|
Stocks or bonds with a fixed rate of interest that is adjusted, usually quarterly, based on some independent benchmark like Treasury-bill yields. Vanguard dissolved its eight-year-old Adjustable Rate Preferred Stock fund in April 1991, after changes in tax laws made the fund unappealing.
Securities representing a fixed number of shares of stock in foreign companies. ADRs trade like regular common stocks and are much easier to buy and sell than overseas shares. Many fund managers prefer ADRs to foreign stocks for this reason alone. There are several hundred ADRs available in the U.S.
The investment company which offers a mutual fund. The fund's portfolio is usually run by an individual portfolio manager who is employed by the adviser. Vanguard contracts with a number of outside investment advisers to run many of its funds.
A stock fund that invests exclusively for growth and ignores income from dividends or interest. Generally the riskiest of funds, these are also the funds with the greatest potential for profits. Many aggressive growth funds buy shares in small, fast-growing companies. A fund that invests exclusively in zero-coupon bonds can also be considered an aggressive fund.
A federal tax system developed for wealthy individuals who have numerous tax credits and deductions. Closing some tax-law loopholes, the AMT seeks to ensure that everyone pays at least some income tax.
The first day of the month in which the annuity holder specifies that annuity payments should begin.
Association of Southeast Asian Nations. Intergovernmental association of Asia-Pacific countries for more than 20 years. Members include Brunei, Indonesia, Malaysia, Singapore, Thailand, the Philippines and Vietnam, which entered in mid-1995.
Objects of value. The most common assets which individuals own for investment purposes are stocks, bonds and other securities, but can include gold bullion, rare stamps or coins, or real estate.
A mutual fund which invests in a variety of assets, most often stocks, bonds, money market securities and, occasionally, gold bullion. Vanguard's Asset Allocation fund invests solely in the component stocks of the S&P 500 index, long-term U.S. Treasury bonds, and cash.
In annuity accounts, the AUV is similar to a mutual fund's NAV (Net Asset Value) except that it incorporates reinvested dividends and capital gains. If you know the AUV for an annuity account for any two dates, you can divide the most recent AUV by the earlier AUV to determine your total return for the period. Note however, that while AUVs are calculated out to six decimal places, Vanguard routinely reports only the first two places. So, for accurate calculations you must call Vanguard's Variable Annuity Department for the complete figures.
The weighted average of maturities for all the bonds in a fund portfolio. (A bond's maturity is the length of time left until its face value is paid off.) The measure gives investors a good sense of interest-rate sensitivity, particularly when comparing funds. The longer the average maturity, the greater the interest-rate sensitivity. When interest rates rise, the fund with the longest maturity should decline the most in price. When rates fall, the opposite is generally true. From time to time, a fund may report an "effective" average maturity. This takes into account the possibility that some bonds in the portfolio may be called in and repaid prior to their maturity dates. In that case, the "effective" maturity will be shorter than the average weighted maturity. (see also Duration)
Mutual funds which charge a sales fee when you sell the fund, rather than when you initially make your purchase. Hence, the charge is called a back-end load, rear-end load or sometimes a contingent deferred sales load. In many cases, the sales fee goes to the broker selling the fund, the fund company or a combination of the two. Vanguard has many funds which charge back-end loads. While the money from the load is returned to the fund and counted as part of its net asset value, the net impact on the investor is the same as any other back-end load; your assets are reduced by the amount of the load.
One which buys both stocks and bonds, often in a fixed proportion. The fund seeks both capital appreciation and income.
Obligation of a bank to pay a draft drawn on the bank by a customer. Often used in international commerce and collateralized by the goods to be sold by that customer. These short-term, non-interest bearing notes are sold at a discount to face value and redeemed at maturity. Considered one type of money-market instrument.
One one-hundredth of a percent. Used when discussing changes or differences in interest rates. For example, a bond yielding 6.32% is said to yield 32 basis points more than a bond yielding 6.00%.
Period of persistently declining stock or bond prices. Bear markets in stocks usually occur when the economy is thought to be slowing, while bear markets in bonds occur when interest rates are rising. (see also Bull Market)
The person to whom death benefits are paid when the owner of an annuity dies.
A measure of a fund's movements relative to the overall stock or bond market. Betas tell you if the fund's monthly returns are greater than, or less than the overall market, and by how much. The stock market, as defined by the S&P 500, or the bond market defined by the Lehman Aggregate Bond index, has a beta of 1.00. Funds with high betas tend to be riskier than, say, an index fund tied to the S&P 500 or Lehman index. Low beta funds are less risky. If the stock or bond market rises or falls 10%, a fund with a beta of 1.4 would be expected to rise or fall 14%. That being said, a fund with a beta of say, 0.5 may not be half as risky as the market, but rather a fund that moves completely independently of the market. That is why you must also refer to a fund's correlation coefficient, or r-squared. Betas in this guide are calculated based on fund returns for the past 24 months. (see also R-Squared, and Relative Volatility.)
Common shares of extremely large, stable U.S. corporations. Often refers to stocks in the Dow Jones Industrial Average which have steady earnings and pay regular dividends.
A fund whose portfolio invests in interest-paying securities like government or corporate bonds (see also Treasuries). Corporate bonds, unlike stocks, do not represent an ownership interest in a company, but rather an indebtedness issued by the company. Bond funds are more interested in paying shareholders steady income than in capital growth.
Named after then U.S. Treasury Secretary Nicholas Brady, the Brady bond is backed by U.S. bank loans to Latin American companies. The bonds' principal and first few semiannual interest payments are secured by U.S. Treasury bonds.
A period of generally rising prices for stocks or bonds. (see also Bear Market)
The German central bank, which is as influential in European markets as the Federal Reserve is in the U.S. Sets interest rates for the German economy, including the discount rate, which is the rate for short-term loans to commercial banks, and the Lombard rate, which establishes a ceiling for short-term money-market rates. (see also Federal Reserve System)
Simple investment strategy that, as its name implies, consists of buying a particular security and then holding it through up and down markets, rather than trying to jump out when prices are falling and jump back in when they are rising. (see Timing)
Paris, France's best-known stock-market index.
The profit or loss that results from selling a security or piece of property. A capital gain occurs if your selling price is higher than your purchase price. A loss results from selling below the purchase price. Short-term capital gains are those made on investments held for less than a year, while long-term gains are those made on holdings of one year or more.
Profits on the sale of assets, generally stocks or bonds, held in a fund portfolio. These profits, when and if they exceed any losses, are paid to fund shareholders at least once a year.
Price appreciation in securities or other assets held in a fund portfolio. Until the asset is sold, this growth is considered unrealized. Growth, rather than income, is the prime objective of many equity mutual funds.
The market value of a publicly-held company. A company's value is determined by multiplying the total number of its outstanding common stock shares by their current price.
Interest-bearing, short-term bonds and notes. Often when funds claim to have a percentage of their assets in cash, what they really mean is that they are invested in these cash equivalents.
A short-term, say 6-month or 1-year, interest-bearing investment. Usually a deposit in a bank or savings and loan.
Unsecured, short-term, interest-bearing IOUs issued by large corporations or financial entities. Maturities can be as short as a few days. Some commercial paper, rather than paying interest, is sold at a discount to its face value.
Securities representing an ownership interest in a corporation.
The multiplying effect upon the growth of an investment that comes from reinvesting all dividends and capital gains distributions and leaving the principle untouched.
An investor who marches to the beat of a drummer different from that of the herd. When the majority of investors are bullish, the contrarian is bearish, or is investing in under-loved companies or industries.
A bond or preferred stock which can, under certain circumstances particular to that security, be exchanged, usually for common stock in the issuing company. Conditions can be set on the time, price and number of shares received on conversion.
The rise or fall of a bond portfolio relative to an index of bonds. A portfolio that rises more rapidly than the bond market and also falls less than the bond market as interest rates fluctuate, is said to have a "positive" convexity.
(see R-Squared)
One measure of a bond's risk, the rating tells you how secure analysts are that the company or government entity issuing the bond will be able to maintain interest payments as well as return principle when the bond matures. The most common ratings agencies are Standard and Poor's (S&P) and Moody's. S&P's top investment-grade ratings are AAA, AA, A, and BBB. Moody's are Aaa, Aa, A and Baa. Below this, riskier bonds are rated BB or Ba and lower. These bonds can be called high-risk or "junk" bonds. Bonds which have defaulted are rated D.
Shares in a company whose main business regularly experiences ebbs and flows in activity, usually tied to economic activity. The auto, chemical, paper and steel industries, for example, are considered cyclical since their earnings tend to fall when the economy slows. Food and drug stocks are typically considered by most investors to be non-cyclical since people continue to eat and demand medical care even during the worst of times.
The best-known German stock market index.
A security whose value, or interest payments, are based on (or derived from) some other security or index or financial measure. In the early 1990s certain highly speculative derivatives caused some mutual fund portfolios to incur substantial losses. Vanguard uses some very plain-vanilla, low-risk derivatives in some of its funds, such as Floating Rate Notes. (see also Floating Rate Notes)
The interest rate charged by the Federal Reserve Board for overnight loans to member banks. A change in this rate can have a dramatic impact upon other interest rates and upon bond prices. A Prime Rate change usually follows a change in the Discount Rate. (see also Federal Funds Rate, Prime Rate)
A payment by the fund to shareholders of either interest income or capital gains.
The spreading of risk among many entities. Fund managers may buy several stocks or bonds issued by several companies in a wide range of industries to spread their risk. The objective is to be diversified enough so that no one investment has too large an impact upon the entire portfolio. Mutual fund investors may also buy several, different types of funds to diversify their own portfolio.
A payment, usually made quarterly, by a corporation to common-stock holders. Equity mutual funds may pay dividends quarterly, twice a year, or annually. Bond funds typically pay dividends monthly though they are accrued daily.
A strategy for investing a fixed amount on a regular basis regardless of whether prices are higher or lower than at the time of your last investment. (See also Value Averaging)
The sum of the stock prices of 30 of the largest companies traded on the New York Stock Exchange. The companies include Coca Cola, General Electric, IBM and Merck. To adjust for stock splits, the sum of the shares is divided by a number less than 1 to produce the actual Dow Jones Average. There are a number of broader stock market indices that give investors a better idea of how the overall market is faring. See also S&P 500, Russell 2000, Wilshire 5000)
As contrasted with non-durables, durable goods are products which are designed to last for more than one year. This includes things like automobiles, dishwashers, furniture and television sets. Non-durables include things like food, beverages, drugs, cigarettes and the like.
An increasingly popular measurement of the volatility (risk) of bond or bond fund prices relative to changes in interest rates. More complex than simply knowing that long-maturity bonds are more volatile than short-maturity bonds, duration is calculated by considering the present values of future cash flows from the bond, combining the size of the bond's coupon with the time to maturity. Two thirty-year bonds, for instance, with different coupons, will have different durations. (see also Average Maturity)
Morgan Stanley Capital International's Europe, Australia, and Far East (EAFE) Index is a benchmark used to track the performance of non-U.S. stock markets. Vanguard's Tax-Managed International and Developed Markets Index funds attempt to mimic this index.
Earnings before interest, taxes, depreciation and amortization. A measure of earnings power used by some investors to determine a company's value.
Investment theory which holds that pricing of shares in the stock markets immediately reflect all available information and investor expectations pertaining to a particular company. Believers in the efficient market hold that it is impossible to beat the stock market over long periods of time.
European Economic and Monetary Union. The name given to the melding of European countries into a borderless trade zone. Officially begun with the introduction of a common currency, the Euro, on January 1, 1999. Original 11 member countries include Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Spain and Portugal. Notable exception: the United Kingdom.
(see Common Stock)
In their purest form, an index fund that is priced and traded continuously on one of the major stock exchanges. ETFs have taken the investment world by storm of late. The most active include the Diamonds, DIA, representing the Dow Jones Industrial index; the QQQ, or Cubes, representing the NASDAQ 100 index; the MDY, which corresponds to the Standard & Poor's MidCap 400 index; and the Spyder, or SPY, which tracks the Standard & Poor's 500 index. (See also HOLDR and iShare)
The day on which a mutual fund pays a dividend or makes a distribution to shareholders. The fund's net asset value drops by the amount of the distribution on this date (the NAV may also rise or fall due to the performance of the fund's portfolio on that date). (see also Record Date, Reinvestment)
Transfer of money between one fund and another within the same fund complex. Usually accomplished by a single phone call. Investors should be aware that the exchange out of one fund constitutes a sale of that fund's shares and is taxable.
Combined cost of a fund's management fees and operating expenses for a given year. Operating expenses include accounting costs, transaction costs, etc. Expressed as a percentage of fund assets. With fixed-income funds in particular, lower expenses generally translate into higher fund yields and returns. (see Management Fee)
The rate on short-term, overnight loans among commercial banks. The Federal Reserve influences the Fed Funds Rate by buying and selling Treasuries in the open market and by changing reserve requirements for banks.
The "Fed" regulates the U.S. monetary and banking system through 12 regional Federal Reserve Banks plus their 24 branches and other member banks. Federal Reserve Banks monitor banks in their regions for compliance with regulations and provide funds in emergencies. The Fed's Federal Open Market Committee (FOMC) sets short-term monetary policy, and its actions in lowering and raising interest rates have a great impact on the bond markets. Fed Chairman Alan Greenspan became one of the most influential policy makers in the 1990s as the bull market moved ahead in part due to deft monetary policy.
One which seeks to generate a consistent level of interest income. Primarily invests in bonds and sometimes preferred stocks or convertibles.
Time that elapses between when you write a check and when that check is debited from your account. An investor may write a check on a Monday but continue to earn interest on the money until the check is presented for payment.
A derivative security whose interest rates are pegged to some underlying interest rates or indexes. Most of the floaters used by Vanguard derive their interest rates from either the Fed Funds rate, the Repo rate (or repurchase rate determined by transactions between borrowers and lenders or buyers and sellers of government securities) or LIBOR (the London Interbank Offered Rate.) LIBOR is what high quality international banks charge each other for Eurodollar loans.
Nickname for the Federal National Mortgage Association. Purchases mortgages from lending institutions, packages them together and then resells to investors. Primarily purchases mortgages backed by the Federal Housing Administration. This government-sponsored corporation is publicly-owned. Shares trade on the New York Stock Exchange.
Employee benefit plan which allows you to deduct a portion of your salary, before taxes, and invest it tax-free. Many mutual fund families administer 401(k) plans for corporate employees. There is a penalty for withdrawing funds from a 401(k) plan prior to retirement. FFSA conducts 401(k) and 403(b) plan reviews. (see 403(b) Plan)
Similar to a 401(k) plan, but designed for employees of non-profit organizations or institutions such as schools and hospitals.
Nickname for the Federal Home Loan Mortgage Corporation.
A fixed number of days, generally 10, during which you may cancel an annuity contract such as Vanguard's Variable Annuity Plan.
The "footsie" is London's most widely quoted stock market index.
The collection of mutual funds offered by a single fund adviser. Investors increasingly prefer to deal with just one or two fund families since record-keeping is simpler, particularly with account statements that combine many fund holdings in one. Also, conducting transactions between funds is greatly simplified. The Vanguard Group is a family of more than 100 mutual funds.
Technique by which investors scrutinize a company's operating results, such as profits or cash flow as well as economic and market factors, to determine appropriate values for the firm's securities. (See also Technical Analysis)
Financial contracts which require the owner to buy or sell a security or commodity at a certain price before or on a certain date. These speculative securities can be used to make large bets on the direction in prices for a particular commodity, stock or market index. (see also Options)
Nickname for the Government National Mortgage Association. GNMA is a government corporation which sell securities backed by pools of mortgages. Generally yielding more than Treasury securities, GNMAs are subject to interest rate risk beyond that of other bonds. If interest rates drop far enough, many mortgage holders will prepay their loans and refinance, leaving the investor with cash that must be reinvested at lower rates.
The total value of all goods and services produced by U.S. companies within U.S. borders. Since December 1991, this has been the Commerce Department's primary measure of the U.S. economy's size and growth or contraction. An inflation-adjusted measure of GDP is called the "real GDP."
Similar to Gross Domestic Product, but includes U.S. operations abroad as well. Until December 1991, this was the primary means of measuring the health and size of the U.S. economy.
Usually a stock fund which invests primarily, if not exclusively, for capital appreciation. Income is inconsequential.
Stock funds which attempt to provide both capital growth as well as income. Usually these funds provide a dividend yield above that of the overall stock market. Typically they invest in dividend-paying stocks. They may also buy bonds.
Investment strategy which prizes profit growth above asset values when determining a company's worth. Growth investors are most interested in companies whose earnings are rising faster than the overall market. (See also Value Investing)
The most widely-followed stock market index for Hong Kong's markets.
An attempt to offset one investment by buying a security such as an option or future that will move in the opposite direction of the original investment. Most hedges are imperfect since a perfect hedge would result in absolutely no gain or loss.
(see Junk Bond)
Merrill Lynch's entry into the exchange-traded fund, or ETF, marketplace. Stands for Holding Company Depositary Receipts. Consists of a static basket of stocks selected by Merrill Lynch. These baskets cover broad and narrow market segments including biotechnology and Internet infrastructure. Unlike most ETFs these are only sold in round lots of 100.
The simple average of yields paid by taxable money-market mutual funds. Used as the basis for comparing individual money-market fund yields against the universe of similar funds. Compiled by IBC.
Additional fees paid to a fund manager above and beyond the normal fees which are usually based on fund size. The incentive fee is generally tied to the manager's ability to outperform a market index such as the S&P 500, or a group of other, similar funds.
The passing through of interest and dividends paid on investments held by the fund to shareholders.
A composite of stock or bond prices or market capitalizations of a specific set of companies. Indexes are used to gauge market activity and direction. Familiar indexes are the Dow Jones Industrial Average, the S&P 500 and the Lehman Aggregate Bond index.
A mutual fund which seeks to match the performance of a specific stock or bond market index. Some funds simply purchase all the securities in a given index while others use an optimization program to purchase enough securities to mimic the financial characteristics of an index such as industry weightings or duration, without purchasing every security in the index. Vanguard offers myriad stock and bond index funds.
The rate at which consumer prices, usually measured by the consumer price index (CPI), are rising. Usually expressed as an annualized figure, inflation results in declining purchasing power for the dollar.
A personal investment account into which individuals can invest up to $2,000 annually ($3,000 in 2002), and which grows sheltered from taxes. For some investors, deposits into IRAs qualify as deductions against income. Used primarily for retirement savings since you are heavily penalized for withdrawals made before the age of 59 and a half.
Large pension funds, banks, labor union funds, college endowment funds, insurance companies and mutual funds are all considered institutional investors. They invest money for other people and wield enormous power with their billion-dollar plus portfolios. It is the buying and selling by institutional investors which generally pushes individual stocks, bonds or markets up and down.
We all know who the tax-man is, but what about those IRS forms investors need to fill out their tax returns? Here are the most common varieties:
- IRS Form 1099-DIV: Reports all dividend and interest income subject to federal income tax.
- IRS Form 1099-B: Reports all redemptions subject to capital gain or loss.
- IRS Form 1099-R: Reports all distributions from IRAs and other qualified retirement plans.
- IRS Form 5498: Reports all IRA contributions.
- IRS Form 1042-S: Reports all in-come subject to non-resident alien tax.
The stated goal of an investor or of a mutual fund. Investors try to match their own objectives for growth and/or income with funds that have similar objectives.
An exchange-traded fund developed by Barclays Bank, the original and largest index fund investment house. (See also HOLDR, SPDR and WEBS) Barclays' offerings track a host of major and minor market indexes.
Higher yielding, higher risk bonds. These are bonds either issued by solid companies that have fallen upon hard times and lost their investment quality ratings, or have been issued originally with higher than average interest rates by financially troubled companies. New junk bond issues proliferated in the '80s when formerly public companies were taken private by insiders who used junk bonds to pay for the purchase of all outstanding public stock. Junk bonds are rated BB or lower by Standard and Poor's, or Ba and lower by Moody's. Vanguard's High Yield Corporate bond fund, though nominally a "junk bond fund," tends toward higher quality bonds and does not experience the volatility (both up and down) that traditional junk funds do. In strong economic periods, High Yield Corporate tends to lag its peers. But when the economy weakens and most junk funds suffer huge losses, High Yield Corporate remains fairly steady.
Retirement plan, similar to an IRA, but aimed solely at self-employed workers. Investors with Keogh plans may contribute substantially more than the IRA limit.
An index which tracks the overall bond market compiled by the Wall Street firm of Lehman Bros. It includes more than 5,000 individual bond issues including U.S. Treasury and Government bonds, corporate bonds and mortgage-backed bonds. Vanguard's Total Bond Market fund is designed to mimic this index.
The use of borrowed money or options to increase your investments without spending much additional money. Leverage adds significant risk to a portfolio and magnifies losses as well as gains.
A measure of how easily an investment can be converted into its present value for cash or cash equivalents. Mutual fund shares are extremely liquid since they can be sold at their net asset value on any day the stock or bond markets are open. Real estate, on the other hand, is very illiquid.
Sales charge imposed on either the purchase or sale of fund shares. The charge is often split between the fund company and the broker conducting the transaction. Low loads typically charge 1% to 4% sales charges. Load funds charge as much as 8%. No-load funds do not levy a sales charge though Vanguard charges both front-end and back-end loads on several funds, paying the proceeds back into the fund portfolios. (see also Back-End Load)
Usually expressed as a percentage of a fund's assets, this is the amount of money paid to an investment adviser for running the fund's portfolio. (see also Expense Ratio)
(see Capitalization)
(see Timing)
A portfolio of very short-term, low-risk securities including bankers' acceptances, certificates of deposit, commercial paper, repurchase agreements and Treasury bills. These funds are very liquid; you can put money in and take money out easily, often by simply writing a check. A money market fund accrues interest daily and generally pays it out monthly, all the while maintaining a fixed price of $1.00 per share.
Security created by a pooling of mortgages with similar rates of interest and maturities. Monthly interest and principal payments on these mortgages are passed through to investors as interest.
Bonds issued by states, cities or local governments whose interest payments are free from Federal taxes as well as taxes in the state which issued them. Often referred to as tax-free bonds. Interest paid to investors in general municipal bond funds is not completely free from state taxes if the fund invests in a wide range of state securities. State-specific funds are free from taxes at the federal and state level.
An investment company which pools investors' assets and invests them in securities, typically stocks and/or bonds.
North American Free Trade Association. Members include Canada, Mexico and the United States.
National Association of Purchasing Management. Computes the closely watched NAPM index, a composite of production, orders, employment, inventories and delivery times. When the NAPM index falls below 500, the economy is said to be contracting. This indicator is said to be a favorite of Alan Greenspan's.
The total market value of all assets, minus liabilities, in a fund portfolio. Most funds calculate their NAV after the markets close for the day, then divide it by the number of shares outstanding to arrive at the net asset value per share figure found in newspaper listings.
The most widely quoted Tokyo index of Japanese stocks.
(see Durable Goods)
A contract which permits, but does not require, the owner to buy (call option) or sell (put option) a security or commodity at a certain price before or on a certain date. Options can be used to make large bets on the direction in prices for a particular commodity, stock or market index. (see also Futures)
A market comprised of many individual dealers who trade in securities that are not listed on an exchange like the New York Stock Exchange or the American Stock Exchange.
The day on which a fund's distributions are paid to shareholders of record. If you reinvest your dividends and capital gains distributions then this occurs on the reinvestment date. Otherwise the payment date, when checks or bank wires are received by shareholders, is generally a week or so after the record date. (see also Record Date, Ex-Dividend Date)
(see Total Return)
The mix of investments, usually securities, which makes up a specific fund. A fund owning 25 different stocks and 10 different bonds is said to have a portfolio of 35 individual securities. The term is sometimes used to mean a distinct mutual fund. While Vanguard's Fixed Income fund has several different portfolios, each can be considered a separate mutual fund with its own individual portfolio of securities.
The possibility that if interest rates fall far enough, a bond issuer will pay off the bond's principal early, forcing the investor to re-invest in bonds with lower yields. This risk is especially great for investors in GNMA securities, since falling interest rates give home-owners an incentive to pay off their mortgages and then refinance at lower rates.
This key interest rate is what banks charge on loans to their most creditworthy customers. Most large banks follow each other in setting the prime rate. Most other interest rates to consumers and businesses are then somehow tied to the prime. A rising or falling Prime Rate indicates rising or falling demand for loans and economic activity.
The SEC-approved offering document for an investment. The prospectus defines a mutual fund's investment objective, its expenses, its past performance history and lists the fund's portfolio manager. Unless there are fundamental changes to a fund's operations, a new prospectus must only be issued annually.
Measure of correlation of returns between two equity mutual funds. Usually expressed as a percentage, it defines the percentage of one fund's performance which can be correlated with, or be explained by, the performance of another fund. Funds with high r-squareds can be expected to perform similarly. Most fund reporting services calculate an r-squared between a particular fund and the S&P 500 index. However, calculations of r-squared between any two funds, not just the index, help investors find funds which will diversify a portfolio.
The day on which you must be a fund shareholder to be entitled to a scheduled distribution. The record date often precedes the reinvestment date by a day.
The use of interest or capital gains distributions to automatically purchase additional fund shares. Investors often choose to reinvest their mutual fund distributions in lieu of taking the distribution in cash. At Vanguard, you may choose to have your distributions from one fund invested in shares of a different fund including a money market fund.
(See Ex-Dividend Date)
Another statistical measure of fund risk (see also Beta). Volatility is measured by taking the standard deviation of fund returns over several months and dividing it by the standard deviation of returns for the S&P 500 (for stock funds) or the Lehman Aggregate Bond index (for bond funds) over the same period. A fund whose relative volatility is greater than 1.0 is said to be more volatile than the market. Conversely, a volatility rating of less than 1.0 indicates a fund is less volatile than the broad stock or bond market. (see Standard Deviation)
A security purchased for a short time, often a week, with a guarantee that another investor will repurchase it at a given time and a given price, usually with interest.
Index of the 3,000 largest stocks, compiled by the Frank Russell Company. The 3000 is split into two sub-indexes, the Russell 1000 index of large stocks and the Russell 2000 index of small stocks. Each of these indexes, in turn, are broken into both growth and value indexes. Vanguard uses some of these sub-indexes, such as the Russell 1000 Value index, as benchmarks for some of its funds.
One of several indices for the performance of small stocks, the Russell 2000 tracks 2,000 small companies. Others small stock indices include the Wilshire 4500 and the NASDAQ Composite. Vanguard's SmallCap Index fund is designed to mimic the Russell 2000 index. (see also Index Fund)
The Standard & Poor's 500 is the most common index used by professional money managers to assess the performance of the U.S. stock market. While the Dow Jones Industrial Average tracks the prices of just 30 large stocks, the S&P 500 measures the market capitalization of 500 stocks (see Capitalization). Vanguard's 500 Index and Tax-Managed Growth & Income funds are designed to mimic this index. Investors should be aware that the S&P 500 index, like most, does not incorporate the value of reinvested dividends but is merely a price index.
A mid-cap index put together by Standard & Poor's. Vanguard's MidCap Index fund mimics this index.
A small-cap index put together by Standard & Poor's. Vanguard's Tax-Managed SmallCap fund mimics this index. And the SmallCap Growth and SmallCap Value funds mimic subsets of the S&P SmallCap 600.
Sometimes called specialty funds, sector funds concentrate their holdings in a particular asset (gold and gold shares) or industry (health care or technology). Sector funds tend to be more aggressive investment bets as they are not fully diversified. Vanguard shut down its Specialized Service Economy and Specialized Technology sector funds early in 1994. It still offers gold, energy, health care and utilities funds.
Independent agency charged with administering federal securities laws. Oversees mutual fund industry.
A risky technique for betting that a security's value will drop, rather than rise. Securities are borrowed from brokerage houses for a small fee and sold. The investor hopes to profit from replacing those securities sometime in the future at a lower price. Short-sellers often use leverage (see Leverage) to magnify their potential profits. Some brokers allow investors to short-sell mutual funds.
The strategy of investing by avoiding companies deemed to have socially "irresponsible" practices. SR investors typically avoid companies in the tobacco, alcohol, defense and gambling businesses. In addition, companies with poor labor or environmental records are often shunned. Vanguard, bowing to consumer pressure, opened its Social Index fund based on a new index from the Calvert Group, a pioneer in the social indexing business, in 2000. Whether socially responsible indexing actually is a vehicle for social change, or simply a better way to invest has yet to be proven. Only in the late 1990s did SR funds perform well. Before that performance was decidedly lousy.
Standard & Poor's Depositary Receipt. A new form of index fund, also known as an ETF, or exchange-traded fund, which is traded on the American Stock Exchange. The original Spider, so-named because its symbol is SPY, tracks the S&P 500 index. There are now Spiders which track a variety of industry groups as well as indexes like the NASDAQ 100 (QQQ) known as a "cube" and the Dow Jones Industrial Average (DIA) which is called a "diamond." Spiders and their ilk (see WEBS) are giving traditional open-end index funds a run for their money due in part to the fact that they can be bought and sold throughout the day and do not typically distribute large capital gains. Another form of Spider, a HOLDR, has been developed by Merrill Lynch.
A statistical measure of the range of fund returns, from its largest loss to its greatest gains. A high standard deviation marks a fund whose returns have varied widely over time. A fund with a small standard deviation is just the opposite and would lower volatility than a fund with a high standard deviation. Standard deviations are used to measure relative volatility between a fund and say, an index. (see Relative Volatility)
(see Common Stock)
The yield you would need to earn on a taxable fixed-income fund to match the yield on a tax-free municipal bond fund. Since a portion of a taxable fund's yield is lost to taxes, you don't really keep all the income you are paid. However, most investors can shelter all of the income from their municipal bond funds because this income is "tax-free." Consider an investor in the 36% federal tax bracket earning 4% yield on a municipal bond fund. This tax-free 4% yield is equivalent to a 6.25% yield on a taxable investment.
A measure of how much of a fund's gains are retained by the shareholder after paying taxes on income and capital gains distributions. For instance, a fund that returns 15% in a year, but pays out large distributions might be said to be only 80% tax-efficient if the investor's return, after taxes, was 12%. Funds with high dividend yields tend to be less efficient than those with small yields, such as growth funds. At FFSA we have been publishing tax efficiency numbers for Vanguard funds since 1993.
Research technique which tracks patterns of historical price movements in a firm's securities or in the stock market, as well as trading volume and other statistical measures, to identify trends that will help to determine appropriate buy and sell points. (see also Fundamental Analysis)
In its purest form, an all-or-nothing investment technique based on a forecast about the direction of the stock market or interest rates. Market timers will put all their money into stocks (long-term bonds) when they think the market will rise (or interest rates fall), then quickly convert that money to cash when they think the trend is changing direction. Market timing is extremely risky, can generate excessive taxes and trading costs, and more often than not underperforms a simple buy-and-hold investment program.
The best way to measure investment performance. Combines price change plus income from dividends or interest. With mutual funds, total return calculations assume the investor is reinvesting all distributions.
The date on which a transaction such as a purchase or sale occurs. This date determines eligibility for income or capital gains distributions. (see also Record Date)
Debt securities issued by the U.S. Treasury and considered to be some of the safest bonds in the world. Treasury bills (T-bills) are securities with maturities of 1 year or less. Treasury notes have maturities up to 10 years and Treasury bonds are those with maturities greater than 10 years. The 30-year Treasury bond is commonly referred to as the benchmark bond against which most other long-term bond yields are compared.
Quarterly, simultaneous expiration of stock options, stock futures and options on stock indexes. Typically creates tremendous volatility in the stock market for the day as dealers and investors "square" their positions.
The rate at which securities in a portfolio are bought and sold. A turnover rate of 100% indicates that in one year the fund manager has bought or sold securities with a value equal to the fund's portfolio value. High turnover rates indicate active buying and selling which can lead to higher than average transaction costs for the fund. Turnover can also generate higher taxes for investors since recognized gains are taxed at year-end, while gains on a stock that appreciates and is held are not taxed until the manager sells it. All things being equal, the lower the turnover rate, the better.
A form of account registration in which a custodian, generally a parent or grandparent, acts on behalf of a minor, who is the beneficial owner of the account. All income and capital gains or losses in the account are reported under the minor's social security number. For children under the age of 14 years, unearned investment income up to $1,000 is taxed at the child's tax rate while that income exceeding $1,000 is taxed at the parent's tax rate. For minors 14 and older, only the child's tax rate applies.
The difference between an unsold security's purchase price and its current price. Sometimes called a paper profit or loss since the second half of the transaction, the sale, has not yet been completed. Unrealized gains are not taxable.
A strategy for investing on a regular basis a varying sum of money so that your portfolio grows by a fixed amount each month. When prices drop, it requires investing more money than when prices rise. In contrast to Dollar-Cost Averaging, Value Averaging forces the investor to put more money into the markets as they decline and less as the markets are rising.
An investment style that puts a premium on paying less for something than the investor thinks it is worth. Value investors typically buy stocks whose price/earnings ratios are below the market's. They also like to find companies whose per-share book value is not reflected in their share prices. This often leads value investors to companies in industries that are currently out of favor, but which could be expected to recover sometime in the future. Several of Vanguard's funds use a value approach to their stock-picking styles, but the most prominent value investor in the family is Windsor Fund's lead manager, Charles Freeman.
Insurance contract under which investment returns fluctuate with the markets. Vanguard offers a choice of four funds under its variable annuity plan. (see also VVAP)
A series of mutual funds designed for tax-free investing through a variable annuity. Vanguard's VVAP funds, first introduced in mid-1991 and expanded since, mimic several existing Vanguard funds, but have higher expenses. And in some cases annuities are led by single managers, rather than the teams of managers handling their non-annuity counterparts.
World Equity Benchmark Shares, or WEBS, are index-like securities which track specific foreign markets including Germany (EWG), Japan (EWJ), and the U.K. (EWU). Like SPDRs and HOLDRs, these securities are traded throughout the day rather than priced once a day, like traditional open-end index funds.
The largest index covering the broadest number of stocks in the markets. Vanguard's Total Stock Market fund is designed to mimic the performance of the approximately 7,000 stocks in the Wilshire 5000 index. The Extended Index fund mimics the Wilshire 4500 index, which includes some 6,500 stocks in the Wilshire 5000 that are not in the S&P 500.
Systematic program for withdrawing a specified amount of money each month from one or more mutual funds. The money is then paid to you in a check, or is wired to your bank.
Income from dividends or interest. Usually expressed as a ratio comparing a stock or mutual fund's annualized dividends per share to its price-per-share. Bond funds report a "30-day" yield calculated according to guidelines set down by the Securities & Exchange Commission. Money market funds quote a "7-day" SEC yield. In general, when interest rates are falling, a fund's SEC yield will be higher than its actual payout over the next 30 days. When rates are rising, the yield will be somewhat lower.
Simple graph showing the relationship between bond maturity and yield. Generally longer-maturity bonds yield more than short-maturity bonds so the yield curve slopes up as maturity lengthens. The steepness of the yield curve indicates the spread between short- and long-term rates.
A debt instrument sold at a steep discount to its face value and which pays no annual interest. The discount from face value and the bond's maturity reflect an implied interest rate. The price of these bonds is extremely sensitive to changes in interest rate.
|