When A Mutual-Fund Converts To An ETF: How It Works

Asset managers continue to convert some of their mutual funds into exchange-traded funds. So what does that mean for investors? A 2019 change to the rules governing investment funds made it easier for managers to convert mutual funds to ETFs by removing the need for separate approval of each potential conversion by the Securities and Exchange Commission.

A handful of asset managers, including Dimensional Fund Advisors and JPMorgan Chase & Co.’s J.P. Morgan Asset Management, have recently converted actively managed mutual funds into actively managed ETFs. They say the change is in response to the preference of many investors for ETFs, which generally offer lower fees than mutual funds and provide a tax advantage.

Investors in the funds being converted might appreciate those benefits. But they need a brokerage account to keep the new ETF, and may have some tax consequences if they own fractional shares of the mutual fund.

Why convert?

The initial group of conversions has mostly been in actively managed stock or bond funds. For example, J.P. Morgan completed conversions of four funds in June, an actively managed fixed-income fund now called JPMorgan Inflation Managed Bond ETF (JCPI); an active equities fund, now JPMorgan Market Expansion Enhanced Equity ETF (JMEE); a real-estate income fund, now JPMorgan Realty Income ETF (JPRE); and a global equities fund, now JPMorgan International Research Enhanced Equity ETF (JIRE).

Dimensional Fund Advisors converted a $30 billion suite of actively managed systematic funds last year. Systematic funds’ investment decisions are largely guided by models based on extensive market data, rather than left purely to the fund managers’ discretion.

Analysts say actively managed funds are likely to be where most conversions happen. That’s because active funds have higher fees than passive ones and tend to generate more taxable gains through trading, which makes them more vulnerable to investors’ preference for lower fees and taxes.

There is a recognition among asset managers that there is a better way to offer certain strategies, and that’s coming alongside investor demand for ETFs,” says Daniel Sotiroff, a Morningstar analyst. Even mutual funds that already have some of the qualities of an ETF can benefit from conversion, he says. “If you look at what Dimensional converted, those funds were already tax managed as mutual funds,” meaning they were designed to minimize investors’ tax burden. “The ETF structure makes that process easier to do and comes with lower fees.”

He notes that ETFs typically don’t charge the so-called 12b-1 fees that mutual funds do. These fees, which are named after the SEC rule that allows them to be charged, cover the marketing and distribution of a mutual fund or ETF. ETFs also tend to have fewer trading transactions than mutual funds, which means they have lower transaction costs, because trades aren’t triggered by asset inflows and outflows in ETFs as they are in mutual funds.

ETFs offer a tax advantage because, since they can make fewer trades, they distribute fewer, if any, capital gains to investors. Some mutual funds are designed to distribute fewer gains, but investors are still likely to see taxable distributions over the course of their investment in a mutual fund.

The higher fees of actively managed funds and the taxes on capital gains from distributions have led to outflows in favor of actively managed ETFs with similar strategies for a number of years. The SEC rule change for conversions gives investors the option to stick with the same strategy and managers at a lower cost.

For fund managers, a conversion allows them to keep the performance record of the mutual fund as well as any investor assets in the fund that stay through the conversion. That can give the new ETF a leg up over a newly launched ETF, as many investors and financial advisers want to see a substantial record and enough assets to support the long-term viability of a fund before investing.

What to watch for

For investors in a mutual fund that is up for conversion, there are a few things to keep in mind. Those who invested in a mutual fund through a transfer agent instead of a broker, which is common, will need a brokerage account to be able to hold and trade the ETF. If they don’t have a brokerage account, there are many low-cost brokers, with some offering low or no minimums to open an account, but it may be a bit of a learning curve for those who haven’t used a brokerage account before.

ETFs also don’t offer fractional shares. Any fractional shares of the mutual fund held at the point of conversion will be redeemed and could result in a taxable gain.

A conversion may also require approval from shareholders, and if enough shareholders don’t want to convert, fund managers may opt to offer a separate ETF that runs the same strategy. Individual investors can then decide to move into the ETF on their own, but that could result in tax consequences when they sell out of the mutual fund if they end up with capital gains.

By:

Source: When a mutual-fund converts to an ETF: How it works | Mint

Critics by By Matthew Romano

Mutual fund” is the common term for an investment vehicle that pools money from multiple investors and invests in various assets such as stocks and bonds. Most traditional mutual funds, commonly referred to as “open ended” funds, issue shares directly to shareholders and redeem them at the demand of the shareholder at the fund’s net asset value (NAV). Mutual funds register with the SEC under the Investment Company Act of 1940 (the Act).

While an exchange-traded fund (ETF) is similar to a traditional mutual fund in that it pools money into a fund to invest in various assets and can register with the SEC under the Act, it differs in that its shares are traded on a secondary market as opposed to directly between the shareholders and the fund. One or more intermediaries, referred to as authorized participants, seed the fund with cash and/or stocks in exchange for the fund shares and then list those shares on a secondary market to be bought and sold by the prospective fund shareholders.

A traditional mutual fund can be converted to an ETF. The present discussion focuses on the tax implications of doing so. A conversion may be appealing because of the greater tax efficiency of ETFs (discussed below), lower expense ratios, and the fact that a conversion utilizes the scale and performance of an existing fund. Mutual funds’ appetite for converting was further enhanced by the SEC’s approving Rule 6c-11 in 2019, which reduced the time and cost of launching an ETF.

Tax efficiency of ETFs

Both traditional mutual funds and ETFs that are domestic corporations — if they are registered with the SEC under the Act and meet certain diversification, income, and distribution requirements — are taxed as regulated investment companies (RICs) under Subchapter M of the Internal Revenue Code. Under these rules, they are not subject to entity-level tax if they distribute their net income and capital gains via dividends to their shareholders. Shareholders with nonqualified taxable accounts ultimately bear the tax burden.

ETFs are often more tax-efficient than traditional mutual funds, however. In the case of a mutual fund, besides the trading that occurs in the normal course of business, other transactions at the fund level can result in an increased tax burden for the shareholders. For instance, a portfolio rebalance and/or change in investment strategy can result in the fund’s recognizing substantial gains. Large redemptions can also cause a mutual fund to recognize gains because it may need to sell securities to raise the cash to meet the redemption request.

The ETF structure can mitigate or even eliminate this tax burden. With respect to redemptions, Sec. 852(b)(6) provides that a RIC that redeems shareholders with “property” instead of cash will not recognize any gain from the disposition of that property. While this provision applies to both traditional mutual funds and ETFs, mutual fund shareholders will almost always prefer a cash redemption, while authorized participants are usually indifferent.

With respect to a rebalancing of the portfolio, ETFs can utilize either a redemption basket (of securities) or a creation basket (of securities) between the ETF and the authorized participants. This allows the ETF to avoid recognizing and distributing taxable gains to the shareholders.

The conversion transaction itself

While the conversion of a traditional mutual fund to an ETF has numerous legal and operational hurdles, the details of which are outside the scope of this discussion, the tax structuring is fairly simple. Typically, the fund sponsor will create a shell ETF for purposes of the conversion. This ETF will likely have the same investment objectives, board of directors, and management as the original mutual fund. After the shell ETF is created, the original mutual fund merges into the shell ETF.

If structured properly, the merger will qualify as a tax-free reorganization under Sec. 368(a)(1)(F) (F reorganization). The requirements of an F reorganization, detailed in Regs. Sec. 1.368-2(m), are listed below:

  • Immediately after the F reorganization, all the stock of the resulting corporation, including any stock issued before the potential F reorganization, must have been distributed in exchange for the stock of the transferor corporation.
  • The same person or persons must own all the stock of the transferor corporation and of the resulting corporation in identical proportions.
  • The resulting corporation may not hold any property or have any tax attributes immediately before the F reorganization.
  • The transferor corporation must completely liquidate as part of the transaction.
  • Immediately following the potential F reorganization, no corporation other than the resulting corporation may hold property that was held by the transferor corporation immediately before the reorganization.
  • Immediately following the potential F reorganization, the resulting corporation may not hold property acquired from a corporation other than the transferor corporation.

Given the nature of the conversion of a traditional mutual fund to an ETF, it is likely that the transaction will meet the above requirements. Assuming it does, an F reorganization is considered a “mere change of form” for tax purposes. As such, the fund tax year end, employer identification number, and all tax attributes from the original mutual fund remain.

There are some other ancillary tax implications of the conversion. The mutual fund may want to sell some assets prior to the conversion; this could result in some taxable distributions to shareholders. Also, unlike traditional mutual funds, ETFs generally do not issue fractional shares, so these will be redeemed with cash prior to the conversion and could result in a nominal amount of tax.

Other items to consider

While this item focuses primarily on the tax impact, some nontax aspects of converting a traditional mutual fund to an ETF should also be considered:

  • Shareholders may need to set up a brokerage account to hold the ETF shares.
  • Unlike traditional mutual funds, ETFs can trade at a premium or discount to NAV, which can create some level of risk to the shareholder. However, the create/redeem process between the ETF and the authorized participants can operate to reduce any premium or discount spreads.
  • Approval by the mutual fund’s board of directors may be required to complete this transaction.

Potentially significant benefits

While substantial operational and legal obstacles need to be considered and addressed, the conversion of a traditional mutual fund to an ETF can have significant tax benefits, depending on the nature of the fund’s activities and the makeup of the fund shareholder base.

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ETFs vs. Mutual Funds: How They Differ

Exchange-traded funds, or ETFs, and mutual funds are both investment products that represent a basket or collection of securities.”They provide investors access to underlying investments, like stocks or bonds, and generally provide more diversification than a single stock or bond,” said Wendy Liebowitz, vice president and branch leader at Fidelity Investments.

However, there are a few key differences between ETFs and mutual funds to keep in mind before investing. Here’s what you need to know:

ETFs differ in how they are traded

Greg McBride, chief financial analyst at Bankrate.com, explained that mutual funds only trade once per day, after the market close at a price based on the value of all the fund’s assets less the expenses. ETFs, as the name implies, McBride said, trade on an exchange and this means investors can buy or sell throughout the trading day at a price that fluctuates as the prices of the underlying investments change.

“Many fund companies offer both a mutual fund and an ETF version of the same investment, and the ETF is typically the lower-cost option in terms of expense ratio,” he said. “Just make sure your brokerage permits you to invest commission-free, as any brokerage commissions erase the modest expense advantage of ETFs.”

ETFs are more passive

Todd Rosenbluth, head of research at VettaFi, explained that similar to mutual funds, ETFs provide investors with the benefits of diversification, by owning stocks or bonds from numerous companies.

“However, most ETFs outperform mutual funds in the same investment style as they cost less and passively track an index like the S&P 500 or the Russell 2000 Index rather than try to pick winners but end up with laggards,” Rosenbluth said. “Most ETFs available track an index and are passively managed, while most mutual funds are actively managed with the team picking through a larger universe of investments.”

ETFs generally cost less

The fees you pay to purchase ETFs tend to be lower than mutual funds, but this does vary depending on the investments. A significant reason it’s cheaper is that an ETF is a passive fund.”ETFs tend to have a lower cost of ownership, with expense ratios often less than 0.20%, while mutual funds are often five times as expensive,” said Rosenbluth.

ETFs can offer tax advantages

Another difference to consider is tax efficiency. “Generally, holding an ETF in a taxable account will generate less tax liabilities than if you held a similarly structured mutual fund in the same account,” said Liebowitz with Fidelity Investments. Although both are subject to capital gains and dividend income tax, Liebowitz said ETFs generally have fewer taxable events than mutual funds.

Understand the ramifications of investing

Liebowitz stated it is important to review the portfolio fundamentals of any fund before investing. “While an ETF and mutual fund might have the same investment objective or investment ‘style,’ the composition of each fund could vary, so investors should compare the annual turnover ratio, concentration risk, expense ratio, and other risk factors to determine if it is right for them and what they are trying to achieve with their investment,” she said.

Despite their differences, Liebowitz explained that both mutual funds and ETFs can offer investors exposure to a diversified basket of securities to help meet their financial goals and objectives – and it doesn’t have to be one or the other. “Investors should pick the best choice for their specific investing needs, keeping their time horizon, risk tolerance, financial circumstance, and short- and long-term goals in mind before making any investment decision,” added Liebowitz.

Source: ETFs vs. mutual funds: How they differ | Fox Business

Critics by InvestorVanguard

ETFs and mutual funds both come with built-in diversification. One fund could include tens, hundreds, or even thousands of individual stocks or bonds in a single fund. So if 1 stock or bond is doing poorly, there’s a chance that another is doing well. That could help reduce your risk—and your overall losses.

ETFs and mutual funds both give you access to a wide variety of U.S. and international stocks and bonds. You can invest broadly (for example, a total market fund) or narrowly (for example, a high-dividend stock fund or a sector fund)—or anywhere in between. It all depends on your personal goals and investing style.

ETFs and mutual funds are managed by experts. Those experts choose and monitor the stocks or bonds the funds invest in, saving you time and effort. Although most ETFs—and many mutual funds—are index funds, the portfolio managers are still there to make sure the funds don’t stray from their target indexes.

An ETF could be more suitable for you. You can buy an ETF for the price of 1 share—commonly referred to as the ETF’s market price. Depending on the ETF, that price could be as little as $50 or as much as a few hundred dollars. A mutual fund may not be a suitable investment. Mutual fund minimum initial investments aren’t based on the fund’s share price. Instead, they’re a flat dollar amount. Most Vanguard mutual funds have a $3,000 minimum. That would buy you 30 shares of a hypothetical fund with a net asset value (NAV) of $100 per share.

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Should I Cash Out of Mutual Funds to Pay Off Debt?

If you have some money invested in mutual funds, using them to pay off debt may seem like an attractive option. You may assume that you’ll get more benefit from using the money that you’ve invested to eliminate debt (and the associated high interest rates). But cashing in your mutual funds may not be the best way to become debt-free if there are other options available. And depending on where you hold your mutual funds, you could end up receiving a steep tax bill.

Key Takeaways

  • Cashing out mutual funds may not be the best option for repaying debt.
  • You may owe capital gains tax on mutual funds that you cash out from a taxable brokerage account.
  • Cashing out mutual funds from an IRA or other qualified retirement account could trigger income tax on earnings, as well as an early withdrawal tax penalty.
  • Withdrawing money from your investments to pay debt means missing out on future growth from compounding interest.

Pros and Cons of Cashing Out Mutual Funds to Pay Off Debt

Using mutual funds to pay off debt may seem appealing at first glance. If you aren’t using the money that you’ve invested for any particular financial goal, then why not use it to pay off credit cards, student loans, or other debts? After all, eliminating debt can free up more money in your budget that you can then reinvest in mutual funds, stocks, or other securities.However, there are some problems with that logic.

Specifically, there are two major drawbacks associated with cashing out mutual funds to pay down debt. The first is taxes; the second is how it may negatively impact your long-term financial goals.In terms of tax implications, there are two ways that cashing out mutual funds to pay debt can backfire, depending on where you hold them. If you have mutual funds in a taxable brokerage account, then cashing them out may trigger capital gains tax if you’re selling them above what you initially paid for them.

Short-term capital gains on securities owned for less than one year are subject to ordinary income tax rates.1 The long-term capital gains tax rate is 0%, 15%, or 20%, depending on your income.

If the mutual funds are in an IRA, you may pay ordinary income tax on the entire withdrawal, the exception would be if you had any basis in your IRA. Then a 10% penalty may apply. The rules are slightly different for Roth IRAs, especially when it comes to taxes.

Aside from the tax consequences of using mutual funds to pay down debt, it’s also important to consider how it may impact your ability to grow wealth. By selling off mutual funds and not replacing them with other investments, you miss out on the power of compounding interest. Depending on how much of your mutual fund holdings you choose to sell, that could mean losing thousands of dollars in growth over time.

If you’re considering cashing out mutual funds in a brokerage account, use an online capital gains tax calculator to estimate how much you may owe on the sale.

Other Options for Paying Off Debt

Cashing out mutual funds isn’t the only way to manage debt. There are other possibilities for eliminating debt faster while also saving money on interest, including:

  • Refinancing student loans, personal loans, or other loans at a lower interest rate
  • Consolidating credit card debts into a single personal loan
  • Taking advantage of 0% credit card balance transfer offers
  • Using a home equity loan to consolidate debts
  • Selling vehicles or other non-investment assets that you own and applying the proceeds to your debt balances

If you’re struggling with debt repayment, then you may consider other options, such as a debt management plan or debt settlement. With a debt management plan, you work with a certified credit counselor to create a plan for paying off what’s owed. This may include reducing interest rates or fees. You make a single payment to the credit counselor, who then distributes the funds among your creditors.

Debt settlement is something that you may consider for past-due debts. This involves working with a consumer debt specialist to negotiate debts with creditors. The goal is to pay off debts for less than what’s owed to avoid filing for bankruptcy as a last resort.

Debt management and debt settlement may have potentially negative impacts to your credit score, so it’s important to weigh these options carefully.

Making an Informed Decision

If you’re considering selling mutual funds to pay off debt, it’s important to do your research beforehand. Your broker or financial advisor can provide you with the expected rate of return for a mutual fund going forward. Compare this rate to the fund’s historical performance to ensure its accuracy. If the mutual funds pay dividends, then this amount should be included in the assessment. If funds are held within a retirement account, find out the fees and penalties for cashing out.

Again, cashing out of a traditional IRA before age 59½ results in a 10%, or 25% if you have a SIMPLE IRA, tax penalty. There are exceptions for withdrawals, such as disability, medical debt, certain educational expenses, and buying a home. Mutual funds held within regular brokerage accounts have the standard commission charges, but the fund itself still may charge a fee for redeeming your shares. Brokers and financial advisors are great resources for this information.

The interest rate on your debt and the length of the loan should provide the last pieces of evidence to make an informed decision. Debts such as credit cards and short-term loans typically have higher interest rates than longer-term debts such as vehicle loans or mortgages. For mortgages, check to make sure that you have a fixed interest rate. Adjustable-rate mortgages (ARMs) can keep increasing over time and lead to payments that might balloon above your ability to repay them.

Note

A 401(k) loan also is an option for repaying debt, but if you separate from your job before the loan is repaid, then the entire amount could be treated as a taxable distribution.

The Bottom Line

While becoming debt-free may be relief, there are some downsides to consider if you’re using mutual funds to achieve that goal. Fees and penalties are red flags when thinking about cashing in your mutual funds. Loss of future investment income and the lack of a retirement account can put you in a worse situation later in life.

You can make additional debt payments using current income to shorten the length of the loan and reduce the total amount of interest that you have to pay, assuming your budget allows it. If you’re truly struggling with how to repay debt, then consider reaching out to debt relief companies to see how they may be able to help.

When researching debt relief companies, be sure to get a clear explanation of the services that they offer and the fees that you might have to pay before signing a contract for services.

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By: Nathan Buehler

Nathan Buehler is a well-established writer on the VIX and its related exchange traded products. Nathan also provides coverage on publicly traded companies, commodities, and personal finance/budgeting. Not only is Nathan a writer, but he is also a teacher. His drive to help others doesn’t end in the classroom. This is evident by the time and commitment he gives to his readers through personal feedback and open discussion of topics. He has written articles on topics such as economics, investing, and finance.

Source: Should I Cash Out of Mutual Funds to Pay Off Debt?

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Curious About Crypto? Here’s What 10 Financial Experts Think

A photo to accompany a story about financial experts' advice for investing in cryptocurrency

Everyday investors are overflowing with cryptocurrency questions, according to the financial advisors hired to answer them.

There is clearly an “emotional euphoria that seems to be sweeping through the public around cryptocurrency,” says Frederick Stanfield, a CFP with Lifewater Wealth Management in Atlanta, Georgia.

But for the average person focused on retirement planning and financial stability, is it time to consider investing in cryptocurrency?

The answer is complicated, so we asked financial advisors for their crypto advice, and here’s what 10 of them are telling clients. In an emerging field with few set rules and norms, we discovered some universal truths that everyone should know before putting money in cryptocurrency.

First of all, financial advisors say a healthy dose of skepticism is a crucial place to start, and you should never invest in crypto if it takes away from other goals and financial fundamentals like paying off debt, building an emergency fund, or maxing out your retirement accounts.

As difficult as it may be, do not become seduced by the intrigue and allure of this new technology, says Stanfield. Instead, employ the same mindset you bring to your regular investment strategy.

Here’s what else the experts want you to know about cryptocurrency investing:

Be Prepared for Loss

As with any investment, financial gains are far from guaranteed with cryptocurrency investing. For some financial advisors, crypto looks more like a lottery ticket than an investment strategy.

That means you should only put in what you’re OK with losing. “On a spectrum between gambling and investing, I think it’s closer to the former,” says Matt Morris, principal advisor at Sanderling Finance in Columbia, South Carolina.

As a high-risk, high-reward investment, keep any crypto investments in perspective amid your broader goals and finances. As with certain types of gambling, “you have a high chance of losing it all, but a small chance of winning it big,” says Nate Nieri, a CFP with Modern Money Management in San Diego, California. “Just don’t gamble an amount that would burden your family or prevent you from achieving your goals” if you lost it all.

Steer Clear if You’re Risk Averse

If you’re risk averse, crypto isn’t the investment for you.“How well can you sleep at night knowing that this is an emerging asset class with high volatility? And if you were to wake one morning to find that crypto has been banned by the developed nations and it became worthless, would you be OK?” asks Stanield.

If you’re going to be constantly stressing about your crypto investment, or tempted to change your investments in light of the volatility that comes with crypto, then you’re better off putting your money in a more stable investment, according to Stanfield.

“I believe it is still in its infancy stage, and just like any new fund or IPO, there is a level of uncertainty about the future that I’m not ready to stomach,” says Alajahwon Ridgeway, owner of Ridgeway Wealth Management in Lafayette, Louisiana. “I believe it … is an unnecessary risk at this point for my clients to reach their financial goals.”

There’s also far less historical data available about cryptocurrency to help investors make informed decisions — unlike conventional ETF and index/mutual funds. Crypto investors face additional risk in the form of poor or inaccurate trade data, competition among fellow investors, theft, loss of wallet passwords, supply and demand issues, government regulation, and energy consumption concerns, says Chelsea Rude, a CFP at Rude Wealth Advisory in Olney, Illinois.

“Most importantly for investors, there is a lack of a well designed and tested way to value the assets,” Rude says. This means crypto investors are essentially going in blind, and subjecting themselves to the uncertainty that comes with any new business or investment

Know Why You’re Interested In the First Place

Some people see crypto as an emerging investment, while others see it as an interesting new global currency you can use instead of the U.S. dollar or other international currencies. But whether crypto has long-term staying power on either front is still uncertain.

“I strongly believe the vast majority of people who own crypto currency are doing so for all the wrong reasons and misunderstanding what they are truly buying,” says Ben Lies, chief investment officer at Delphi Advisers.

Many experts are concerned about people dumping their money into crypto without real understanding of the area. Do your own research, and make sure you’re thinking about your investment in the right way.

“Hype and excitement around the space are not reasons for inclusion into any portfolio, but I believe there are compelling reasons to consider cryptocurrencies,” says James Vermillion, owner of Vermillion Private Wealth in Lexington, Kentucky. “When discussing crypto with clients I emphasize education and understanding. It’s important to note that there are thousands of cryptocurrencies in existence and they are not created equally. Due diligence is important, just as it is when looking at stocks or other investment vehicles.”

Nieri warns those who see Bitcoin as a currency to think about what that means for investing. “I don’t typically trade or have a currency hedge as part of my investment strategy. Would you have ever thought about trading dollars for Euros as an investment? In order for Bitcoin to be a legitimate currency, the world’s governments would need to accept it as a global currency, something that has a remote likelihood,” Nieri says.

Keep Crypto In Its Place

Don’t rely on crypto investments for your retirement or overall financial strategy. Make sure the majority of your investment portfolio is made up of stable assets projected for long-term growth.

“What I am sharing for [my clients] to do is build their future financial pie with investments such as stocks and bonds. If there is extra money they want to play with, buying crypto is an option,” says Eric Powell, financial advisor and founder of the Future Mill.

Make sure your overall investment portfolio is predominantly made up of conventional investments like stocks and bonds, says Powell. But within any crypto investments you might have, experts recommend sticking with the big names.

“I personally do not go beyond Bitcoin and or Ethereum,” says Michael Kelly, a CFA at Switchback Financial in Madison, Connecticut.  “I feel those two have a bit more of an established base and feel the risk of other coins becomes too significant.”

By:

 

Source: Curious About Crypto? Here’s What 10 Financial Experts Think | NextAdvisor with TIME

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Decentralized finance (commonly referred to as DeFi) is a blockchain-based form of finance that does not rely on central financial intermediaries such as brokerages, exchanges, or banks to offer traditional financial instruments, and instead utilizes smart contracts on blockchains, the most common being Ethereum.[1] DeFi platforms allow people to lend or borrow funds from others, speculate on price movements on a range of assets using derivatives, trade cryptocurrencies, insure against risks, and earn interest in savings-like accounts.[2]

DeFi uses a layered architecture and highly composable building blocks.[3] Some DeFi applications promote high interest rates[2] but are subject to high risk.[1] By October 2020, over $11 billion (worth in cryptocurrency) was deposited in various decentralized finance protocols, which represented more than a tenfold growth during the course of 2020.[4][2] As of January 2021, approximately $20.5 billion was invested in DeFi.[5]

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References

Braun, Alexander; Cohen, Lauren H.; Xu, Jiahua (May 2020). “fidentiaX: The Tradable Insurance Marketplace on Blockchain”. Harvard Business School. Retrieved 2021-01-05.

Investment Giant Fidelity Will Let Your Teen Trade Stocks—For Free

Fidelity Investments Earns

As interest in the stock market grows and equities continue to soar, investment giant Fidelity said Tuesday that it will launch new investing accounts just for teens.

The offerings for 13- to 17-year-olds—limited to those teenagers whose parents or guardians also invest with Fidelity—will include ways to save and deposit money, a debit card and investing capabilities, all accessible on a mobile app.

Teens will be able to buy and sell U.S. equities, Fidelity’s own mutual funds and ETFs without any fees or commissions.

To open the account, a teen’s parent or guardian must enter into a brokerage agreement with Fidelity, the Wall Street Journal reported, and after that the account—and power to make trades—is transferred to the teen.

Parents will be able to monitor the account’s activity and will retain the ability to close the account at any time, the Journal reported, and teens won’t be able to trade options or borrow money to fund trades.

Crucial Quote

“Fidelity is committed to responsibly supporting young investors,” Jennifer Samalis, senior vice president of acquisition and loyalty at Fidelity Investments, said in a statement. “Importantly, our goal for the Fidelity Youth Account is to encourage young Americans to learn through action and foster meaningful family conversations around financial topics.”

Big Number

$10.3 trillion. That’s how much money Fidelity manages. It’s one of the largest stock brokerage firms in the United States.

Tangent

Old-guard brokerage firms and startups alike are actively pursuing the next generation of investors. Greenlight, a startup that offers debit cards and investing services for kids, was recently valued at $2.3 billion.

Key Background

Fidelity’s new offering was in the works before the memestock trading frenzy that sent stocks soaring and captivated investors earlier this year, the Journal reported.

In January, retail traders from online communities including Reddit’s r/WallStreetBets and the popular brokerage app Robinhood—which is also aimed at making investing simpler for young investors—pitted themselves against Wall Street institutions which had placed bets that a handful of previously unpopular stocks would fall.

That resulted in a short squeeze that sent Gamestock and other stocks soaring and ignited a national debate about regulation, risky trades and the what some viewed as gamified app-based trading.

I’m a breaking news reporter for Forbes focusing on economic policy and capital markets. I completed my master’s degree in business and economic reporting at New York University. Before becoming a journalist, I worked as a paralegal specializing in corporate compliance.

Further Reading

Fidelity’s Pitch to America’s Teens: No-Fee Brokerage Accounts (Wall Street Journal)

With Debit Cards And Investing For Kids, Fintech Startup Greenlight Doubles Valuation To $2.3 Billion (Forbes)

It’s Not Just Crypto Crashing: Here Are All The Market Bubbles Popping So Far This Year (Forbes)

Goldman Sachs Says Stock Picking Becoming Harder, But Tesla, Twitter And Etsy Have Potential. Here’s Why (Forbes)

Source: Investment Giant Fidelity Will Let Your Teen Trade Stocks—For Free

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