Adjustable Rate Preferred
Stocks or bonds with a rate of interest that is adjusted, usually quarterly, based on some independent benchmark, such as 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.
A lower-cost, higher-minimum class of fund shares intended to reward long-term and large investors with small cost savings. Originally introduced in November 2000 with $250,000 minimums, Vanguard lowered the minimum to $100,000 in May 2005 in response to a low-cost foray by Fidelity Investments. In October 2010 the minimums were reduced even further—to as little as $10,000 in many cases. In 2014, Vanguard merged its Signal share class into Admiral shares. Admiral share expense ratios can be several basis points lower than expense ratios on regular, Investor class shares. (see also Investor Shares, Institutional and Institutional Plus Shares)
ADR (American Depositary Receipt)
Securities representing a fixed number of shares of stock in foreign companies. ADRs trade like regular common U.S. stocks and are easier to buy and sell than overseas shares. Some fund managers prefer ADRs to foreign stocks for this reason alone. There are several hundred ADRs available in the United States.
The investment company that 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.
Aggressive Growth Fund
A stock fund that invests exclusively for growth and ignores income from dividends or interest. Generally the most volatile 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.
AMT (Alternative Minimum Tax)
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 AMT has come under fire as more middle-income earners fall into its clutches, raising their tax burden. In 2013 Congress permanently indexed the exemption income level to inflation.
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.
Asset Allocation Fund
A mutual fund that invests in a variety of assets, most often stocks, bonds, money market securities and, occasionally, commodities. Balanced funds, including Vanguard's Managed Payout, STAR, STAR LifeStrategy, and Target Retirement funds, are all asset allocation funds.
AUV (Accumulation Unit Value)
In annuity accounts, the AUV is similar to a mutual fund's Net Asset Value (NAV) 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 that AUVs are calculated out to six decimal places, which Vanguard now reports on its website.
A bond's maturity is the length of time left until the initial amount borrowed is repaid. The weighted average of maturities applies to any portfolio of bonds , such as a bond mutual fund. The measure gives investors a good sense of the portfolio's sensitivity to changes in interest rates. 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.
Some funds report an "effective" average maturity. This takes into account the possibility that some bonds in the portfolio may be repaid prior to their maturity dates. The "effective" maturity is typically shorter than the weighted average "stated" maturity. When rates are rising, the stated maturity is relevant, as issuers stop calling bonds (or repaying them early). When rates are falling, the effective maturity is relevant, as bonds are called to access lower rates (similar to refinancing your mortgage).
Vanguard's website reports average effective maturity for taxable bond funds and average stated maturities for municipal bond funds. (see also Duration)
One that buys both stocks and bonds, often in a fixed proportion. The fund seeks both capital appreciation and income. Vanguard's Wellington and Wellesley Income funds are both balanced funds.
Bank of England
The Bank of England, or BoE, serves a similar role in the United Kingdom to that of the Federal Reserve in the United States. Established in 1694, the BoE is the second oldest central bank, and charged with maintaining price stability and supporting economic growth.
Bank of Japan
The Bank of Japan, or BoJ, serves a similar role in Japan to that of the Federal Reserve in the United States. The bank is responsible for issuing currency, implementing monetary policy and ensuring stability of the financial system.
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.
Barclays U.S. Aggregate Bond
An index tracking the overall bond market, originally compiled by the Wall Street firm Lehman Bros., which was taken over by Barclays Capital. It includes around 9,000 individual investment-grade rated bonds, including U.S. government bonds, corporate bonds and mortgage-backed bonds. Vanguard's Total Bond Market Index fund is designed to mimic this index. Note, however, that in 2009 Vanguard switched to a float-adjusted variant of this index . (see Float-Adjusted Index)
One one-hundredth of a percent. Used when discussing changes or differences in interest rates and percentages. For example, the difference between a bond yielding 3.32% and one yielding 3.00% is 32 basis points, or 0.32%.
Period of persistently declining stock or bond prices. Many consider a 20% decline to constitute a bear market. 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)
A measure of a fund's movements relative to the overall stock or bond market. A fund's beta tells you if its returns have been greater than or less than the overall market over a given period, and by how much. The stock market, as defined by the S&P 500, or the bond market, as defined by the Barclays U.S. Aggregate Bond Index, has a beta of 1.00. Funds with high betas, above 1.00, tend to be riskier than an index fund tied to the S&P 500 or the Barclays 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%. Betas can, and do, change over time. Betas in this Guide are calculated based on fund returns for the past 24 months. (see also Correlation Coefficient, R-Squared, and Relative Volatility)
A type of digital currency. Unlike most currencies, which are controlled by a central bank, bitcoin is regulated by increasingly complex encryption techniques. All bitcoin transactions are recorded in a public ledger.
Some have hailed bitcoin as the currency of the future. Others have focused on its links to illegal activities and its volatile price; bitcoin soared in 2013, but tumbled some 50% in 2014.
A fund investing in interest-paying securities such as government or corporate bonds. Corporate bonds, unlike stocks, do not represent an ownership interest in a company, but rather an obligation of the company to repay money it borrowed, typically with interest. Bond funds are generally more interested in paying shareholders steady income than in capital growth. (see also Treasurys)
Named after then U.S. Treasury Secretary Nicholas Brady, Brady bonds were issued mostly by Latin American countries in the late 1980s. The bonds are denominated in U.S. dollars and were designed to reduce the debt these countries owed to U.S. banks. The bonds' principal and first few semiannual interest payments are secured by U.S. Treasury bonds. The program ended in the 1990s and since then Mexico, Colombia, Brazil, Venezuela and the Philippines have paid back all of their Brady bonds.
Coined in a 2001 Goldman Sachs report, BRIC is an acronym for what are generally thought to be the fast-growing and fast-developing countries Brazil, Russia, India and China. Often referred to as "the BRIC countries " or "BRIC markets ." The notion was that Brazil and Russia would become dominant global suppliers of raw materials while China and India would become dominant global manufacturers.
A period of generally rising prices for stocks or bonds. Typically a bull market is established after a gain of 20% or more for a given market or asset class. (see also Bear Market)
The German central bank, which sets interest rates for the German economy, including the discount rate (the rate for short-term loans to commercial banks) and the Lombard rate (the ceiling for short-term money market rates). The Bundesbank is influential in European markets and has a reputation for being vigilant on inflation. (see also Federal Reserve System)
Buy and Hold
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 also Timing)
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 one year or less, while long-term gains are those made on holdings of more than one year.
Price appreciation in securities or other assets held in a portfolio. Until the asset is sold, the gains are considered "unrealized." Growth, rather than income, is the prime objective of many stock mutual funds.
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 one or more cash equivalent securities.
Center for Research in Security Prices (CRSP)
A research department at the University of Chicago business school. Its market data is well-known among academic researchers. Similar to more established index providers, such as Standard & Poor's, Russell or MSCI, CRSP creates indexes that slice and dice the U.S. stock market by market capitalizations (small, mid or large) and styles (value, core or blend). Vanguard made waves in 2012 when it announced a change from MSCI to CRSP indexes for its U.S. stock index funds, the first time the CRSP indexes have been used for actual investment products.
CRSP Mega Cap
An index from the Center for Research in Security Prices (CRSP), the Mega Cap index (as well as growth and value sub-indexes) tracks the companies that make up the top 70% of market capitalization in the U.S. In 2013, it replaced an MSCI index as the bogey for MegaCap ETF.
CRSP Mid Cap
An index from by the Center for Research in Security Prices (CRSP), the Mid Cap index (as well as growth and value sub-indexes) tracks the companies that make up the middle 15% to 30% of market capitalization in the U.S. It is comparable to the S&P MidCap 400, the Russell MidCap and the MSCI Mid Cap 450 indexes. In 2013, it replaced the MSCI MidCap 450 as the bogey for MidCap Index.
CRSP Large Cap
An index from the Center for Research in Security Prices (CRSP), the Large Cap index (as well as growth and value sub-indexes) tracks the companies that make up the top 85% of market capitalization in the U.S. It encompasses both the CRSP Mega Cap and Mid Cap indexes. It is comparable to the S&P 500, the Russell 1000 and the MSCI Prime Market 750 indexes. In 2013, it replaced MSCI Prime Market 750 as the bogey for LargeCap Index.
CRSP Small Cap
An index from the Center for Research in Security Prices (CRSP), the Small Cap index (as well as growth and value sub-indexes) tracks the companies that make up the bottom 2%–15% of market capitalization in the U.S. It is comparable to the S&P SmallCap 600, the Russell 2000 and the MSCI SmallCap 1750 indexes. In 2013, it replaced MSCI SmallCap 1750 as the bogey for SmallCap Index.
Certificate of Deposit (CD)
A short-term—say, six-month or one-year—interest-bearing investment (though longer-term CDs do exist and are popular with some savers). Usually a deposit in a bank or savings and loan and often insured by the FDIC.
Coefficient of Determination
Also referred to as "r-squared," this is a measure of the similarity of returns between two mutual funds over a given period of time. Usually expressed as a percentage or two-digit decimal, it defines the percentage of one fund's performance that can be explained by the performance of another fund. Funds with high r-squared values can be expected to perform similarly. Most fund-reporting services calculate an r-squared correlation 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 that will diversify a portfolio.
Unsecured short-term interest-bearing securities 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.
Commercial Paper Funding Facility (CPFF)
A system created on Oct. 27th, 2008 by the Federal Reserve Board in response to the severe distress of investment banks like Lehman Brothers and insurer AIG during the financial crisis to improve liquidity in the short-term bond, or commercial paper market. The CPFF purchased three-month unsecured and asset-backed commercial paper directly from eligible issuers to increase availability of credit for firms doing business in the financial sector. The facility was shut down on Feb. 1, 2010.
An investor who marches to the beat of a drummer different from that of the band. When the majority of investors are bullish, the contrarian is bearish or is investing in under-loved companies or industries.
A hybrid security that is structured like a bond, in that it pays out a periodic dividend. However, under certain circumstances specific to that security, it can 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.
Another measure of the similarity of returns between two mutual funds (or a mutual fund and an index) over a given period of time. The correlation coefficient indicates the degree that two funds move in same direction at the same time. Did the two funds rise or fall in price at the same time? Correlation ranges between -1.00 and 1.00; the closer it is to those values, the stronger the relationship. 1.00 indicates perfect correlation, which means that every time one fund rose or fell, the other fund rose or fell too (though not necessarily by the same amount). -1.00 is a perfect negative correlation, and signals that when one fund rose or fell, the other fund did the opposite. 0.00 means there is no correlation. (see also R-Squared)
Crane Money Fund Averages
The average return produced by taxable money market mutual funds and tax-exempt money market funds. The data is collected from hundreds of funds and compiled by Crane Data LLC, publisher of Money Fund Intelligence, www.cranedata.com.
One measure of a bond's risk, the rating tells you how confident analysts are that the company or government entity issuing the bond will be able to maintain interest payments as well as return principal when the bond matures. The most common ratings agencies are Standard & 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 rated BB or Ba and lower are called high-yield or "junk " bonds. Bonds that have defaulted are rated D. (see also Junk Bond).
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.
Shares in a company whose main business tends to remain stable through the different phases of the business cycle. Food and drug stocks are typically considered by most investors to be defensive, since people continue to eat and demand medical care even during the worst of times. Defensive stocks are also known as "non-cyclical" stocks.
Deflation occurs when prices are broadly declining. Central bankers fear deflation because consumers can get stuck in a deflationary cycle or loop that is harmful to the overall economy, delaying purchases on the expectation that prices will continue falling. This reduction in demand leads sellers to reduce prices. Seeing prices fall, consumers further delay spending, creating a vicious cycle. The U.S. has seldom experienced deflation—the Great Depression being a notable exception. (see also Inflation)
A security whose value or interest payments are based on (or derived from) some other security or index or financial measure. In the 2008 financial crisis, derivative securities on everything from mortgage bonds to sophisticated insurance on bond defaults converged to create near-panic conditions in many markets. Vanguard uses some very plain-vanilla, low-risk derivatives in some of its funds, such as floating rate notes. (see also Floating Rate Notes)
Developed countries and markets tend to be mature economies with high levels of gross national income and have historically been considered less risky for foreign investors. Examples of developed foreign markets include the United Kingdom, Germany, France, Japan and Australia. 2012 saw a bit of controversy over whether South Korea, considered an emerging market by MSCI, was indeed a developed market, as defined by FTSE. (see also Emerging Markets)
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)
The spreading of risk among many entities. Fund managers may buy 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 single investment has too large of a negative impact upon the entire portfolio. Mutual fund investors may also buy several funds with different investment objectives to diversify their own portfolios.
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)
Dow Jones Industrial Average
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 McDonald's. 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 indexes 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 nondurables, durable goods are products that are designed to last for more than one year. For example, automobiles, dishwashers, furniture and television sets are durable goods. Nondurables include things like food, beverages, drugs and cigarettes.
A measure of the sensitivity of bond or bond fund prices 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 30-year bonds with different coupons will have different durations, for instance. (see also Average Maturity)
Morgan Stanley Capital International's Europe, Australasia and Far East (EAFE) Index is a benchmark used to track the performance of developed non-U.S. stock markets. It consists of 21 markets including Australia, France, Germany, Hong Kong, Japan and the United Kingdom. Notably, it does not include Canada. In 2013, Vanguard transitioned Developed Markets Index, Tax-Managed International and EAFE ETF away from this index and toward a similar index created by FTSE. In 2014, Developed Markets Index and Tax-Managed International were consolidated into one, and EAFE ETF became Developed Markets ETF. (see also Developed Markets) (see also Developed Markets)
Investment theory that 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 maintain that it is impossible to beat the stock market over long periods of time. Former Vanguard board member and author of A Random Walk Down Wall Street Burton Malkiel is a well-known efficient market theorist who, nonetheless, tried to beat the market by making non-indexed bets in some portfolios he managed.
Emerging market countries are in the earlier stages of developing large, robust economies. That can mean they have newer, less-entrenched political and fiscal systems that are more susceptible to missteps and instability—factors that can add to volatility and risk in their individual stock markets. Examples of emerging economies include Brazil, Chile, China, Egypt, India, Mexico, Russia and South Africa. (see also Developed Markets)
Emerging Markets Index (MSCI)
Morgan Stanley Capital International's Emerging Markets index is a benchmark used to track the performance of stock markets in developing nations. The index consists of 21 countries including Brazil, Chile, China, Egypt, India, Korea, Mexico, Russia, and South Africa. Emerging-markets tend to be riskier than developed markets. (see also Emerging Markets)
The European Central Bank, or ECB, serves a similar role in Europe to that of the Federal Reserve in the United States. The ECB is tasked with maintaining the purchasing power of Europe's single currency (the euro) and price stability in the eurozone. (see also EMU)
European Economic and Monetary Union. The name given to the melding of European countries into a borderless trade zone. Officially began with the introduction of a common currency, the euro, on January 1, 1999. Only 19 of the 28 members of the European Union utilize the euro as their official currency. The original 11 member countries included Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain. Cyprus, Estonia, Greece, Malta, Latvia, Lithuania, Slovakia and Slovenia have since adopted the euro, and several other countries are working towards this conversion as well. Notable exceptions include the United Kingdom, Sweden and Switzerland.
(see also Common Stock)
ETF (Exchange-Traded Fund)
In the purest form, an index fund that is priced and traded throughout the day on one of the major stock exchanges. ETFs have taken the investment world by storm. The most heavily traded include the Diamonds (DIA), representing the Dow Jones Industrial Index; the QQQ, representing the NASDAQ 100 Index; the MDY, which corresponds to the Standard & Poor's MidCap 400 Index; and the Spider, or SPY, which tracks the Standard & Poor's 500 Index. Vanguard is now a major player in the ETF market, with many ETF share-class clones of its traditional index funds. (See also iShares and VIPER)
When a mutual fund pays a distribution to shareholders, its net asset value drops by the amount of the distribution. The ex-dividend or "ex date" is the day this occurs. Typically a fund's NAV drops on its ex date, but the NAV may also rise or fall independent of the dividend amount due to the performance of the fund's portfolio on that date. This is also the date upon which distributions are reinvested, if the shareholder has so chosen. (see also Record Date, Reinvestment)
Transfer of money between one fund and another within the same fund complex. Usually accomplished by phone call or online. Investors should be aware that the exchange out of one fund constitutes a sale of that fund's shares and is a taxable event.
Combined cost of a fund's management fees and operating expenses for a given year , expressed as a percentage of fund assets. Operating expenses include accounting costs . With fixed-income funds in particular, lower expenses generally translate into higher fund yields and returns. All things being equal, though they rarely are, the lower the expense ratio, the better. (see also Management Fee)
The possibility that as interest rates rise, a bond issuer slows the rate at which they repay the loan, leaving investors holding lower paying bonds and with less money to reinvest at higher rates. This risk is especially great for investors in mortgage-backed securities, since mortgage holders are less likely to prepay their loans when interest rates rise. (see also Mortgage-Backed Security)
Federal Funds Rate
The rate on short-term overnight loans among commercial banks. The Federal Reserve influences the fed funds rate by buying and selling Treasurys in the open market and by changing reserve requirements for banks.
Federal Reserve System
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 impact the bond markets. Fed Chairman Alan Greenspan became one of the most influential policymakers in the 1990s. Greenspan retired at the end of January 2006, handing the reins to economist Ben Shalom Bernanke, a Bush appointee. Bernanke stepped down in January 2014 as Janet Yellen became the first chairwoman in the Fed's history.
A tax-deferred investment vehicle offered by an insurance company, guaranteeing a set interest rate on your initial premium over a predefined period. The interest rate offered is determined by market conditions and can change periodically. They differ from variable annuities in that you only pay one premium and your rate of return is locked in for the period of the contract. Vanguard used to offer a five-year fixed annuity issued by Lincoln Life & Annuity of Syracuse, New York but now simply offers an electronic marketplace for the purchase of fixed annuities.
(1) 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.
(2) The total number of shares or bonds from a given company or issuer available for trading. Float is calculated by subtracting those bonds or shares that do not trade from the total number of shares outstanding.
Not all shares of a company or issuer's stocks or bonds are readily available for trading. For instance, the Federal Reserve bought large quantities of Treasury and mortgage-backed bonds that it is not planning to sell. A float-adjusted index takes these non-traded stocks or bonds out of the index. Vanguard's Total Bond Market tracks a version of the Barclays U.S. Aggregate Bond index that is adjusted for this and only includes bonds that are tradable.
Floating Rate Notes
A derivative security whose interest rates reset periodically and 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 (the repurchase rate determined by transactions between borrowers and lenders or buyers and sellers of government securities) or the London Interbank Offered Rate (LIBOR). (see also LIBOR)
FNMA (Fannie Mae)
Nickname for the Federal National Mortgage Association. FNMA is a government-sponsored entity born out of the Great Depression. It is tasked with expanding the mortgage market by purchasing mortgages from lending institutions, packaging them together and then reselling to investors. While it is a publicly traded company, many investors view its securities as being backed by a government guarantee. (see also Mortgage-Backed Securities, Prepayment Risk)
Employee benefit plan that allows you to deduct a portion of your salary, before taxes, and invest it tax-deferred. There is a penalty for withdrawing funds from a 401(k) plan prior to retirement. Many mutual fund families administer 401(k) plans for corporate employees. (see also 403(b) Plan)
Similar to a 401(k) plan, but designed for employees of non-profit organizations or institutions such as schools and hospitals. (see also 401(k) Plan)
FHLMC (Freddie Mac)
Nickname for the Federal Home Loan Mortgage Corporation (FHLMC). A government-sponsored entity whose role is to expand the secondary mortgage market. Freddie Mac does this by purchasing mortgages, packaging them together, and reselling them to investors. (see also Mortgage-Backed Securities, Prepayment Risk)
Foreign Stock Index Country Index Brazil Bovespa China Shanghai Composite England FTSE 100 France CAC 40 Germany DAX Hong Kong Hang Seng Japan Nikkei Mexico IPC All-Share South Korea Kospi
The table below lists some of the most-quoted foreign stock indexes and the countries where they trade.
FTSE is an index provider best known for its international stock indexes. Vanguard created a stir in 2012 when it announced a change from MSCI to FTSE indexes for a number of its foreign stock index funds—including Emerging Markets Stock Index.
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 that require the owner to buy or sell a security or commodity at a certain price before or on a certain date. These securities can be used to make large bets on the direction in prices for a particular commodity, stock or market index. (see also Options)
GNMA (Ginnie Mae)
Nickname for the Government National Mortgage Association. GNMA is a government entity that sells securities backed by pools of mortgages. GNMAs are the only mortgage-backed bonds to carry an explicit guarantee from the U.S. Government. Generally yielding more than Treasury securities, GNMAs are less liquid than and subject to interest-rate risk beyond that of Treasurys. (see also Mortgage-Backed Securities and Prepayment Risk)
GDP (Gross Domestic Product)
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."
GNP (Gross National Product)
Similar to Gross Domestic Product but includes foreign operations of U.S. companies as well. Until December 1991, GNP was the primary means of measuring the health and size of the U.S. economy.
Growth and Income Fund
A stock fund attempting to provide 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 that rewards 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)
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.
High Yield Bond
(see Junk Bond)
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. (see also Management Fee)
A specific set of stocks or bonds. Indexes are used to gauge market activity and direction. Familiar indexes are the Dow Jones Industrial Average, the S&P 500 index and the Barclays U.S. Aggregate Bond index. Indexes can track a wide range of securities or asset classes beyond stocks and bonds, and many have been created to do so, particularly as the market for exchange-traded funds has grown.
A mutual fund that seeks to match the performance of an index. Some funds simply purchase all of 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 prices are rising. The consumer price index (CPI) measures prices of a basket of goods that individuals purchase. Commonly expressed as an annualized figure, inflation results in declining purchasing power for the dollar. When prices are falling in concert, it is called deflation. (see also Deflation, TIPS)
Institutional and Institutional Plus Shares
These shares have $5 million to $100 million minimums with exceptionally low expense ratios. As the names would suggest, they are used mostly by big, institutional investors, but are sometimes found in 401(k) or 403(b) plans. (see also Admiral Shares, Investor Shares, Signal Shares)
Large pension funds, banks, college endowments, insurance companies, sovereign wealth funds and hedge and mutual funds are all considered institutional investors. They invest money for other people and wield enormous influence with their multi-billion-dollar portfolios.
- 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 income subject to nonresident alien tax.
These shares are the ones individual investors at Vanguard are usually most familiar with. They have the lowest minimum initial investments (not including ETF shares, which have no minimums other than the share price), which are generally either $1,000 or $3,000, but the highest expense ratios of Vanguard's share classes. (see also Admiral Shares, Institutional and Institutional Plus Shares)
IRA (Individual Retirement Account)
A personal investment account into which individuals can invest up to $5,500 in 2015 (those 50 or older can invest $6,500), 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.
Higher-yielding, higher-risk bonds rated BB or lower by Standard & Poor's and Ba or lower by Moody's. These are bonds either issued by solid companies that have fallen upon hard times and lost their investment-quality ratings, or issued originally with higher-than-average interest rates by financially troubled companies. The junk bond market expanded in the '80s when formerly public companies were taken private by insiders who used debt to pay for the purchase of all outstanding public stock. (See also Credit Rating)
A measure of how easily an investment can be converted from its present form into 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.
LIBOR (London Interbank Offered Rate)
LIBOR is what high-quality international banks charge each other for eurodollar loans. The LIBOR rate came under fire in 2012 as it was discovered that several bankers providing data used to calculate the rate each day were manipulating the data, and the rate for their own purposes. Large fines and trials have resulted.
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-load funds typically charge 1% to 4% sales charges. Load funds once charged as much as 8%, though 4.5% to 5.5% seems to now be the norm. No-load funds do not levy a sales charge. Vanguard charges some front- and back-end loads on funds, paying the proceeds back into the fund portfolios.(see also Back-End Load)
An investment strategy that involves both buying stocks (going long) and selling borrowed shares (going short). Vanguard's Market Neutral fund employs just such a strategy, buying and selling an equal dollar amount of stocks in an effort to generate returns regardless of the direction of the overall stock market. Other long/short strategies may favor one side or the other of the equation. (see also Short Sale)
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, Incentive Compensation)
Market Neutral Investing
Money Market Fund
A portfolio of very short-term, low-risk securities, including bankers' acceptances, certificates of deposit, commercial paper, repurchase agreements and Treasury bills. 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. In rare situations a fund may "break the buck ," which means its net asset value falls below $1.00. This generally leads to liquidation as shareholders lose confidence in the fund manager. This happened to the Reserve Fund in 2008. Again, it is rare, but not unheard of.
In 2014, the SEC ruled that some institutional money market funds would shift to reporting a floating NAV. The SEC also gave money funds the ability to charge a fee for redemptions or to suspend redemptions entirely for up to 10 days during periods of distress.
Security created by pooling mortgages with similar rates of interest and maturities. Monthly interest and principal payments on these mortgages are passed through to bondholders as interest. MBSs are subject to interest-rate risk beyond that of other bonds , which is known as "prepayment risk ." 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 flipside is "extension risk ." When interest rates rise, mortgage holders are less likely to prepay their loans, leaving investors holding lower paying bonds and with less money to reinvest at higher rates. (see also Prepayment Risk)
Morgan Stanley Capital International, or MSCI, is an index provider best known for its index of foreign developed markets: the EAFE index. Vanguard made waves in 2012 when it announced it would be dropping MSCI as an index provider on many of its funds in 2013 in favor of indexes from FTSE and CRSP.
MSCI LargeCap 300
One of the Morgan Stanley Capital International indexes, the LargeCap 300 index (as well as growth and value sub-indexes) tracks the 300 largest companies by market capitalization in the U.S. Until 2013 it was the bogey for the three MegaCap ETFs Vanguard introduced in late 2007.
MSCI MidCap 450
One of the Morgan Stanley Capital International indexes, the MidCap 450 replaced the S&P MidCap 400 as the bogey for MidCap Annuity and MidCap Index in 2003. It was then replaced by the CRSP MidCap index in 2013.
MSCI Prime Market 750
A large-cap index created by Morgan Stanley Capital International, comparable to the Russell 1000 Index. Vanguard adopted growth and value sub-indexes of the Prime Market 750 midway through 2003 as benchmarks for Growth Index and Value Index, respectively, replacing the S&P 500 sub-indexes previously used. The MSCI Prime Market 750 was also the bogey for LargeCap Index. In 2013, these indexes were replaced by CRSP LargeCap Index and its corresponding growth and value sub-indexes.
MSCI SmallCap 1750
This Morgan Stanley Capital International index (along with growth and value sub-indexes) replaced the Russell 2000 as the bogey for SmallCap Index and the S &P 600 sub-indexes for SmallCap Growth Index and SmallCap Value Index over the summer of 2003. They were then replaced by the CRSP SmallCap index and its corresponding growth and value sub-indexes in 2013.
Bonds issued by states, cities or local governments whose interest payments are generally free from federal taxes, as well as taxes in the state that issued them. Often referred to as tax-free bonds. (There are also taxable munis, but they are far less common than their tax-free counterparts.) Interest paid by municipal bond funds may not be completely free from your state's taxes if the fund invests in bonds issued by states you do not live in–which most national muni bond funds do. State-specific funds are free from taxes at the federal and state level, if held by someone living in that state.
NAV (Net Asset Value)
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.
(see Durable Goods)
A contract that 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)
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 typically occurs on the reinvestment (or ex-dividend) date. Otherwise, the payment date, when checks or bank wires are received by shareholders, is generally several days after the record date. (see also Record Date, Ex-Dividend Date)
(see Total Return)
PIGS (sometimes PIIGS)
An acronym born during the 2010 European sovereign debt crisis. Problems were most acute among countries referred to as the PIGS, or PIIGS, of Europe. Those countries were Portugal, Ireland, Italy (sometimes), Greece and Spain.
The mix of investments, usually securities, that 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. A portfolio can also consist of other mutual funds. For example, the STAR fund's portfolio is made up of 11 other funds, including Windsor II, PRIMECAP, International Growth and Short-Term Investment-Grade.
The possibility that as interest rates fall, a bond issuer pays off the bond's principal early, forcing the investor to reinvest in bonds with lower yields. This risk is especially great for investors in mortgage-backed securities, since falling interest rates give homeowners an incentive to pay off their mortgages and then refinance at lower rates. (see also GNMA, Mortgage-Backed Security)
This key interest rate banks traditionally charged on loans to their most creditworthy customers. Today it is most commonly used a base rate to determine rates for credit cards, home equity lines of credit, mortgages and student loans. Most large banks follow each other in setting the Prime Rate. A rising or falling Prime Rate indicates rising or falling demand for loans and economic activity.
The offering document filed with the SEC for an investment. The prospectus defines a mutual fund's investment objective, expenses and risks, 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. (see also Correlation Coefficient, Coefficient of Determination)
One of many biases and cognitive errors that cause investors to make poor decisions, recency risk is the tendency to extrapolate the recent past into the near-term future. In simple terms, it means we think that what has just happened will continue to happen. For instance, if stocks went up, they'll continue to go up. If interest rates went down, they'll continue to go down.
The use of interest or capital gains distributions to automatically purchase additional 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.
The date when mutual fund distributions are used to automatically purchase additional shares. (See Ex-Dividend Date)
The possibility that as a bond comes due, interest rates will have fallen, forcing the investor to reinvest in bonds with lower yields. Similar to prepayment risk, but reinvestment risk applies to all bonds while prepayment risk is specific to mortgage-backed securities. (see also Prepayment Risk)
Another statistical measure of fund risk. Relative 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 Barclays U.S. Aggregate Bond Index (for bond funds) over the same period. A fund whose relative volatility is greater than 1.0 has been more volatile than the market. Conversely, a volatility rating of less than 1.0 indicates a fund was less volatile than the broad stock or bond market. (see also Beta, Standard Deviation)
Index of the 1,000 largest U.S. stocks, compiled by Russell Investments. The Russell 1000 vies with the S&P 500 Index as the index of choice against which many money managers benchmark themselves. There are both growth and value subsets of the Russell 1000 as well. (See also Dow Jones Industrial Average, S&P 500, Wilshire 5000)
Index of the 3,000 largest U.S. stocks, compiled by Russell Investments. The Russell 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, is broken into both growth and value indexes. All are tracked by various Vanguard ETFs.
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 chosen by a committee. Vanguard's 500 Index and the 2010-introduced Vanguard S&P 500 ETF are designed to mimic this index. Investors should be aware that the S&P 500 index quoted in the media does not incorporate the value of reinvested dividends and is merely a price index. (See also Dow Jones Industrial Average, Russell 1000, Wilshire 5000)
S&P SmallCap 600
A small-cap index of 600 U.S. stocks determined by a committee at Standard & Poor's. Vanguard's Tax-Managed SmallCap fund mimics this index. Vanguard also offers ETFs that track this index plus its growth and value subsets.
Sometimes called specialty funds, sector funds concentrate their holdings in a particular asset (e.g., gold and gold shares) or industry (e.g., 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. Besides its older precious metals, energy, health care and REIT funds, Vanguard now has a variety of sector index funds in both Admiral and ETF formats. (see also ETF)
Retail money market funds provide a stable $1.00 NAV using an "amortized cost" to value their securities. Amortized cost is an accounting method that considers the price paid for the security and any discount or premium. However, money market funds are also required to calculate per-share values (NAV) at market prices. This real-time, market-based per-share value is the "shadow price." It is typically very close to the target $1.00 NAV but is a reminder that money market funds are not entirely risk-free.
(1) 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 may use leverage to magnify their potential profits. Some brokers allow investors to short-sell mutual funds. (see also Leverage)
(2) In the real estate market, a short sale is one in which a property is sold for less than the remaining mortgage debt, leaving the seller "short" of funds to pay off his or her mortgage. The term has gained usage since the 2007–2008 real estate crisis began.
Share class for Vanguard index funds started in 2006 with lower expenses than comparable Admiral shares and a $1 million minimum. Vanguard phased the Signal share class out of existence in 2014, in some cases converting funds' Signal shares into Admirals. (see also Admiral Shares, Institutional and Institutional Plus Shares, Investor Shares)
Socially Responsible Investing
The strategy of investing by avoiding companies deemed to have socially "irresponsible" practices. These investors typically avoid companies in the tobacco, alcohol, defense and gambling businesses. In addition, companies with poor labor or environmental records are often shunned. In 2000, 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, then switched bogeys in 2005 to a FTSE4Good index.
Standard & Poor's Depositary Receipt, or SPDR. A form of index fund, also known as an ETF, or exchange-traded fund, which is traded on the American Stock Exchange. The original Spider (ticker: SPY) tracks the S&P 500 Index. There are now Spiders, or SPDRs, that track a variety of industry groups. (see also ETF)
A statistical measure of the range of a fund's returns. More specifically, it measures how much the fund's return strayed from its average. A high standard deviation marks a fund whose returns have varied widely over time. A fund with a small standard deviation had more consistent (though not necessarily greater) returns. Standard deviations are used to measure relative volatility between a fund and, say, an index. (see also Relative Volatility)
(see Common Stock)
TARP (Troubled Asset Relief
TARP was created by Congress in October 2008 as part of the $700 billion bailout plan in response to the financial crisis and is run by the U.S. Treasury. Its purpose was to purchase illiquid or "troubled" assets from banks in an attempt to shore up the financial industry in the hopes of returning lending and investment banking to pre-crisis levels of stability. However, its use may not be restricted solely to banks.
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 would 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.
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 35% federal tax bracket earning a 4% yield on a municipal bond fund. This tax-free 4% yield is equivalent to a 6.15% yield on a taxable investment.
A research technique that tracks patterns of historical price movements of an individual stock or an entire market index to identify trends that will help to determine appropriate buy and sell points. In addition to examining price, technical analysts might also track trading volume or the pace of change in analysts' earnings estimates. (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 of their money into stocks or long-term bonds when they think the market will rise or interest rates will 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. (see also Buy and Hold)
TIPS (Treasury Inflation-Protected Securities)
TIPS, like other Treasury bonds, are backed by the full faith and credit of the U.S. Government. They differ from typical (nominal) Treasury bonds in that their principal amount is adjusted quarterly based on the CPI-U, or headline consumer price index, unadjusted for seasonal variations. Because of this adjustment they are more commonly called "inflation bonds." Vanguard's Inflation-Protected Securities fund, introduced in June 2000, and its Short-Term Inflation-Protected Index fund, introduced in 2012, both invest in TIPS.
The decision to buy TIPS rather than "nominal," or non-inflation-adjusted, Treasury bonds of a similar maturity depends on your outlook for inflation. The difference in yields, known as the break-even inflation rate (BEIR), is an indicator of what the bond market believes the rate of inflation will be going forward. For instance, if you buy a 10-year inflation bond when the BEIR is 2%, and inflation runs over 2% for the next 10 years, this will prove to be a better investment than a purchase of a nominal 10-year Treasury. However, if the BEIR is 2% at purchase and inflation then runs at just 1.5%, the nominal Treasury would have been the better purchase. (see also Treasurys)
The best way to measure investment performance. Combines price change plus income from dividends or interest. With mutual funds, reported total returns assume that the investor is reinvesting all distributions of interest, dividends and capital gains. Total return figures are generally reported net of operating expenses.
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, considered to be some of the safest bonds in the world. Treasury bills (T-bills) are securities with maturities of one year or less. Treasury notes have maturities up to 10 years, and Treasury bonds are those with maturities greater than 10 years. Thirty-year Treasury bonds, suspended in October 2001, were issued once again beginning in 2006. While the 30-year Treasury used to be considered the "benchmark" bond, the 10-year Treasury has now become the de facto bond market benchmark. (see also TIPS)
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 as gains on a stock that appreciates are not taxed until the manager sells the stock. All things being equal, the lower the turnover rate, the better.
UGMA (Uniform Gift to Minors Act) Account
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 18 years (this limit was once 14, but it got bumped up to 18 in 2006), unearned investment income up to $ 1,000 is not taxed, and the next $ 1,000 is taxed at the child's tax rate, while income exceeding $ 2,000 is taxed at the parent's tax rate. For people 18 and older, only their individual tax rate applies. In some states an UTMA, or Uniform Transfers to Minors Act account, is an alternative registration.
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 a varying sum of money on a regular basis 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. The bible of value averaging, a book by the same name, was written by Harvard professor Michael E. Edleson in 1991. (see also Dollar-Cost Averaging)
An investment style that emphasizes 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. Several of Vanguard's funds use a value approach to their stock-picking styles. (see also Growth Investing)
Insurance contract under which investment returns fluctuate with the markets. Vanguard offers a choice of 17 funds under its variable annuity plan. (see also VVAP)
VIPER (Vanguard Index Participation Equity Receipts)
The former label for exchange-traded shares at Vanguard. The original Total Stock Market and Extended Stock Market VIPERs were joined by an entire family of index and sector index VIPERs in 2004, and many more have been added since. In 2006, Vanguard discarded the VIPER label and switched to calling their version of ETFs "ETF Shares."" (see also ETF)
VVAP (Vanguard Variable Annuity Plan)
A series of mutual funds designed for tax-deferred investing through a variable annuity. Vanguard's VVAP funds were first introduced in mid-1991 and the list of available annuities has expanded since. Several mimic existing Vanguard funds but have higher expenses. (see also Variable Annuity)
An index covering the broadest number of stocks in the U.S. markets. Vanguard's Total Stock Market fund was originally designed to mimic the performance of the approximately 5,000 stocks in the Wilshire 5000 Index. The fund switched to the MSCI Broad Market Index in April 2005, and then in 2013 adopted the CRSP U.S. Total Market Index. (See also Dow Jones Industrial Average, S&P 500, Russell 2000)
Income from dividends or interest. Usually expressed as a ratio comparing a stock or mutual fund's annual dividends per share to its price per share (distribution yield). Bond funds report a "30-day" yield calculated according to guidelines set down by the Securities and Exchange Commission. Money market funds quote a "seven-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 that is sold at a steep discount from its face value and 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 rates.
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Daniel P. Wiener is editor of The Independent Adviser for Vanguard Investors, a monthly newsletter that keeps abreast of recent developments at Vanguard, and the annual FFSA Independent Guide to the Vanguard Funds. Through his newsletter and guide book, Dan helps tens of thousands of Vanguard investors choose wisely among more than 100 Vanguard mutual funds. The Adviser is a five-time winner of the Newsletter Publishers Foundation's Editorial Excellence Award. View More »
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