Aug
02
2023

Rollover IRA vs Traditional IRA: What’s the Difference?

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on Rollover IRA vs Traditional IRA: What’s the Difference?

If you’re leaving a job, you may hear the term “rollover IRA.” But exactly what is a rollover IRA? Employees have the option of moving their retirement savings from their employer-sponsored 401(k) plan to an individual retirement account, or IRA, at another financial institution when they leave a job. This IRA, where they transfer their 401(k) savings to, is called a rollover IRA. If the 401(k) plan was not a Roth 401(k), you’ll likely want to open what’s called a traditional IRA.

In this scenario, a rollover IRA is also a traditional IRA. But they aren’t always the same. You can have a traditional IRA that is not a rollover IRA. Read on for the differences worth noting between a rollover IRA and a traditional IRA.

Key Points

•   A rollover IRA is an individual retirement account created with funds rolled over from a qualified retirement plan, like a 401(k), usually when someone leaves a job.

•   A traditional IRA is funded by direct contributions by the account holder, and contributions are tax-deductible up to a cap and subject to eligibility limitations.

•   Directing rollover funds from an employer-sponsored plan to a traditional IRA that holds your direct contributions is called commingling funds, which you may not want to do, especially if you want to transfer the rollover funds to a new employer’s plan.

•   Withdrawals from either type of IRA before age 59.5 are subject to both income taxes and an early withdrawal penalty, except for certain eligible expenses.

•   The IRS requires owners of both types of IRAs to start making withdrawals at age 73 (for people born in 1951 or later); these withdrawals are also called required minimum distributions (RMDs).

Is There a Difference Between a Rollover IRA and a Traditional IRA?

When it comes to a rollover IRA vs. traditional IRA, the only real difference is that the money in a rollover IRA was rolled over from an employer-sponsored retirement plan. Otherwise, the accounts share the same tax rules on withdrawals, required minimum distributions, and conversions to Roth IRAs.

💡 Recommended: Here’s a complete list of retirement plans to compare.

What Is a Rollover IRA?

A rollover IRA is an individual retirement account created with money that’s being rolled over from a qualified retirement plan. Generally, rollover IRAs happen when someone leaves a job with an employer-sponsored plan, such as a 401(k) or 403(b), and they roll the assets from that plan into a rollover IRA.

In a rollover IRA, like a traditional IRA, your savings grow tax-free until you withdraw the money in retirement. There are several advantages to rolling your employer-sponsored retirement plan into an IRA, vs. into a 401(k) with a new employer:

•   IRAs may charge lower fees than 401(k) providers.

•   IRAs may offer more investment options than an employer-sponsored retirement account.

•   You may be able to consolidate several retirement accounts into one rollover IRA, simplifying management of your investments.

•   IRAs offer the ability to withdraw money early for certain eligible expenses, such as purchasing your first home or paying for higher education. In these cases, while you’ll pay income taxes on the money you withdraw, you won’t owe any early withdrawal penalty.

There are also some rollover IRA rules that may feel like disadvantages to putting your money into an IRA instead of leaving it in an employer-sponsored plan:

•   While you can borrow money from your 401(k) and pay it back over time, you cannot take a loan from an IRA account.

•   Certain investments that were offered in your 401(k) plan may not be available in the IRA account.

•   There may be negative tax implications to rolling over company stock.

•   An IRA requires that you start taking Required Minimum Distributions (RMDs) from the account at age 73, even if you’re still working, whereas you may be able to delay your RMDs from an employer-sponsored account if you’re still working.

•   The money in an employer plan is protected from creditors and judgments, whereas the money in an IRA may not be, depending on your state.

Recommended: This guide can help you financially prepare for retirement.

What Is a Traditional IRA?

Now that you know the answer to the question of what is a rollover IRA?, you’ll want to familiarize yourself with a traditional IRA. To understand the difference between a rollover IRA vs. traditional IRA, it helps to know some IRA basics.

From the moment you open a traditional IRA, your contributions to the account are typically tax deductible, so your savings will grow tax-free until you make withdrawals in retirement.

This is advantageous to some retirees: Upon retirement, it’s likely one might be in a lower income tax bracket than when they were employed. Given that, the money they withdraw will be taxed at a lower rate than it would have when they contributed.

A Side-by-Side Comparison of Rollover IRA vs Traditional IRA

  Rollover IRA Traditional IRA
Source of contributions Created by “rolling over” money from another account, most typically an employer-sponsored retirement plan, such as 401(k) or 403(b). For the rollover amount, annual contribution limits do not apply. Created by regular contributions to the account, not in excess of the annual contribution limit, although rolled-over money can also be contributed to a traditional IRA.
Contribution limits There is no limit on the funds you roll over from another account. If you’re contributing outside of a rollover, the limit is $6,500 for tax year 2023, plus an additional $1,000 if you’re 50 or older. Up to $6,500 for tax year 2023, plus an additional $1,000 if you’re 50 or older.
Withdrawal rules Withdrawals before age 59 ½ are subject to both income taxes and an early withdrawal penalty (with certain exceptions , like for higher education expenses or the purchase of a first home). Withdrawals before age 59 ½ are subject to both income taxes and an early withdrawal penalty (with certain exceptions , like for higher education expenses or the purchase of a first home).
Required minimum distributions (RMDs) You’re required to withdraw a certain amount of money from this account each year once you reach age 73 (thanks to the SECURE 2.0 Act of 2022). You’re required to withdraw a certain amount of money from this account each year once you reach age 73 (again, thanks to the SECURE 2.0 Act).
Taxes Since contributions are from a pre-tax account, all withdrawals from this account in retirement will be taxed at ordinary income rates. If contributions are tax deductible, all withdrawals from this account in retirement will be taxed at ordinary income rates. (If contributions were non-deductible, you’ll pay taxes on only the earnings in retirement.)
Convertible to a Roth IRA Yes Yes

Can You Contribute to a Rollover IRA?

By now you’re probably wondering, can I contribute to a rollover IRA?, and the answer is yes. You can make contributions to a rollover IRA, up to IRA contribution limits. For tax year 2023, individuals can contribute up to $6,500 (with an additional catch-up contribution of $1,000 if you’re 50 or older). If you do add money to your rollover IRA, however, you may not be able to roll the account into another employer’s retirement plan at a later date.

Can You Combine a Traditional IRA With a Rollover IRA?

A rollover IRA is essentially a traditional IRA that was created when money was rolled into it. Hence, you can combine two IRAs by having a direct transfer done from one account to another, or by rolling money from one IRA to the other IRA.

There’s one important aspect of the transfer or rollover process that will help prevent the money from counting as an early withdrawal or distribution to you—and that’s being timely with any transfers. With an indirect rollover, you typically have 60 days to deposit the money from the now-closed fund into the new one.

A few other key points to remember: As mentioned above, if you add non-rollover money to a rollover account, you may lose the ability to roll funds into a future employer’s retirement plan. Also keep in mind that there’s a limit of one rollover between IRAs in any 12-month period. This is strictly an IRA-to-IRA limit and does not apply to rollovers from a retirement plan to an IRA.

How to Open a Traditional or Rollover IRA Account

Opening a traditional IRA and a rollover IRA are identical processes — the only difference is the funding. Open a traditional or rollover IRA by doing the following:

•   Decide where to open your IRA. For instance, you can choose an online brokerage firm where you can choose your own investments, or you can select a robo-advisor that will offer automated suggestions based on your answers to a few basic investing questions. (There’s a small fee associated with most robo-advisors.)

•   Open an account. From the provider’s website, select the type of IRA you’d like to open — traditional or rollover, in this case — and provide a few pieces of personal information. You’ll likely need to supply your date of birth, Social Security number, and contact and employment information.

•   Fund the account. You can fund the account with a direct contribution via check or a transfer from your bank account, transferring money from another IRA, or rolling over the money from an employer-sponsored retirement plan. Contact your company plan administrator for information on how to do the latter.

The Takeaway

Both a rollover IRA and a traditional IRA allow investors to put money away for retirement in a tax-advantaged way, with very little difference between the two accounts.

One of the primary questions anyone considering a rollover IRA should consider is, will you keep contributing to it? If so, that would prevent you from rolling the rollover IRA back into an employer-sponsored retirement account in the future.

Whether it’s a rollover IRA you’ve created by rolling over an employer-sponsored retirement account or a traditional IRA you’ve opened with regular contributions, either account can play a key role in your retirement game plan.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Easily manage your retirement savings with a SoFi IRA.

FAQ

Can you take money out of a rollover IRA?

You can, but if you take money from a rollover IRA (or a traditional IRA for that matter) before age 59½, those withdrawals are subject to income tax and an early withdrawal penalty of 10%. There are certain exceptions, however. If you withdraw the money for certain higher education expenses or to buy your first home, for example, the penalty may not apply.

Why would you rollover an IRA?

A rollover is when you move money between two different types of retirement plans. Typically, you might roll over an IRA if you leave a job with an employer-sponsored plan, such as a 401(k) or 403(b). You would roll the assets from that plan into a rollover IRA where your savings grow tax-free until you withdraw the money in retirement. You could instead choose to leave the money in your former employer’s plan, if that’s allowed, or roll it over into your new employer’s 401(k) or 403(b) plan, if they have one. However, a rollover IRA may offer you more investment choices and lower fees and costs than an employer-sponsored plan.

Can I roll over assets into my traditional IRA?

Yes, rolled over money can be contributed to a traditional IRA. It’s also worth noting that you can also combine a traditional IRA and a rollover IRA. You can do this with a direct transfer from one account to another, or by rolling money from one IRA to another, for instance. Just keep in mind that there is a limit of one rollover between IRAs in any 12-month period.

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Aug
01
2023
What Is Book Value Per Share (BVPS)?

What Is Book Value Per Share (BVPS)?

By | Growing Wealth, invest, Investing | Comments Off on What Is Book Value Per Share (BVPS)?

One of the most popular and trusted forms of fundamental analysis is Book Value Per Share (BVPS), or a company’s “book value.” Book value per share is an accounting metric that calculates the per-share value of a company’s equity.

The book value per share of an undervalued stock is higher than its current market price, so book value per share can help investors appraise a stock price.

Knowing what book value per share is, how to calculate it, and how it differs from other calculations, can add yet another tool to an investor’s tool chest.

What Is Book Value Per Share?

Book Value per Share (BVPS) is the ratio of a company’s equity available to common shareholders to the number of outstanding company shares. This ratio calculates the minimum value of a company’s equity and determines a firm’s book value, or Net Asset Value (NAV), on a per-share basis. In other words, it defines the accounting value (i.e. book value) of a share of a company’s publicly-traded stock.



💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

Book Value Per Share vs Market Value Per Share

The Book Value Per Share provides information about how the value of a company’s stock compares to the current Market Value Per Share (MVPS), or current stock price. For example, if the BVPS is greater than the MVPS, the company’s stock market may be undervaluing a company’s stock.

The market value per share is forward-looking, since it’s based on what investors think a company should be worth, while book value per share is an accounting measure that uses historical data.

Recommended: Intrinsic Value vs Market Value, Explained

What Does Book Value Per Share Tell You?

Commonly used by stock investors and analysts, the Book Value Per Share (BVPS) metric looks at a company’s stock price to determine whether it’s undervalued compared to the stock’s current market price. An undervalued stock will have a BVPS higher than its current stock price.

If the company’s BVPS increases, investors may consider the stock more valuable, and the stock’s price may increase. On the other hand, a declining book value per share could indicate that the stock’s price may decline, and some investors might consider that a signal to sell the stock.

Book Value Per Share also theoretically reflects what shareholders would receive in a company liquidation after all its assets were sold and all of its liabilities paid. However, because assets would hypothetically sell at market value instead of historical asset values, this may not be an entirely accurate measurement.

If a company’s share prices dip below its BVPS, the company can potentially be vulnerable to a takeover by a corporate raider who could buy the company and liquidate its assets risk-free. Conversely, a negative book value indicates that a company’s liabilities exceed its assets, making its financial condition “balance sheet insolvent.”

Book Value Per Share solely includes common stockholders’ equity and does not include preferred stockholders’ equity. This is because preferred stockholders are ranked differently than common stockholders in the event the company is liquidated. If a corporate raider intends to liquidate a company’s assets, the preferred stockholders with a higher claim on assets and earnings than common shareholders are paid first and that amount gets deducted from the final shareholders’ equity distributed among common stockholders.

How to Calculate Book Value Per Share

An investor can apply BVPS to a stock by analyzing the company’s balance sheet. Specifically, an investor will need total asset value, cost of acquiring an asset, and accumulated depreciation of corporate assets which helps provide the most accurate BVPS figure.

Whereas some price models and fundamental analyses are complex, calculating book value per share is fairly straightforward. At its core, it’s subtracting a company’s preferred stock from shareholder equity and dividing that sum by the average amount of outstanding shares.

Book Value Per Share = (Shareholders’ Equity – Preferred Equity) / Total Outstanding Common Shares
Shareholders’ Equity = Total equity of all shareholders.
Total Outstanding Common Shares = Company’s stock currently held by all shareholders, including blocks held by institutional investors and restricted shares owned by preferred stockholders. This number may fluctuate wildly over time.


💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Example of Book Value Per Share

Company X has $10 million of shareholder’s equity, of which $1 million are preferred stocks and an average of 3 million shares outstanding. With this information, the BVPS would be calculated as follows:

BVPS = ($10,000,000 – $1,000,000) / 3,000,000
BVPS = $9,000,000 / 3,000,000
BVPS = $3.00

How to Increase Book Value Per Share

A company can increase its book value per share in two ways.

Repurchase Common Stocks

A common way of increasing BVPS is for companies to buy back common stocks from shareholders. This reduces the stock’s outstanding shares and decreases the amount by which the total stockholders’ equity is divided. For example, in the above example, Company X could repurchase 500,000 shares to reduce its outstanding shares from 3,000,000 to 2,500,000.

The above scenario would be revised as follows:

BVPS = ($10,000,000 – $1,000,000) / 2,500,000
BVPS = $9,000,000 / 2,000,000
BVPS = $4.50

By repurchasing 1,000,000 common shares from the company’s shareholders, the BVPS increased from $3.00 to $4.50.

Increase Assets and Reduce Liabilities

Rather than buying more of its own stock, a company can use profits to accumulate additional assets or reduce its current liabilities. For example, a company can use profits to either purchase more company assets, pay off debts, or both. These methods would increase the common equity available to shareholders, and hence, raise the BVPS.

The Takeaway

There are many methods that investors can use to evaluate the value of a company. By leveraging useful and insightful formulas such as a company’s Book Value Per Share, investors can determine a company’s value relative to its current market price. While it has limitations, the BVPS can identify companies that are undervalued (or overvalued) according to core fundamental principles, and it’s a relatively straightforward calculation that even beginner investors can use.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

Photo credit: iStock/Tempura

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Aug
01
2023
Gross Spread for IPOs Explained

What Is Gross Spread?

By | Growing Wealth, invest, Investing | Comments Off on What Is Gross Spread?

The term “gross spread” refers to an important element of the initial public offering (IPO) process: Gross spread is the money underwriters earn for their role in taking a company public.

When a company IPOs, or “goes public,” it releases its shares onto a public stock exchange, an undertaking that demands a tremendous amount of work behind the scenes. That work involves bankers, analysts, underwriters, and numerous others. All of that work must be compensated, which is where the gross spread — also called the underwriting spread — comes into play.

How Gross Spread Works

The gross spread refers to the cut of the money that is paid to the underwriters for their role in taking a company public. In effect, it’s sort of like a commission paid to the IPO underwriting team. But the underwriting spread isn’t a flat fee, but a spread in the sense that it represents a share price differential.

Underwriters

Underwriters are common players in many facets of the financial industry. It’s common to find underwriters working on mortgages, as well as insurance policies.

When it comes to IPOs, underwriters or underwriting firms work with a private company to take them public, acting as risk-assessors, effectively, in exchange for the underwriters spread. Their job is to evaluate risk and charge a price for doing so.

Recommended: What Is the IPO Process?

The Role of Underwriters in the IPO Process

These IPO underwriters generally work for an investment bank and shepherd the company through the IPO process, ensuring that the company covers all of its regulatory bases.

The underwriters also reach out to a swath of investors to gauge interest in a company’s forthcoming IPO, and use the feedback they receive to set an IPO price — this is a key part of the process of determining the valuation of an IPO.

In order to generate compensation for all this work, the underwriters typically buy an entire IPO issue and resell the shares, keeping the profits for themselves. So, the underwriters set the IPO price, buy the shares, and — assuming the shares increase in value once they become publicly available — the underwriters generate a profit from reselling them, the same way you would selling the shares of an ordinary stock that had risen in value.

For companies that are going public, the benefit is that they’re essentially guaranteed to raise money from the IPO by selling the shares to the underwriters. The underwriters then sell the shares to buyers they have lined up at a higher price in order to turn a profit. That difference in price (and profit) is the gross spread.

For the mathematically minded, the gross spread — basically the IPO underwriting fee — would be equal to the sale price of the shares sold by the underwriter, minus the price of the shares it paid for the shares.


💡Quick Tip: Keen to invest in an initial public offering, or IPO? Be sure to check with your brokerage about what’s required. Typically IPO stock is available only to eligible investors.

[ipo_launch]

Gross Spread & Underwriting Costs

The gross spread, for most IPOs, can range between 2% and 8% of the IPO’s offering price — it depends on the specifics of the IPO. There can be many variables that ultimately dictate what the gross spread ends up being.

The gross spread also comprises a few different components, which are divided up by members of the underwriter group or firm: The management fee, underwriting fee, and concession. The underwriters typically split the gross spread, overall, as such: 20% for the management fee, 20% for the underwriting fee, and 60% for the concession. More on each below:

Management fee

The management fee, or manager’s fee, is the amount paid to the leader or manager of the investment bank providing underwriting services. This fee essentially amounts to a commission for managing and facilitating the entire process. It’s also sometimes called a “structuring fee.”

Underwriting fee

The IPO underwriting fee is similar to the management fee in that it is collected by and paid to the underwriters for performing their services. Again, this is more or less a commission that is taken as a percentage of the overall gross spread and divided up by the underwriting teams.

Concession

The concession, or selling concession, is generally the compensation underwriters get for managing the IPO process for a company. So, in this sense, the concession is a part of the gross spread during the IPO process and is, effectively, the profits earned by selling shares when the process is complete. It’s divided up between the underwriters proportionately depending on the number of shares the underwriter sells.


💡Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

Examples of Gross Spread

Here’s an example of how gross spread may look in the real world:

Company X is planning to IPO, and its shares are valued at $30 each. The underwriters working with Company X on its IPO purchase the full slate of shares prior to the IPO, and then go off and sell the shares at $32 each to investors and the general public.

In this case, the gross spread would be equal to the difference between what the underwriters paid Company X for the shares, and what they then sold the shares for to the public — $32 – $30 = $2.

Or, to express it as a ratio, the gross spread is 6.7%. More on the ratio calculation below.

Gross Spread Ratio

As mentioned, the gross spread can be expressed or calculated as a ratio. Using the figures above, we’d be looking to figure out what percentage $2 is (the gross spread) of $30 (the share price sold to the underwriters).

So, to calculate the ratio, you’d simply divide the gross spread by the share price — $2 divided by $30. The calculation would look like this:

$2 ÷ $30 = 0.0666

The figure we get is approximately 6.7%. Also note that the higher the ratio, the more money the underwriters (or investment bank serving as the underwriter) receives at the end of the process.

IPO Investing With SoFi

Though the gross spread, or underwriters spread, is not a well-known aspect of the IPO process, it’s relatively straightforward. Underwriters, who shepherd a company through the IPO process, ultimately buy the initial shares from the company at one price, and sell them to the public at the IPO at a higher price. The spread between the two is considered the gross spread, or the compensation the underwriting team earns for all their work.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

What is meant by the underwriting spread?

The underwriting spread is another term for the gross spread. Underwriters pay issuers, or an issuing company, for a company’s shares prior to the IPO. The underwriting firm then turns around and sells shares to investors. The difference (expressed as a dollar amount) that the underwriter pays the issuer and that it receives back from selling the shares during an IPO is the underwriting spread.

What are gross proceeds in an IPO?

Gross proceeds, in relation to an IPO, refers to the total aggregate amount of money raised during the public offering. This is all of the money raised by investors during the IPO.

What is a typical underwriting spread?

As underwriting spreads are usually expressed as dollar amounts, the typical underwriting spread can vary depending on several variables in the IPO process — including share price, share volume, etc. But in general, it can amount to between 3.5% and 7% of gross proceeds during an IPO.

Photo credit: iStock/bankrx

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Aug
01
2023
What Are Non-Transparent ETFs?

What Are Non-Transparent ETFs?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Are Non-Transparent ETFs?

Unlike ordinary exchange-traded funds (ETFs), which disclose their underlying assets daily, non-transparent ETFs are only required to reveal their holdings on a quarterly or monthly cadence. This ability to conceal their assets can help active non-transparent ETF managers to cloak their strategies for longer periods, with the aim of maximizing performance.

To understand some of the advantages these funds may offer investors, it helps to compare them with standard ETFs.

Why Would You Invest in Non-Transparent ETFs?

For nearly 30 years, exchange-traded funds (ETFs) have been a mainstay for big institutional investors as well as individuals, thanks to their transparency, tax efficiency, and low cost. Today, the ETF industry in the U.S. has billions, if not trillions, under management.

Traditionally, investors have found ETFs an attractive option because of their liquidity, which has made ETFs more transparent than mutual funds. Unlike mutual funds, you can trade ETF shares throughout the day on an exchange, similar to stocks. And the way shares are created and redeemed gives investors more visibility into the funds’ underlying assets, compared with mutual funds. This ‘transparency’ has been true of both actively managed ETFs as well as passive ETFs, which track an index such as the S&P 500.

But the fundamental transparency of the ETF “wrapper” or fund structure has been a thorn in the side of some active ETF managers, who may prefer less visibility around their holdings for strategic reasons. Hence the appeal of non-transparent ETFs to active managers.

Active non-transparent ETFs — also called ANT ETFs — aren’t required to reveal their assets daily, as noted above; rather they report a snapshot of what they hold on a monthly or quarterly basis, similar to a mutual fund. In some cases they report the assets they hold, but not how much they hold.

Recommended: ETFs vs. Index Funds: What’s the Difference?


💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

How Passive vs. Active Strategies Can Impact Transparency

If you think about it, the evolution of active non-transparent ETFs makes sense in the larger context of the ETF universe, where passively managed ETFs comprise more than 90% of that market.

Passively managed ETFs offer some of the lowest ETF fees in today’s market, which is one reason they’re typically cheaper to own than mutual funds. The overall tax efficiency of index ETFs also helps to lower investing costs, and has contributed to their overall popularity with investors.

ETFs, of course, are also valued for their role in adding diversification to investors’ portfolios, with many ETFs invested in specific sectors (e.g. electric vehicles, pharmaceuticals) or securities (e.g. U.S. Treasuries, corporate bonds).

No matter whether an ETF is invested in a broader equity market or a niche sector, passive ETFs are designed to mirror or track the stocks in a certain index. Thus the transparency of these funds is part of how they work.

That’s not true of active ETFs, which rely on the oversight of a fund manager to choose the underlying assets (just like an active mutual fund). But because ordinary ETFs require a daily disclosure of the fund’s holdings, this can hamper an active manager’s ability to execute their investment strategies.

When a fund’s assets are disclosed on a daily basis, the market can bid up the price for their holdings. And while in the short term this might be good (the assets could go up), in the long term it could disrupt the fund manager’s strategies. And, if other investors try to anticipate the trades that active managers might make, sometimes called front running, that could cause asset prices to fluctuate and potentially impact the ETF’s performance.

The Use of Proxies in Non-Transparent ETFs

How might a non-transparent ETF solve this problem?

The way ETFs keep their price in line with their assets is that the sponsor of the ETF trades throughout the day with an “authorized participant.” These authorized participants will create and redeem “baskets” of securities, i.e. the stocks or bonds that the ETF holds, and then trade them to the ETF for shares of the fund, which allows the ETF to stay in line with the price of its underlying stocks.

This process obviously requires a great degree of transparency across the board. So, how does a non-transparent ETF obscure its holdings? The answer is, by the use of “proxies”: These are baskets of stock that are similar to but not identical to the underlying holdings of the ETF.

Thus, non-transparent ETFs are able to occupy a happy middle ground in the ETF world: they enable fund managers to conceal their strategies while keeping the liquidity of pricing that is core to trading ETFs overall.

The History of Non-Transparent ETFs

For years, the ETF industry was composed mostly of index ETFs, which helps to explain why the universe of ETFs is primarily passive. But over time, some investment companies began seeking regulatory approval for non-transparent ETFs, also sometimes called semi-transparent ETFs, in order to pursue more active strategies. The approval for these funds, and the technology underlying the non-transparent strategy, began rolling out in late 2019, and ANT ETFs have seen steady inflows since then.

Though non-transparent ETFs are still a relatively small part of the overall ETF market, this sector is gaining traction and is now approaching $2 billion AUM. This reflects a similar trend among active ETFs, which have also seen more inflows this year.


💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.

The Takeaway

Non-transparent ETFs may be a relative newcomer in the multi-trillion-dollar world of ETFs, but they offer an attractive new opportunity for investors who are interested in active investment styles — but still want the cost efficiency and liquidity of an ETF. Non-transparent ETFs also give active fund managers the ability to cloak their strategies, which may aid potential outcomes.

As with all ETFs, they may have a place in an investor’s portfolio. But it’s generally best that investors do some research or consult with a financial professional before investing.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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Photo credit: iStock/ANA BARAULIA

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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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Aug
01
2023
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Investing in Growth Funds

By | Growing Wealth, invest, Investing | Comments Off on Investing in Growth Funds

A growth fund or growth stock mutual fund is invested primarily in growth stocks and focused on capital appreciation, or in other words: profit.

Just as growth investing is a certain investing style, a growth fund is a specific type of mutual fund or exchange-traded fund (ETF) that reflects this more aggressive investment style. Growth funds primarily include shares of growth stocks, but can also include bonds or other investments designed specifically with higher returns in mind.

Unlike some value stock funds, growth funds rarely pay dividends. Instead, investors make money on the appreciation of the underlying stocks. Since growth mutual funds are considered riskier investments — with a higher risk of loss along with a higher potential for gains — holding these funds for the longer term may help mitigate the short-term impact of price volatility.

Before you decide whether growth funds would suit your strategy, it may help to learn more about how they work, as well as some of the pros and cons of these funds.

What Is Growth Investing?

Growth investing is a strategy that focuses on increasing an investor’s capital or earnings. For this reason, growth investors may invest in younger or smaller companies which are said to be in a growth phase, and whose earnings are expected to increase at an above-average rate compared to their industry sector or the overall market.

Growth stocks aren’t always new companies, though. Larger, more established companies can also fall into this category, assuming they are poised for expansion. Big companies could be in a growth phase due any number of factors, e.g., technological advances, a shift in strategy, a movement into new markets, acquisitions, and so on.

How much growth can you expect to get from good growth stock mutual funds? As with any mutual fund, the performance of these funds depends on their underlying assets and, in the case of actively managed funds, their portfolio managers’ strategies.

There are also growth index funds, which are passively managed. A growth index fund is a growth stock mutual fund that tracks the performance of a particular stock index that’s focused on growth (e.g., the CRSP Large Growth Index or CRSP Small Cap Growth Index).

To give you an example of how growth funds compare to the domestic equity market as a whole, the U.S. stock market had an average return of 14.83% from 2012 to 2021, according to the most recent data. For context, here is the performance of five growth mutual funds and ETFs over the last 10 years.

Fund Name Total Net Assets 10-year avg. annual return
Growth Fund of America
(AGTHX) from American Funds, as of 7/21/23		 $231.7 billion 12.23%
iShares Core S&P U.S. Growth ETF (IUSG) , as of 7/21/23 $13.91 billion 14.05%
Vanguard Mega Cap Growth ETF (MGK) , as of 7/21/23 $13.99 billion 15.29%
SPDR Portfolio S&P 500 Growth ETF (SPYG) , as of 7/21/23 $17.7 billion 14.39%
Vanguard Small-Cap Growth Index Fund (VSGAX) , as of 7/21/23 $30.5 billion 11.95%

Remember that growth investing can be volatile since companies typically take some risks in order to expand. Also, some growth companies can get a lot of media or investor attention, which can contribute to price swings as investors buy and sell shares with the hope of seeing a profit.


💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

Examples of Growth Stocks

Market capitalization — which indicates the number of outstanding shares a company has multiplied by its price per share — is not a specific hallmark or characteristic of growth stocks. Growth stocks can be large-cap corporations, mid-cap, or smaller companies. That said, most growth funds generally tilt toward larger companies.

Large-cap companies can scale their manufacturing to produce more products at cheaper prices, which increases their potential. Plus, big companies tend to reinvest the money they make into research and development, acquisitions, or expansion.

Information technology companies are often the largest holdings in U.S. growth mutual funds, but these funds may also hold healthcare and consumer discretionary stocks as well.

Smaller companies also have a lot of growth potential, as noted above — and some small-cap companies may be in the initial startup phase, which can sometimes generate outsize growth. And many mid-cap companies have been around longer and may have the ability to adapt to new market needs.

Recommended: Value Stocks vs Growth Stocks: Key Differences to Know

Benefits of Investing in Growth Mutual Funds

There are a few good reasons to consider growth stock mutual funds, and portfolio diversification is at the top of the list. It would be expensive for most individual investors to achieve the level of diversification offered by a pooled investment like a growth mutual fund. Investing in a single fund gives investors exposure to a wide range of stocks in different sectors.

Growth funds may also have long-term potential. For instance, growth stocks are more likely to see returns during an economic boom cycle, when many companies are growing and thriving.

While investors may not be able to count on dividend income from a growth mutual fund, they may still be able to sell the fund for more than what they paid for it. Whether that’s attractive to you can depend on your overall investment objectives, time horizon and risk tolerance.

Downside of Growth Mutual Funds

Like any other investment, there are potential drawbacks to keep in mind with growth stocks and their growth fund counterparts.

While growth stocks can potentially increase in value more quickly than other stocks, this also makes them a potentially risky and more volatile investment. A good growth stock mutual fund might return 18% one year and 6% the next. That kind of volatility isn’t for everyone.

In order for a growth stock to keep growing, the company must continue to earn money. This is challenging for any company to maintain over a long period of time. If there’s a recession, if a company has an unforeseen loss, or can’t continue to grow, the value of the stock will go down.

To manage this risk, investors may choose to hold growth stocks and growth mutual funds for the five to 10 years, so that they can ride out market fluctuations and potentially be more likely to make a profit.

It’s also important to keep in mind that some growth stocks could become overvalued by the market, which might impact a growth fund’s performance. In this scenario, an investor might buy shares in a growth fund, hoping for solid returns. But if one or more of the underlying companies in those funds ends up being overvalued, the stock’s performance might fall below investor expectations.


💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Evaluating a Company’s Potential for Growth

Assessing a company’s potential for growth, either in the near or long term, is not an exact science. But it’s important to consider how likely a company is to grow when determining whether it’s a good fit for a growth portfolio. This typically involves looking at several key metrics, including:

•  Return on Equity (ROE). Return on equity is used to measure company performance. It’s calculated by dividing net income by shareholder equity over a set time period.

•  Earnings Per Share (EPS). Earnings per share represents a company’s total profit divided by its total number of outstanding shares. EPS is used to measure a company’s profitability.

•  Price to Earnings to Growth (PEG). The price to earnings to growth ratio represents the price to earnings (P/E) ratio of a stock divided by the growth rate of its earnings over a set time period. Growth funds tend to have a higher P/E ratio (price to earnings ratio), which is the cost of a company’s stock relative to its earnings-per-share (EPS) than other funds. This can make them more expensive, but their potential for growth might make the extra cost worth it.

When using these and other metrics to measure a company’s growth potential, it’s important to understand how to interpret them. For example, a company that has a higher earnings per share is generally viewed as being more profitable. Likewise, a high price to earnings ratio is considered to be an indicator of continued growth.

But investors should also consider how sustainable the outlook for profitability and growth truly is, given the context of a company’s revenue, debt, and cash flows.

Buying Growth Mutual Funds

When choosing which growth stocks or growth funds to invest in, there are several factors investors may choose to consider. These include:

•  Historical performance

•  Stocks and other securities held in the fund

•  Cost and potential earnings

Growth funds can often — but not always — be identified by the word growth in their name. Some investors might choose to put their money in blended funds, which combine growth stocks with less risky holdings. These funds allow investors to benefit from some of the upsides of growth funds without quite as much risk.

Certain growth funds are exchange-traded funds, or ETFs. Like any ETF, these funds can be traded during the day like stocks.

It’s important for investors to understand the risks before investing in any stock or fund, and to build a diversified portfolio of assets in order to mitigate risk. With a diversified portfolio, investors hold both riskier assets and safer assets, in an effort to reap the benefits of growth without losing too much along the way. It’s also vital to remember that past performance is not a guaranteed indicator of how well a stock or growth fund will perform in the future.

Investing for Growth or Value?

Growth investing and value investing are couched as different styles of investing, yet they share a similar profit-driven focus — just a different means of getting there. With growth investing, the overarching goal is to invest in companies that have solid potential for growth. With value investing, the goal instead is to find companies that have been undervalued by the market — and hopefully see them increase in value.

A value investor may seek out companies that they believe are bargains based on current market price. They then invest in these companies, either by purchasing individual shares or through value mutual funds, and hold onto those investments over time. The end goal is to eventually sell their shares for a profit down the line.

In addition to eventual capital appreciation, value stocks can also pay dividends to investors. Value stocks are typically more likely to be established companies rather than newer ones. The most important thing to know with value investing vs. growth investing is how to avoid a value trap. This is a company that appears to be undervalued, but actually has a correct valuation. The trap comes into play when an investor buys in, expecting the stock’s price to rise over time, only to be disappointed by a price that stays the same or worse, declines.

Determining When to Invest in Growth Mutual Funds

Dollar cost averaging is a way to invest small amounts of money consistently over time, rather than attempting to time the market, which helps investors to limit their risk exposure. However, if there is a stock market correction, it can be a good time to pick up some extra assets while they’re at particularly low prices.

Growth stocks tend to do well during bull markets, so while they may not see significant gains during a recession, they can still be an option to consider for long-term investments to pick up before the next economic boom.

The Takeaway

Growth stocks have a primary goal of capital appreciation. These stocks are expected to grow more quickly than other stocks in the market, and because of this, growth mutual funds are considered riskier investments than other mutual funds with a high risk of loss along with a higher potential for gain.

Growth funds holdings tend to have a higher P/E ratio (price to earnings ratio), which can make them more expensive investments, but their quick growth may make the extra cost worth it.

These types of funds are more likely to see returns during an economic boom cycle, vs a recession. During a recession or economic downturn, companies may not have the cash or earnings to be able to invest in growth, and the value of the stocks the fund could go down.

Investors who know the basics of growth mutual funds may be interested in adding some of these assets, or other types of mutual funds and ETFs, to their investment portfolio.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


Invest with as little as $5 with a SoFi Active Investing account.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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