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Q: What Is UCITS?

UCITS stands for Undertakings for Collective Investment in Transferable Securities and are a category of investment funds designed to both streamline and safeguard investment transactions. UCITS funds are a type of mutual fund that complies with European Union regulations and holds securities from throughout the region.

Jul

2023

What Is UCITS?

By Brian O'Connell | Growing Wealth, invest, Investing | Comments Off

Undertakings for Collective Investment in Transferable Securities (UCITS) are a category of investment funds designed to both streamline and safeguard investment transactions. UCITS are usually structured like traditional mutual funds, exchange traded funds, or a money market fund.

The European Union (EU) regulates UCITs, but they are widely available to non-EU investors. U.S. investors, for example, can buy shares of UCITS through U.S.-based fund managers, although local, EU-based money managers run the funds. Because they undergo a high level of regulatory scrutiny, many view UCITS as a relatively safe investment.

What Is a UCITS Fund?

UCITS funds are a type of mutual fund that complies with European Union regulations and holds securities from throughout the region. They emerged as part of an effort by the European Union to consolidate disparate European financial investments into one central sector, governed by the EU, with a “marketing passport,” that enables financial services firms across the EU to invest in multiple countries under a common set of rules and regulations.

The EU launched UCITS for two primary reasons:

1. To structure a single financial services entity under the EU umbrella that allowed for the cross-sale of mutual funds across the EU, and across the globe.

2. To better regulate investment asset transactions among all 28 EU member countries, giving investors inside and outside of the EU access to more tightly regulated investment funds.

Fundamentally, UCITS funds rules give EU regulators a powerful tool to centralize key financial services issues like types of investments allowed, asset liquidity, investment disclosures, and investor safeguards. By rolling the new rules and regulations into UCITS, EU regulators sought to make efficient and secure investment funds available to a broad swath of investors, primarily at the retail and institutional levels.

For investors, UCITS funds offer more flexibility and security. Not only are the funds widely viewed as safe and secure, but UCITS funds offer a diversified fund option to investors who might otherwise have to depend on single public companies for the bulk of their investment portfolios.

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A Brief History of UCITS

The genesis of UCITS funds dates back to the mid-1980’s, with the rollout of the European Directive legislation, which set a new blueprint for financial markets across the continent. The new law introduced UCITS funds on an incremental basis and has been used as a way to regulate financial markets with regular updates and revisions over the past three decades.

In 2002, the EU issued a pair of new directives related to mutual fund sales — Directives 2001/107/EC and 2001/108/EC, which expanded the market for UCITS across the EU and loosened regulations on the sale of index funds in the region.

The fund initiative accelerated in 2009 and 2010, when the Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 clarified the use of UCITS in European investment markets, especially in coordination of all laws, regulations, and administrative oversight. The next year, the European Union reclassified UCITS w as investment funds regulated under Part 1 of the Law of 17 December 2010.

In recent years, “Alt UCITS” or alternative UCITS funds have grown in popularity, along with other types of alternative investments.

How Does a UCIT Fund Work?

Structurally, UCITS are built like mutual funds, with many of the same features, regulatory requirements, and marketing models.

Individual and institutional investors, who form a collective group of unit holders, put their money into a UCIT, which, in turn, owns investment securities (mostly stocks and bonds) and cash. For investors, the primary goal is to invest their money into the fund to capitalize on specific market conditions that favor the stocks or bonds that form the UCITS. UCTIS funds may provide one way for American investors to get more international diversification within their portfolios.

A professional money manager, or group of managers, run the fund, and they are singularly responsible for choosing the securities that make up the fund. The UCITS investor understands this agreement before investing in the fund, thus allowing the fund managers to choose investments on their behalf.

An investor may leave the fund at any point in time, and do so by liquidating their shares of the fund on the open market. American investors should know that the Internal Revenue Service may classify UCITS as passive foreign investment companies, which could trigger more onerous tax treatments, especially when compared to domestic mutual funds.

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UCITS Rules and Regulations

UCITS do have some firm regulatory and operational requirements to abide by in the European Union, as follows:

• The fund and its management team are usually based on a tax-neutral EU country (Ireland would be a good example.)

• A UCITS operates under the laws mandated by the member state of its headquarters. After the fund is licensed in the EU state of origin, it can then be marketed to other EU states, and to investors around the world. The fund must provide proper legal notification to the state or nation where it wants to do business before being allowed to market the fund to investors.

• A UCITS must provide proper notice to investors in the form of a Key Investor Information Document, usually located on the fund’s website. The fund must also be approved.

• A UCITS must also provide a fund prospectus to investors (also normally found on the fund’s web site) and must file both annual and semiannual reports.

• Any time a UCITS issues, sells, or redeems fund shares, it must make pricing notification available to investors.

The Takeaway

As discussed, Undertakings for Collective Investment in Transferable Securities (UCITS) are a category of investment funds designed to both streamline and safeguard investment transactions. Note that while UCITS are usually structured like traditional mutual funds, exchange traded funds, or a money market fund.

UCITS may be an interesting type of investment for U.S. investors looking to diversify their portfolios. As with any investment, investors must conduct thorough due diligence on the UCITS, which should include a review of fund holdings, past performance, management stability, fees, and tax consequences.

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Jul

2023

Investing in Gold and Silver: a Guide

By Samuel Becker | Growing Wealth, invest, Investing | Comments Off

Precious metals can be an important part of a diversified portfolio. Here’s what to know before you invest.

Jul

2023

Complete Guide to the Moving Average Convergence Divergence (MACD) indicator

What Is MACD?

By Colin Dodds | Financial Independence, Growing Wealth, invest, Investing | Comments Off

The moving average convergence divergence (MACD) is an indicator that shows the momentum in equity markets. It’s especially popular with traders, who use it to help them rapidly identify short-term momentum swings in a stock.

A moving average can help investors see past the noise of daily market movements to find securities trending up or down. The MACD offers another way to focus on such stocks, by showing the relationship between two moving averages.

Understanding the Moving Average

The moving average convergence divergence may sound complex, so it makes sense to start with the first part – the moving average (MA), also called the exponential moving average, or EMA. This is a very common metric with stocks, used to make sense of ever-fluctuating price data by replacing it with a regularly updated average price. This moving average can give investors a clearer idea of where a stock is trading than one that’s updated second by second.

Because the moving average reflects past prices, it is a lagging indicator. But how much the past prices factor in depends on the person setting the average. Most commonly, investors look at moving averages of 15, 20, 30, 50, 100, and 200 days, with the 50- and 200-day averages being the most widely used.

A moving average with a shorter time span will be more sensitive to price changes, while moving averages with longer time spans will fluctuate less dramatically. Generally, active traders with strategy focused on market timing favor shorter-duration moving averages.

To perform the MACD calculation, traders take the 26-day moving average of a stock and subtract it from that stock’s 12-day moving average. This calculation offers a quick temperature-check of a stock’s momentum.

While the 12-day and 26-day time spans are standard for the MACD, investors can also create their own custom MACD measurements with time spans that better fit their own particular trading tactics and investment strategies.

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How to Read MACD

If a stock’s MACD is positive, that means its short-term average is higher than its long-term average, which could be a bullish indicator that stock is on an upswing. A higher MACD indicates more pronounced momentum in that upswing. On the other hand, a negative MACD indicates that a stock is trending downward.

If the positive or negative difference between the shorter-term and longer-term moving averages expands, that’s considered the MACD divergence, or the D in MACD. If they get closer, that’s considered a convergence, the C in MACD.

When the two moving averages converge, they meet at a place between the positive and negative MACD, called the zero line, or the centerline. For many traders, this MACD crossover is the sign they wait for to jump into a stock, which after losing value, is suddenly gaining value. Conversely, a stock crossing the zero line of the MACD is often taken to mean that the good times are over, leading many traders to sell at that point.

The MACD is a vital concept in technical analysis, a popular approach investors use to try to forecast the ways a stock might perform based on its current data and past movements. It involves a wide range of data and trend indicators, such as a stock’s price and trading volume, to locate opportunities and risks.

Technical analysis does not look at underlying companies, their industries, or any macroeconomic trends that might drive their success or failure. Rather, it solely analyzes the stock’s performance to find patterns and trends.

Recommended: The Pros and Cons of Momentum Trading

The MACD as a Trading Indicator

For traders, a rising MACD is a sign that a stock is being bid up. The MACD shows how quickly that’s happening.

As the short-term average rises above the longer-term average, and the two figures diverge more widely, the MACD expresses this in a simple number. When a stock is sinking, investors also want to know how fast it’s falling, as well as whether its decline is speeding up or slowing down, which they can find quickly by looking at the divergence.

A convergence is also a key indicator for many traders. As the long-term and short-term moving averages get closer to one another, it can be a sign that a given stock is either overbought or oversold for the moment. If they hold the stock, it may be time to sell the stock. But if they like the stock, and are waiting for a bargain-basement price at which to buy it, then the convergence of the two averages on the zero line may mean it’s time to start buying.

By using the MACD, traders can also compare a stock to competitors in its sector, and to the broader market, to decide whether its current price reflects its value and whether they should buy, sell, or short a stock. Because the MACD is priced out in dollars, many traders will use the percentage price oscillator, or PPO. It uses the same calculation as the MACD, but delivers its results in the form of a percentage difference between the shorter- and longer-term moving averages. As such, it allows for quicker, cleaner comparisons.

💡 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.

The Pros and Cons of the MACD

The MACD indicator has benefits for traders. It’s a convenient gauge of a stock’s momentum for an active, short-term trader. But it can also help a long-term investor who’s looking for the right moment to buy or sell a stock. Once an investor understands the MACD, it’s an easily interpreted data point to incorporate into their trading strategy.

But the MACD does have its drawbacks and does not account for certain types of investment risk. Because the MACD is a lagging indicator, it can lead to a trader staying too long in a position that’s since begun to swoon. Or, alternately, it can indicate a turnaround that’s already run the bulk of its course.

This is especially dangerous in volatile markets, when stocks can “whipsaw.” This term – named for the push-and-pull of the saw when it’s used to chop down a tree – describes the phenomenon of a stock whose price is moving in one direction, and suddenly goes sharply in the opposite direction. Whether that whipsaw movement is up or down, it can prove highly disruptive for a trader who relies too heavily on the MACD.

The Takeaway

The MACD can be a helpful metric for traders to understand and to use, in conjunction with other tools to help formulate their investing strategy.

The MACD indicator has benefits for traders. It’s a convenient gauge of a stock’s momentum for active traders. But it can also help long-term investors, too, determine when to buy and sell. It’s also a lagging indicator, which can make it tricky to use for inexperienced traders. As always, it’s best to consult with a financial professional if you’re feeling like you’re in over your head.

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Jul

2023

What Is a Carry Trade in Currency Markets?

What Is A Currency Carry Trade in Forex Markets?

By Samuel Becker | Growing Wealth, invest, Investing | Comments Off

Carry trade is a strategy used by some traders who invest in currency markets to take advantage of differences in interest rates. In a carry trade, an investor buys or borrows a security or asset at a low interest rate, and then uses it to invest in another security or asset that provides a higher rate of return.

Carry trades have some clear uses in the foreign exchange market, or “forex” market. Given that they can be used to drive returns, they can be important for investors of all stripes to understand.

What Is a Carry Trade?

In a carry trade, forex traders borrow money at a low interest rate in order to invest it in an asset with a higher rate of return. In the forex markets, the currency carry trade is a bet that one foreign currency will hold or increase its value relative to another currency.

Of course, this investing strategy hinges on whether or not interest rates and exchange rates are in the traders’ favor. The wider the exchange rate between two currencies, the better the potential returns for the investor.

Recommended: What Is Forex Trading?

Even so, a carry trade strategy can be a relatively simple way to increase an investor’s returns, assuming they understand the difference in interest rates. In that way, it’s similar to understanding “spread trading” as they relate to stocks.

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How Do You Execute a Carry Trade?

Executing a carry trade can seem nebulous without an example. Here’s a runthrough.

Carry Trade Example

Imagine that the U.S. dollar has a 1% interest rate, but the British pound has a 2% interest rate. A trader could take 100 U.S. dollars, and then invest that 100 dollars into the equivalent number of pounds (according to the exchange rate), and earn a higher return in interest. The discrepancy in interest rates allows traders to take advantage and earn higher returns.

This is a rather simplistic carry trade example, professional traders and investors can engage in complex carry trade strategies, and even employ the use of a carry trade formula to help them figure out expected returns, and whether the strategy is worth pursuing in a given situation.

Rather than simply buying one currency with another, traders often execute a carry trade that involves borrowing money in one currency and using it to purchase assets in another currency. In this scenario, traders want to borrow the money at the lowest possible interest rate, and do so using a weak or declining currency.

That can create higher profits when they close the deal and pay back the borrowed money. In general, carry trade is a short-term strategy, rather than one focused on the long-term.

Recommended: Short-Term vs Long-Term Investments

Is a Carry Trade Risky?

The concept of a carry trade is simple, but in practice, it can involve investment risk.

Most notably, there’s the risk that the currency or asset a trader is investing in (the British pounds in our previous example) could lose value. That could put a damper on a trader’s expected returns, as it would eat away at the gains the difference in interest rates could provide. Currency prices tend to be very volatile, and something as mundane as a monthly jobs report released by a government can cause big price changes.

The greater the degree of leverage an investor uses to execute a carry trade, the higher the potential returns — and the larger the risk. In addition to currency risk, the carry trade is subject to interest rate risk. Given the risks, carry trades in the currency markets may not be the most appropriate strategy for investors with a low tolerance for risk.

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The Takeaway

Carry trades are one way for investors or traders to generate returns, although the approach involves some risks that aren’t present in other types of investment strategies. While the carry trade concept is straightforward, it can quickly get complex when institutional investors put it in place.

Carry trades can be advanced trading tools or strategies. For that reason, they may not be appropriate for all investors or traders. If you feel like you’re in over your head, it may be a good idea to speak with a financial professional for guidance, or to do some more homework to further your understanding.

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Jul

2023

What’s the Reflation Trade?

By Matthew Zeitlin | Growing Wealth, invest, Investing | Comments Off

The reflation trade is a bet that certain sectors of the market perform well immediately after a recession or economic crisis. Essentially, it’s a bet on cyclical stocks at the beginning of a market recovery.

Reflation is the inflation that typically comes immediately after a low-point in the economic cycle — often after economic stimulus, and the reflation trade is the purchase of specific stocks or sectors believed to outperform in that type of environment.

Reflation vs Inflation

While both reflation and inflation are characterized by rising prices, they are not the same thing.

Reflation is a recovery of prices lost during an economic downturn along with employment growth, and many economists see reflation as a healthy sign of an improving economy. It often accompanies economic stimulus, and may reflect monetary policy designed to stimulate spending and halt deflation.

Inflation, on the other hand, does not look at employment or any other economic factors. It is the rise in prices beyond their “normal” range, and poses a threat to economic recovery, since it can reduce the purchasing power of consumers and make it more expensive to borrow money.

Reflation is also different from what happens during stagflation, in which prices go up but wages don’t follow.

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Understanding Reflation Trade Opportunities

Reflation doesn’t just mean that the market as a whole will rise as economic activity returns to normal or even higher levels. Instead there’s a focus on certain sectors as they reflate after a decline.

For example, some investors might see reflationary dynamics in sectors like hospitality or dining during a pandemic, along with travel and tourism. It may also be noticeable, under those circumstances, in more indirectly affected sectors like energy and materials.

Again, assuming an economy suffers a pandemic, part of the reflation trade could be a switch from purchases of goods to services, as people go out more, whether it’s movie theaters, restaurant meals, theme parks and hotels. These are the sectors that would perform well if the reflation thesis turned out to be true.

Investors interested in the reflation trade can invest in individual stocks, or get more diversified exposure by investing in sector-specific exchange-traded funds (ETFs) or index funds.

Reflation Trade Sectors

While hospitality stocks might make sense for investors considering a reflation trade, there are other sectors that typically perform well in most deflationary environments. Here’s a look at a few of them:

Financial Stocks

Banks and other financial institutions tend to do well after an economic recession, since they can benefit from both higher interest rates and ramped up consumer spending.

Value Investing

Companies that deliver steady, long-term growth often get undervalued during economic downtimes, meaning that they’re poised for better performance as the market begins to improve. That’s the logic behind value investing.

Bonds

When interest rates are rising–in either the short- or the long-term — investing in bonds may benefit from a reflationary market.

Commodities

Since commodities tend to perform well during both periods of inflation and periods of economic growth, they’re a favored investment among those looking for a reflationary trade. As such, commodities trading could be an attractive area in a reflationary market.

Small Cap Stocks

Investments in small cap stocks tend to increase in value after recessions or during periods of growth, making them another asset that investors might consider in a reflationary market.

💡 Quick Tip: It’s smart to invest in a range of assets so that you’re not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.

The Takeaway

The reflationary trade is a bet on specific sectors of the economy or certain types of asset classes in the aftermath of an economic downturn. If you’re interested in incorporating the reflation trade into your portfolio, you could do so either via individual stocks or by buying sector-specific exchange-traded funds (ETFs) or mutual funds.

But note that the economy is a complicated thing, and that there are cycles it naturally takes, but it’s also susceptible to all sorts of other events. That includes natural disasters, political changes, or even pandemics and other global crises. With that in mind, it can be difficult to be sure of what sort of environment the economy is in, exactly, at any given time.

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What Is UCITS?

What Is a UCITS Fund?

A Brief History of UCITS

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How Does a UCIT Fund Work?

UCITS Rules and Regulations

The Takeaway

Investing in Gold and Silver: a Guide

What Is MACD?

Understanding the Moving Average

How to Read MACD

The MACD as a Trading Indicator

The Pros and Cons of the MACD

The Takeaway

What Is A Currency Carry Trade in Forex Markets?

What Is a Carry Trade?

How Do You Execute a Carry Trade?

Carry Trade Example

Is a Carry Trade Risky?

The Takeaway

What’s the Reflation Trade?

Reflation vs Inflation

Understanding Reflation Trade Opportunities

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Reflation Trade Sectors

Financial Stocks

Value Investing

Bonds

Commodities

Small Cap Stocks

The Takeaway

CATEGORIES

What Is UCITS?

What Is a UCITS Fund?

A Brief History of UCITS

Get up to $1,000 in stock when you fund a new Active Invest account.*

Access stock trading, options, auto investing, IRAs, and more. Get started in just a few minutes.

How Does a UCIT Fund Work?

UCITS Rules and Regulations

The Takeaway

Investing in Gold and Silver: a Guide

What Is MACD?

Understanding the Moving Average

How to Read MACD

The MACD as a Trading Indicator

The Pros and Cons of the MACD

The Takeaway

What Is A Currency Carry Trade in Forex Markets?

What Is a Carry Trade?

How Do You Execute a Carry Trade?

Carry Trade Example

Is a Carry Trade Risky?

The Takeaway

What’s the Reflation Trade?

Reflation vs Inflation

Understanding Reflation Trade Opportunities

Get up to $1,000 in stock when you fund a new Active Invest account.*

Access stock trading, options, auto investing, IRAs, and more. Get started in just a few minutes.

Reflation Trade Sectors

Financial Stocks

Value Investing

Bonds

Commodities

Small Cap Stocks

The Takeaway

CATEGORIES

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