financial due diligence, performance evaluation, 387–393 data, 387 decomposing mutual fund risks, 387–390, 391–393 performance attribution (attribution analysis), 389 risk mapping strategy, 390–393 mutual fund dynamics, theoretical framework for, 381–383 operational due diligence, 393–394 risk evaluation process, 383–386 anti-dilution levy, 386 benchmark selection, 384 credit risk, 386 fees, 385–386 investment strategy, 383–384 liquidity risk, 386 performance measurement based benchmarks, 384–385 swing pricing, 385 risk mapping strategy, 390–393 currency risk, 391 equity-based mutual funds, 391 fixed-income based mutual funds, 391 fund-specific risk dimensions, 391 investment style, 391 risk decomposition of a U.S equity mutual fund, example, 391–393 mutual funds, disclosure versus conventional public company disclosure, 433 mutual funds, distribution, 17, 417–430 advice channel, 419 broker-sold funds, 429 contingent deferred sales loads (CDSLs), 422–423 direct channel, 418–419 direct distribution, 417 INDEX direct purchase by investors, 26 direct-sold funds, 430 distributor, primary role, 417 employer-sponsored retirement programs, 26 financial intermediaries, services provided, 417–418 impact on profitability, 26 indirect distribution, 417 institutional channel, 419 investor characteristics, 429 NASD sales charge rule, 422–423 no-transaction fee promotion (NTF program), 420 obtaining mutual fund shares, 26 retirement channel, 419 Rule 12b-1 fees, 420–428 Rule 12b-2, proposed, 425 sales of funds by financial advisors or brokers, 26 soft-dollar arrangements, 31, 357, 420 supermarket channel, no-transaction fee promotion (NTF program), 420 mutual fund separation theorem optimization of risky portfolios, 321–322 mutual funds market composition, 196, 197f mutual funds statistics, managed assets worldwide, 40 mutual fund trends, 69–71 global mutual funds, increased demand, 553 investment in money market funds, statistics, 67 money market mutual funds (MMMFs), steady rise of inflows, 553 strong growth, 69 superior return availability compared to yields on liquid bank deposits, 71 trends, 552–559 as type of registered investment company (RIC), 67, 68f, 69–71 U.S households assets in long-term mutual funds and money market funds held by, 69–70 demand for long-term mutual fund shares, factors influencing, 69–70 ownership of mutual funds by household income category, 70 mutual fund twins, 323 N NASD sales charge rule, 422–423 National Employment Savings Trust (NEST) target-date funds (TDFs) foundation stage, 110 glidepath for, 110 negative roll yield exchange-traded funds (ETFs) performance, tracking error, 526 617 net asset value (NAV) of mutual funds, determinations calculation of, 79–80 daily redeemability, definition of, 79 forward pricing, 70 pricing process and requirements, 79–80 Netherlands mutual funds, 22t noise trader risk premium closed-end funds discount (CEF discount), 123, 134 no-load funds investor choices, mutual fund portfolios, 309–311 Norway mutual funds, 22t no-transaction fee promotion (NTF program) mutual fund distribution, 420 O offerings, disclosure See fund offering disclosure Omega ratio exchange-traded funds (ETFs) performance, 539, 542–543 open-end funds (OEFs), 11, 87–101 See also headings under mutual funds active management, 90–93 dollar weighting, 90 time-weighted rate of return (TWR), 90–91 advantages and disadvantages, 93–97, 99 board of directors, 98–99 creation or establishment of fund, 87 creation process, 93 daily liquidity, computing NAV, 88–90 defined contribution plans See defined contribution plans (DC plans) definition of, 87, 100 demand for, 547 distinctive characteristics active management, 90–93 daily liquidity, 88–90 fund families, 93–95, 99 dollar weighting, 90 expenses, 93 fees, 90, 93–94, 96–99, 101 fund families, institutional issues, 93–95, 99 fund flows (inflows and outflows), 90–93 governance, 98–99 fees, 98–99 15c process (independent directors, annual advisory agreement negotiation), 98 price and performance, 98 historical background, 87, 547 first OEF, 547 income tax, threat of mutuality, 97–98 618 INDEX open-end funds (OEFs), 11, 87–101 See also headings under mutual funds (continued) institutional environment challenges and opportunities, 95–100 defined contribution plans (DC plans), 95–97 fund families, 93–95, 99 management fees, 99 management of, 87, 88, 91–93, 98–99 active management, 90–93 passive management, 92–93 market evolution, 99–100 growing number of passive vehicles, 100 number of publicly traded stocks, decline, 99–100 reduced transparency, 100 origin of concept, 66 passive management, 92–93 performance dollar weighting, 90 fund flows (inflows and outflows), 90–93 governance, price and performance, 98 time-weighted rate of return (TWR), 90–91 redemption, 90, 93 redemption process, 93 regulation of See regulation of mutual funds retirement plans See defined contribution plans (DC plans) sponsors, 96–97, 400 structure, 400 target-date funds (TDFs), 96 time-weighted rate of return (TWR), 90–91 trends, 94 types of, 92–93 valuation information/NAV, 87, 91, 96, 100, 120 open-end funds (OEFs) industry, 88, 99–100 competing fund types, 548–550 closed-end funds (CEFs), 548–549 exchange-traded funds (ETFs), 550, 551 strategies for competing with exchange-traded funds (ETFs), 551–552 unit investment trusts (UITs), 549 open-end investment company, 4–5 operational due diligence, mutual fund risk, 393–394 optimization model exchange-traded funds (ETFs) sponsors, 155 optimization of risky portfolios, 316–320 arbitrary portfolio, 318, 320f creating utility-maximizing portfolios, 321–322 creation of optimal portfolio without short sales, 318, 320f efficient frontier, 318 mutual fund separation theorem, 321–322 statistics for selected funds, 318, 319f optimization techniques bond mutual funds, 218 organization and structure of funds, 23–26, 71–76, 400–406 administrator, 405 board of directors See board of directors closed-end funds (CEFs), 119–120, 400 custodian, 406 establishing fund, process, 73–74 exchange-traded funds (ETFs), 400 form of organization, 72 funderwriter, 405 impact of structure on fund performance and risk, 413–414 investment advisor subadvisor, 24 investment fund managers, 23–24 management of fund, 74–76, 75 open-end funds (OEFs), 400 oversight independent director’s role, 73 mutual fund board, 73 popular forms of fund organization, 72 shareholders, 401, 402t–404t socially responsible mutual funds (SRMFs), 250–252 of socially responsible mutual funds (SRMFs), 250–252 sponsor or investment advisor, 404–405 sponsor’s role, establishing a fund, 73–74 state law, 72, 74 statistics AUM for various types of U.S mutual funds, 24, 25f number of U.S mutual funds and total AUM, 24 top 10 U.S advisory firms, AUM and market share of mutual funds, 24–26 statutory trusts (business trusts), 72, 400 target-date funds, 24, 26 transfer agent, 405–406 unit investment trusts (UITs), 400 Wells Fargo Advantage Growth Fund, structure example, 401, 402t–404t outflows See fund flows (inflows and outflows) oversight of mutual fund independent director’s role, 73 mutual fund board, 73 P partnerships, low-cost indexing offers, 467 pension plans See employer-sponsored retirement plans Pension Protection Act (PPA), 556 529 plans, 60 target-date funds (TDFs), 103, 106 performance, 36–37 See also fund flows (inflows and outflows) INDEX bond mutual funds, 217–219 cost increases, 37 economies of scale, 36–37 emerging market hedge funds, 502 emerging market mutual funds See emerging market mutual funds (EMMFs) flow and performance relationship, 39–40 fund closings, 36 fund mergers, 37 global mutual funds See global mutual funds, performance luck versus skill, mutual fund outperformance prediction factors, 349–350 money market mutual funds (MMMFs), 209–211 mutual fund outperformance, prediction factors luck versus skill, 349–350 manager characteristics, 358–360 open-end funds (OEFs), 90–93, 98 socially responsible mutual funds (SRMFs), managerial incentives, 283–284 sources of diseconomies, 37 transparency, regulation of mutual funds, 76 performance and risk impact of services provided by mutual fund firms, 413–414 structure of mutual funds, impact on, 413–414 performance attribution (analysis), 238–239 financial due diligence, performance evaluation, 389 portfolio evaluation, determining alpha, 238–239 performance distortion conflicts of interest without ethical standards, 478 SEC disclosure regulations, 441–442 performance studies U.K closed-end funds (CEFs), 146–148 physical replication exchange-traded funds (ETFs) sponsors, 155–156 Poland fund performance, 496t number and size of mutual funds, 495t pooled investing (investment pooling), 66–67 British fund model, 66 historical background of, 66–67 Investment Advisers Act of 1940, 67 Investment Company Act, 67 Securities Act of 1933, 67 Securities Exchange Act of 1934, 67 stock market crash of 1929, 67 portfolio construction, strategies for socially responsible mutual funds (SRMFs), 253–255, 265 best-in-class strategy, 253–254, 255 619 engagement, management and shareholders, 254–255 environmental, social, and governance integration (ESG integration), 254, 255 screening, 253, 255 strategy comparisons, 255t thematic investment approach, 253, 255 portfolio disclosure, SEC disclosure regulations, 442–443 portfolio evaluation, determining alpha alternate evaluation methods, 238–242 multi-factor models, 235–238, 240–244 performance attribution (attribution analysis), 238–239 single factor models, 235, 241–242 portfolio holding strategic asset allocation (SAA), 296 portfolio management conflicts of interest without ethical standards, 478 investment in global mutual funds, impact on domestic portfolio, 519–520 strategic asset allocation See strategic asset allocation portfolio weight-based analysis, decomposing mutual fund risks, 389–390 premiums and discounts closed-end funds (CEFs) discount See closed-end funds discount (CEF discount) generally See closed-end funds discount (CEF discount) U.K See U.K closed-end funds (CEFs) exchange-traded funds (ETFs) performance, tracking error, 463, 526 stochastic discount factor framework See stochastic discount factor framework trading exchange-traded funds (ETFs), 161 price distortions leveraged and inverse exchange-traded funds (LIETFs), 189–190 pricing process and requirements net asset value (NAV) of mutual funds, determinations, 79–80 prime money market mutual funds (prime MMMFs) (general purpose funds), 201, 202t–203t, 558–559 proxy statements, disclosure, 439 proxy voting by funds, Form N-PX SEC disclosure regulations, 443 public company disclosure (conventional) versus mutual fund disclosure, 433 public interventions conflicts of interest without ethical standards, 478–479 purchasing power parity (PPP), 509, 512, 513 purpose of investing, generally, 234 620 INDEX Q qualified default investment alternative (QDIA), 106 qualified tuition programs, tax exemption, 60 R rational fund selection strategies disclosure, investor protection features, 434 luck versus skill, 434 realized excess returns exchange-traded funds (ETFs) performance, 536, 537t–538t rebalancing mutual fund portfolios, 323–325 day-of-the-week effects, 324 Monday effect, 324 mutual fund twins, 323 strategies, 323–324 strategic asset allocation (SAA), 294–295 common reasons, 295 mutual funds, 298, 304 tactical asset allocation (TAA), 294 redemption, 28, 30, 35, 90, 338, 386, 417 See also creation closed-end funds (CEFs), 120 conflicts of interest without ethical standards, 478–479, 481 emerging markets mutual funds (EMMMFs), 497 exchange-traded funds (ETFs), 36, 156–157 credit and redemption process, 120 tracking cost efficiency, in-kind creation/redemption, 529 money market mutual funds (MMMFs), redemption gate, 558 mutual fund outperformance, prediction factors, 351, 357, 360, 362 mutual funds, 34–35 open-end funds (OEFs), 90, 93 redemption gate, 558 regulation of mutual funds, liquidity to support redemptions, 80–81 refunding, bond mutual funds, 217 registered investment companies (RICs), 67–71 net assets held, by type, 68f renewed reliance on mutual funds, 552 strong growth, 69 superior return availability, 71 trends, 67–71, 552 types of, 65, 67–69 closed-end funds (CEFs), 68 exchange-traded funds (ETFs), 68–69 mutual funds, 67, 68f, 69–71 unit investment trusts, 68 U.S households assets in long-term mutual funds and money market funds held by, 69–70 demand for long-term mutual fund shares, factors influencing, 69–70 ownership of mutual funds by household income category, 70 registration statement requirements Securities Act of 1933, amendment requirements, 77 transparency, regulation of mutual funds, 76–77 Regulation Fair Disclosure Act of 2000, 240, 359 regulation of mutual funds affiliates, prohibition on transactions with, 81 compliance programs, 82–83 COO designation, administration of compliance police and procedures, 82–83 Investment Company Act, Rule 38a-1, compliance program rule, 82–83 SEC oversight, 83 custody of mutual fund assets, 81 diversification of fund assets, 82 fees, 76 fund net asset value (NAV) determinations calculation of, 79–80 daily redeemability, definition of, 79 forward pricing, 70 pricing process and requirements, 79–80 illiquid securities, 80 Investment Company Act See Investment Company Act leverage, limits on, 77–79 banks and mutual funds, leverage ratios of, 78–79 covered obligations, 77–78 Investment Company Act, limitations, 77–79 senior securities, 77 liquidity to support redemptions, 80–81 performance information, 76 redemptions, liquidity to support, 80–81 registration statement requirements, 76–77 SEC oversight, 83 SEC regulation, senior securities, 77 statement of additional information (SAI), 76 transparency, disclosure documents, 76–77 Regulation Q limitations money market mutual funds (MMMFs), 196 reinvestment risk, bond mutual funds, 217 replication bond mutual funds, full replication method, 218 exchange-traded funds (ETFs) See exchange-traded funds (ETFs) and replication retail fund investor behavior, characteristics of disclosure, investor protection features, 434–435 INDEX retail money market mutual funds (retail MMMFs) institutional MMMFs versus, 204, 207f by investment category, 207–208 retirement channel, mutual fund distribution, 419 retirement funding target-date funds (TDFs) dynamic lifecycle strategies versus standard lifestyle approach, 115 lifecycle investment theory, 104–105 retirement plans, 10, 44–60 employer-sponsored retirement plans, 46–51 defined benefit plans (), 46–48 defined contribution plans See defined contribution plans (DC plans) exchange-traded funds (ETFs), popularity in, 96–97 Federal Reserve Board’s Survey of Consumer Finances (SCF), 45–46, 47f 401(k) plans, 48–51, 57t See 401(k) plans individual retirement accounts (IRAs), 44, 45–46, 51–54, 57t retirement resource pyramid, 44, 45–46 Social Security, 44, 45 traditional IRAs, 52–54 U.S retirement assets, statistics, 46–48 growth of U.S retirement assets, 46–47 near-retiree households with retirement accumulations, share of, 47–48 shift toward individual account based approaches, 47 retirement resource pyramid, 44, 45–46 employer-sponsored retirement plans, 44, 45 homeownership, 44, 45 IRAs, 44, 45–46 Social Security, 44, 45 retirement savings, role of mutual funds in U.S households’, 54–60 first mutual fund purchase, source of, 54–55 401(k) plans, 58–60 goals of mutual-fund-owning households, 54–55 types of funds used by retirement investors, 57–58 U.S retirement assets, statistics, 56 return-based analysis, decomposing mutual fund risks, 387–388 return relative to market measure exchange-traded funds (ETFs) performance, 536–539 risk and return, mutual fund portfolios, 313–315 risk averse investors, mutual fund portfolios, 321 risk aversion and utility, assessing mutual fund portfolios, 321 risk evaluation process, 383–386 anti-dilution levy, 386 benchmark selection, 384 credit risk, 386 fees, 385–386 investment strategy, 383–384 621 liquidity risk, 386 performance measurement based benchmarks, 384–385 swing pricing, 385 risk mapping strategy, 390–393 currency risk, 391 equity-based mutual funds, 391 fixed-income based mutual funds, 391 fund-specific risk dimensions, 391 investment style, 391 risk decomposition of a U.S equity mutual fund, example, 391–393 risks, SEC disclosure regulations, 440 Rule 2a-7, money market mutual funds (MMMFs), 80–81, 198–200, 212 2014 rules addressing systemic risk concerns, 558–559 Rule 12b-1 fees, 27–28, 30–34, 41, 60, 93, 270, 309–310, 313, 351, 401 average fee, 31 distribution charges, fund managers, conflict with role as fiduciary, 31 intent of fee, 30–31 Investment Company Act, 30 median fee, 31 mutual fund distribution, 420–428 adoption of Rule, 420–422 common uses, 424 contingent deferred sales loads (CDSLs), 422–423 critique of fees, 425–428 current fees, 423–424 Investment Company Act, 421 legislative history, 420–422 NASD sales charge rule, 422–423 non-distribution aspect of, 428 post-adoption issues, 422–423 proposed Rule 12b-2, 425 reform issues, 424–428 requirements, 421–422 percentage of fund classes with 12b-1 fees, 31 shareholders conflict caused by, 31 Rule 12b-2, proposed, 425 Rule 38a-1, compliance program rule, 82–83 Rule 135a, generic advertisement, 438 Rule 482 advertisement, 438 runs on funds, money market mutual funds (MMMFs), 212 S safe harbor regulations target-date funds (TDFs), 105–106 sales and advertising literature regulation fund offering disclosure, 437–438 generic advertisement (Securities Act Rule 135a), 438 Rule 482 advertisement, 438 622 INDEX screening, socially responsible mutual funds (SRMFs) managers, screening ability, 264 negative and positive screens, 253, 255, 273 norms based screening, 253, 255 portfolio construction, strategies for, 253, 255 social activism screens, 273 sustainable investing screens, 273 screen liquidity trading exchange-traded funds (ETFs), 160 Securities Act of 1933 disclosure, civil liability and law enforcement sanctions, 443–444 pooled investing (investment pooling), 67 Securities and Exchange Commission (SEC) See also Investment Company Act disclosure regulations, specific content requirements, 439–443 after-tax performance disclosure, 440–441 anti-fraud principles, 441 derivatives, use of, 443 expenses, 442 investment objectives, 440 investment strategies, defined in Form N-1A, 440 performance disclosure, potential problems involving, 441–442 distortion of information, 441–442 sponsor’s selection bias in presenting information, 441–442 portfolio disclosure, 442–443 proxy voting by funds, Form N-PX, 443 risks, 440 standardized and non-standardized methodologies, 440–441 leveraged and inverse exchange-traded funds (LIETFs), 173–174 regulation of mutual funds oversight, 83 senior securities, 77 SEC Rule 2a-7, money market mutual funds (MMMFs), 80–81, 198–200, 212 2014 rules addressing systemic risk concerns, 558–559 Securities and Exchange Commission (SEC), 2014 rules addressing systemic risk concerns money market mutual funds (MMMFs), 558–559 institutional MMMFs, floating NAV, 558 prime MMMFs (general purpose funds), 558–559 redemption gate, 558 SEC Rule 2a-7, 558–559 Securities and Exchange Commission (SEC), forms Form N1-A, 436, 440 Form N-PX, 443 Form N-Q, 77 Securities Exchange Act of 1934 pooled investing (investment pooling), 67 securities lending exchange-traded funds (ETFs), 163 securities selection conflicts of interest without ethical standards, 478 securities transactions fees See fees and expenses, generally self-indexing, exchange-traded funds (ETFs) cost cutting opportunities, 467 senior securities leverage limits, SEC regulation of, 77 services provided by mutual fund firms, 406–414 additional fund choices, 407 big data revolution, impact of, 411 crowdfunding, 406–407 diversification potential of mutual funds and exchange-traded funds (ETFs), 408, 409f exchange-traded funds (ETFs), 407–409 comparison of fund characteristics, 408, 409f diversification potential of mutual funds and exchange-traded funds (ETFs), 408, 409f hybrid funds, 410–411 impact of services fund performance and risk, 413–414 index funds, 407–409 index funds and exchange-traded funds (ETFs), 407–409 investment product portfolio, 407 shareholder services and tax management, integration of, 411–413 tax-efficiency ranking for major asset classes, 412 tax loss harvesting, 412 shareholder activism closed-end funds (CEFs), 127–134 actions taken by activist shareholders, 129–131 case study, 129–131 characteristics of target CEFs, 127–129 corporate control contests, 127 managed distribution policy (MDP) commitment, 131–134 role of, 127–134 SEC proxy reforms, 131 strategic responses to activist attacks, 131–134 socially responsible mutual funds (SRMFs), 262 shareholder liquidity fees money market mutual funds (MMMFs), SEC 2014 rules addressing, 558 shareholder reports, disclosure, 438–439 shareholder risks leveraged and inverse exchange-traded funds (LIETFs), 184–187 credit risk, 185 liquidity risk, 185–186 INDEX market risk, 184–185 sovereign risk, 186 shareholders leveraged and inverse exchange-traded funds (LIETFs), investor confusion, 173–174 structure of mutual funds, 401 shareholder services and tax management, integration of services provided by mutual fund firms, 411–413 tax loss harvesting, 412 shareholder transaction fees See fees and expenses, generally Sharpe ratio analyzing mutual funds, 331–332, 345 leveraged and inverse exchange-traded funds (LIETFs), 183 Sharpe’s return-based style analysis strategic asset allocation (SAA), 297–298 short sales creation of optimal portfolio without short sales, 318, 320f short selling, advantages leveraged and inverse exchange-traded funds (LIETFs), 183 signaling hypothesis closed-end funds (CEFs), 132 simplified summary prospectus (“layered disclosure) mandated offering disclosure, 437 Singapore fund performance, 496t number and size of mutual funds, 495t single factor models portfolio evaluation, determining alpha, 235, 241–242 single index model exchange-traded funds (ETFs) performance, 539, 540t–541t size of mutual fund, 36–37 cost increases, 37 economies of scale, 36–37 emerging market mutual funds (EMMFs), number and size of funds by country, 494, 495t flow and performance relationship, 39–40 fund closings, 36 fund mergers, 37 global mutual fund industry, size of industry and expenses charged worldwide, 21–23 outperformance, prediction factors, 355–357 sources of diseconomies, 37 Small Business Job Protection Act (SBJPA) of 1996, 52t, 60 Smart Beta ETFs, 162, 411 socially responsible investing (SRI) See also socially responsible mutual funds (SRMFs) 623 definition of, 249–250 globalization and education, impact of, 249 socially responsible investors, 251, 260, 263, 272 See also socially responsible mutual funds (SRMFs) socially responsible mutual funds (SRMFs), 14, 248–265, 264, 272–274 Asia, 257 asymmetric information, 262–263 Australia, 257 Canada, 256 community investing, 255 definition of, 249–250 documentation ability, 264 economic pillar, sustainability paradigm, 252–253 environment environmental, social, and governance integration (ESG integration), 254, 255 environmental impact of SRMFs, 263 opportunities, increase in environmental and social concerns, 261 portfolio construction, strategies, 254, 255 sustainability paradigm, criteria, 252 environmental impact of SRMFs, 263 environmental pillar, sustainability paradigm, 252 Europe, 256–257 financial benefits, 262 future developments, 259–260 Global Sustainable Investment Alliance 2012 (GSIA), 250, 253, 254, 255, 257 impact investing, 255 industry, rapid growth of, 265 investors, 249 “activist” investors, 255 “feel good” investors, 255 socially responsible investors, 251, 260, 263, 272 issues and challenges, 262–263 managers, key success factors, 248, 264 documentation ability, 264 managing engagement, 264 screening ability, 264 managing engagement, 264 measurement See socially responsible mutual funds (SRMFs), performance and measurement mutual funds, growth of, 260–261 opportunities, 260–262 environmental and social concerns, increase in, 261 mutual funds, growth of, 260–261 technological development, 262 performance See socially responsible mutual funds (SRMFs), performance and measurement 624 INDEX socially responsible mutual funds (SRMFs) (continued) portfolio categories, 250 portfolio construction, strategies for, 253–255, 265 best-in-class strategy, 253–254, 255 engagement, management and shareholders, 254–255 environmental, social, and governance integration (ESG integration), 254, 255 screening, 253, 255, 273 strategy comparisons, 255t thematic investment approach, 253, 255 screening managers, screening ability, 264 negative and positive screens, 253, 255, 273 norms based screening, 253, 255 portfolio construction, strategies for, 253, 255, 273 social activism screens, 273 sustainable investing screens, 273 screening ability, 264 shareholder engagement or activism, 262 social concerns, increase in, 261 social performance of asset, measurement criteria, 250 social pillar, sustainability paradigm, 252 social portfolio categories, 250 structure of, 250–252 sustainability paradigm, criteria, 252–253 sustainable and responsible investment, 250 sustainable investing screens, 273 technological development opportunities, 262 trends, 259–260 types of SRMFs, 250–252 U.S., 256 socially responsible mutual funds (SRMFs), performance and measurement, 257–259, 274–284 characteristics of global mutual funds and their holdings, 277t closet indexing, 277t, 282 extra-financial performance measurement, 259 law of one price, 275 mutual fund efficiency, 274–275 mutual fund returns, 276–278 performance measurement, 275–276 relative performance of return, 258–259 social performance of assets, measurement criteria, 250 sources of good performance, 278–282 chasing returns and investor flows, 284 copycat funds, 282 empirical findings of studies on SRMFs, 279t–281t home bias, 282 luck versus skill, 282, 285 managerial incentives, 283–284 stock-picking, 282–283 “streetlight effect” or “drunkard’s search,” 259 social responsibility ethical standards in mutual funds, 473, 476 investing and, 249 Social Security, 44, 45 retirement resource pyramid, 44, 45 soft-dollar arrangements, 31, 357, 420 Solver tool (Excel), 308, 313, 318, 320f Sortino ratios exchange-traded funds (ETFs) performance, 539, 542–543 sources of information about mutual funds, 311–313 analyzing mutual funds, Morningstar products, 337–338, 345, 346–347 Kiplinger mutual fund finder, 312 Lipper leaders, 312 Morningstar, 312 mutual fund prospectus and annual shareholder report, 311 South Africa mutual funds, 22t South Korea fund performance, 496t mutual funds, 22t number and size of mutual funds, 495t sovereign risk leveraged and inverse exchange-traded funds (LIETFs), 186 Spain mutual funds, 22t Spanish equity mutual funds strategic asset allocation (SAA), 298–301 annual average return of Eurozone equity funds and the Euro EuroStoxx 50, 301 annual descriptive statistics, 299–300 benchmarks, 299–301 empirical findings, 302–304 equity investment during different periods, comparison of, 303 fixed income benchmarks, 301 luck versus skill, 303–304 rebalancing strategies, 302 statistics of SAA of investing in Eurozone equity, 302 summary statistics of SAA of investing in Eurozone equity, 302 split capital closed-end funds (CEFs) U.K closed-end funds (CEFs), 139t, 140, 145 sponsors, 399–400 changes in, 554 closed-end funds (CEFs), 120, 400 exchange-traded funds (ETFs), 154–156, 400 INDEX Morningstar grades for stewardship, corporate culture, and board quality among fund families, 38–39 open-end funds (OEFs), 96–97, 400 role in establishing a mutual fund, 73–74 selection bias, potential problems involving performance disclosure SEC disclosure regulations, 441–442 structure of mutual funds, 404–405 target-date funds (TDFs), 104–107, 113, 117 unit investment trusts (UITs), 400 spread, exchange-traded funds (ETFs) bid-ask spread, 463, 527 trading, 161 standard finance theory strategic asset allocation (SAA), 295 standardized and non-standardized methodologies SEC disclosure regulations, 440–441 stated return objective leveraged and inverse exchange-traded funds (LIETFs), 181 state law, mutual funds, 72 establishing fund, 74 statement of additional information (SAI) mandated offering disclosure, 437 transparency, regulation of mutual funds, 76 statistics See mutual fund industry statutory prospectus, mandated offering disclosure, 436–437 statutory trusts (business trusts), 72, 400 stochastic discount factor, definition of, 364 stochastic discount factor framework, 16, 364–377 appeal of approach, 364 empirical evidence, 372–376 gross return of Treasury bill, 372–375 law of one price, 376 evaluation of fund performance, 364–368 admissible performance measure, 366–367, 370 approaches to, 368–370 benchmark, 368 main approaches, 365–366 law of one price, 364–365, 367–370, 372, 376 stochastic discount factor, definition of, 364 weight-based performance measures, 371–372 stock market crash of 1929, 67, 121, 547, 550 stock mutual funds, 13–14, 233–245 alpha, definition of, 234 asset allocation, 233 closet indexing, 244 fund selection, preliminary steps, 234 management fees, 244, 245 portfolio evaluation, determining alpha alternate evaluation methods, 238–242 multi-factor models, 235–238, 240–244 performance attribution (attribution analysis), 238–239 625 single factor models, 235, 241–242 purpose of investing, 234 stock selection ability of mutual fund managers, 242–244 stock selection ability of mutual fund managers, 242–244 strategic asset allocation (SAA), 14–15, 291–304 adequate SAA, 294 asset allocation, 293–295 asset class, 293 behavioral finance, 295–296 defining asset allocation, 293–295 distinguishing changes, 294–295 importance of, 294 investment policy determination, 292–293 misinterpretation of results, 292 methods of determining SAA, 296–297 mean variance approach, 297 mutual funds, 297–298 portfolio holding, 296 Sharpe’s return-based style analysis, 297–298 strong style analysis, 298 window dressing strategy, 296 mutual funds methods of determining SAA, 297–298 rebalancing analysis, 298, 304 Spanish equity mutual funds, 298–304 rebalancing, 294–295 common reasons, 295 mutual funds, 298, 304 tactical asset allocation (TAA), 294 SAA, 293–295 Spanish equity mutual funds, 298–304 standard finance theory, 295 tactical asset allocation (TAA), 294 See also rebalancing, this group strong style analysis strategic asset allocation (SAA), 298 structure of funds See organization and structure supermarket channel, no-transaction fee promotion (NTF program) mutual fund distribution, 420 sustainability paradigm in SRMF investment, criteria, 252–253 economic pillar, 252–253 environmental pillar, 252 social pillar, 252 sustainable and responsible investment See socially responsible mutual funds (SRMFs) Sweden mutual funds, 22t swing pricing, risk evaluation process, 385 Switzerland mutual funds, 22t socially responsible mutual funds (SRMFs), 279t synthetic replication See exchange-traded funds (ETFs) and replication 626 INDEX systematic risk in returns, sources global mutual funds performance, 508–509 currency risk, 509 global versus local market risk, 508–509 global versus local style factors, 509 law of one price, 509 purchasing power parity (PPP), 509, 512, 513 systemic risk concerns, SEC 2014 rules addressing money market mutual funds (MMMFs), 558–559 institutional MMMFs, floating NAV, 558 prime MMMFs (general purpose funds), 558–559 redemption gate, 558 SEC Rule 2a-7, 558–559 shareholder liquidity fees, 558 T tactical asset allocation (TAA), definition of, 294 Taiwan fund performance, 496t mutual funds, 22t number and size of mutual funds, 495t target-date funds (TDFs), 11, 24, 26, 103–117 age of participants/shareholders, 103–107, 112–114 custom target-date funds (custom TDFs), 112–114 benefit programs, 113 demographics, 113 examples of customizations, 114t investment preferences, 112 risk preferences, 113–114 defined benefit plan, age of participants/shareholders, 113 defined contribution plans (DC plans) age of participants/shareholders, 104, 105, 106, 112 defined benefit plans (DB plans), switch from, 104 lifecycle investment theory, 104–105 overview, 104 Pension Protection Act (PPA), 103, 106 percentage of global retirement market, statistics, 104 qualified default investment alternative (QDIA), 106 safe harbor regulations, 105–106 definition of, 24, 107 dynamic asset allocation, 114–115 dynamic lifecycle strategies versus standard lifestyle approach, 115 fees, 108, 112, 116 401(k) plans, 50–51 glidepath, 107–110 equity allocations of major U.S target-date providers, 108, 109f examples, 108–110 landing point date, U.S TDFs, 108–109 National Employment Savings Trust (NEST) TDFs, 110 “to” and “through” approaches of asset allocation management, 111–112 historical background, 104–105 home bias, 108 human capital and financial capital, balancing, 105–106, 111 hybrid fund, 24, 26 industry, 104, 116 lifecycle investment theory defined contribution plans (DC plans), 104–105 dynamic lifecycle strategies versus standard lifestyle approach, 115 longer horizons, 555–556 management fees, 112 National Employment Savings Trust (NEST) TDFs, 110 open-end funds (OEFs), 96 Pension Protection Act (PPA), 103, 106 performance, 116 popularity of, 24 retirement funding dynamic lifecycle strategies versus standard lifestyle approach, 115 lifecycle investment theory, 104–105 safe harbor regulations, 105–106 sponsors, 104–107, 113, 117 trends, 108–109 longer horizons, 555–556 types of, 107, 112–116 taxable government money market mutual funds (taxable government MMMFs), 204, 205t–206t tax attribution exchange-traded funds (ETFs) performance, 530–531 measuring exchange-traded funds (ETFs) performance, 530–531 tax efficiency and fund turnover investor choices, mutual fund portfolios, 311 tax-efficiency ranking for major asset classes shareholder services and tax management, integration of services provided by mutual fund firms, 412 taxes, leveraged and inverse exchange-traded funds (LIETFs), 184 tax-exempt money market mutual funds (tax-exempt MMMFs), 204 tax liability, 35–36 capital gains overhang, 35 cash drag on returns, 35–36 INDEX income equalization, 36 mutual funds, 35–36 tax rate, 35 tax loss harvesting shareholder services and tax management, integration of services provided by mutual fund firms, 412 tax management and shareholder services, integration of services provided by mutual fund firms, 411–413 Taxpayer Relief Act of 1997, 52, 60 education savings, 52, 60 tax treatment differences between mutual funds and exchange-traded funds (ETFs), 165 technological development opportunities socially responsible mutual funds (SRMFs), 262 Thailand fund performance, 496t mutual funds, 22t number and size of mutual funds, 495t 3X funds, 169 3X leveraged ETFs (LETFs) historical returns (tables), 177t–179t index return versus 3X LETFs performance, 175–176 returns, leverage ratio of 3X monthly rebalanced ETF, 181, 182t time-weighted rate of return (TWR) open-end funds (OEFs), 90–91 tracking cost efficiency exchange-traded funds (ETFs) performance, 528–529 measuring exchange-traded funds (ETFs) performance, 528–529 tracking error exchange-traded funds (ETFs) factors leading to, 162–163 securities lending, definition of, 163 exchange-traded funds (ETFs) performance, 459, 525–526 factors leading to, 162–163 negative roll yield, 526 premium or discount, 463, 526 sponsors, 155–156 volatility, driving factors, 526 exchange-traded funds (ETFs) sponsors, 155–156 tracking methods exchange-traded funds (ETFs) sponsors, 155–156 trading costs, 31, 352 defined contribution plans (DC plans), ease of trading, 96 ethics in financial trading, 470–471 627 exchange-traded funds (ETFs), 160–161 high-frequency trading (HFT), 35, 100, 190 late trading, 478 traditional IRAs, 52–54 asset allocation and investor age, 53–54 creation of, passage of ERISA, 51–52 financial services firms holding IRAs, 53 tax benefits, 52 types of, 52 transaction costs exchange-traded funds (ETFs) performance, 529–530 measuring exchange-traded funds (ETFs) performance, 529–530 transfer agent structure of mutual funds, 405–406 transparency, disclosure documents regulation of mutual funds, 76–77 fees, 76 performance information, 76 registration statement requirements, 76–77 Securities Act of 1933, amendment requirements, 77 statement of additional information (SAI), 76 transparency of mutual funds ethical standards, 472–473, 474 Treynor ratio analyzing mutual funds, 332, 341, 342t, 345 2X funds leveraged and inverse exchange-traded funds (LIETFs), 169 types of investment companies, 4, 6–8 closed-end funds (CEFs), exchange-traded funds (ETFs), 6–7, 524 open-end investment company, unit investment trusts (UITs), 7–8 U U.K closed-end funds (CEFs), 12, 137–150 arbitrage trading strategy, 148–149, 150 capital structure, 139–140 CEF discount, anomalies, 141–146 arbitrage issues, 142, 143, 144 governance, impact on, 145 initial premium and the change into a discount, 141–142 investor sentiment theory, 143–144 management fees, 145–146 market wide shocks, affect of, 144–145 nature of the discount and fluctuations, 142–146 repurchase of shares, widening the discount, 145 transparency issues, 144 current structure and regulation, 138–141 historical background, 137 628 INDEX U.K closed-end funds (CEFs) (continued) law of one price, 138 nature of, 138 ownership, 141 performance studies, 146–148 premiums CEF discount, anomalies, 141–142 U.S comparisons, 138 split capital CEFs, 139t, 140, 145 taxation, 140 trading strategies, 148–149 U.S comparisons, 138–139 CEF discounts and premiums, 138 CEF markets, 139 United Kingdom See also U.K closed-end funds (CEFs) fund performance, 496t mutual funds, 22t number and size of mutual funds, 495t socially responsible mutual funds (SRMFs), 279t–280t United States fund performance, 496t mutual funds, 22t mutual funds, statistics, 4, number and size of mutual funds, 495t retirement assets, statistics, 46–48, 56 growth of U.S retirement assets, 46–47 near-retiree households with retirement accumulations, share of, 47–48 shift toward individual account based approaches, 47 socially responsible mutual funds (SRMFs), 256, 279t–281t unit investment trusts (UITs), 157 definition of, 7–8 disclosure, 445 hybrid, sponsors, 400 structure, 400 as type of registered investment company (RIC), 68 U.S market statistics, unit investment trusts (UITs) industry competing with open-end funds (OEFs), 549 upstairs desk trading, 160 U.S households See households and mutual funds V valuation methods money market mutual funds (MMMFs), 199–201 Europe, constant and variable NAV, 199–201 $1 valuation, 199–201 penny rounding, 200 volatility leveraged and inverse exchange-traded funds (LIETFs) effect on market volatility and pricing, 187–188 importance of, 188–189 increasing volume and volatility, 188–189 W weight-based performance measures stochastic discount factor framework, 371–372 Wells Fargo Advantage Growth Fund, structure example, 401, 402t–404t window dressing strategy bond mutual funds, 218–219 strategic asset allocation (SAA), 296 World War II, 547, 550 ... Kent Baker and Greg Filbeck Private Equity: Opportunities and Risks Edited by H Kent Baker, Greg Filbeck, and Halil Kiymaz Mutual Funds and Exchange- Traded Funds: Building Blocks to Wealth Edited... Active Mutual Funds and Their Total Nets Assets by Region 269 Net New Cash Flows to U.S Mutual Funds 271 Net New Flow to and Market Share of U.S Indexed Mutual Funds 272 Cumulative Flows to U.S... Edited by H Kent Baker, Greg Filbeck, and Halil Kiymaz Mutual Funds and Exchange- Traded Funds BUILDING BLOCK S TO WEALTH EDITED BY H KENT BAKER GREG FILBECK and HALIL KIYMAZ 3 Oxford University