SIE cheat sheetSection 2: Understanding Products & Risks (44%)
Mutual Funds, ETFs & Packaged Products
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Mutual Funds (Open-End Funds)
- NAV = (Total Assets - Liabilities) / Shares Outstanding
- NAV calculated once daily AFTER market close (4 PM ET)
- Shares can be redeemed at NAV
- Forward pricing — all orders executed at next calculated NAV
Share Class Comparison:
Class A Shares:
- Front-end sales charge (load) paid at purchase
- Lower ongoing expenses (12b-1 fees typically < 0.25%)
- Breakpoints available (volume discounts)
- Best for: LONG-TERM investors, LARGER investments
Class B Shares:
- No front-end load
- CDSC (Contingent Deferred Sales Charge) if redeemed early
- CDSC decreases over time (typically 5-7 years then converts to A)
- Higher 12b-1 fees
- Best for: investors planning to hold 5+ years
Class C Shares:
- No (or small) front-end load
- Small CDSC (usually 1 year only)
- HIGHEST ongoing 12b-1 fees (typically 1%)
- Never converts to A
- Best for: SHORT-TERM investors (1-3 years)
ETFs (Exchange-Traded Funds)
- Trade on exchange throughout the day (like stocks)
- Can be bought on margin, sold short
- Generally lower expense ratios than mutual funds
- More tax-efficient (in-kind creation/redemption)
- Have market price AND NAV (can trade at premium/discount)
UITs (Unit Investment Trusts)
- Fixed portfolio — NO active management
- Self-liquidating — has a termination date
- Units (not shares) redeemed at NAV
Closed-End Funds (CEFs)
- Fixed number of shares via IPO
- Trade on exchange (like stocks)
- Commonly trade at DISCOUNT to NAV
- Can use leverage
- No continuous offering or redemption at NAV
Variable Annuities
- Insurance product with subaccounts (like mutual funds)
- Tax-deferred growth
- 10% IRS penalty if withdrawn before age 59½
- Gains withdrawn FIRST (LIFO for tax purposes)
- Death benefit guarantee
- Surrender charges for early withdrawal
- Considered a SECURITY (must be registered, sold with prospectus)
REITs (Real Estate Investment Trusts)
- Must distribute 90%+ of taxable income as dividends
- Provide real estate exposure without direct ownership
- Traded REITs: listed on exchanges
- Non-traded REITs: illiquid, not on exchange
Key facts to memorize
- NAV = (Assets - Liabilities) / Shares Outstanding
- Class A: front-end load, breakpoints, best for long-term/large investments
- Class B: back-end CDSC, converts to A, no breakpoints
- Class C: highest 12b-1 fees, best for short-term
- ETFs: trade intraday, can be shorted/margined, more tax efficient
- Variable annuities: tax-deferred, 59½ penalty rule, LIFO for gains
- REITs: must distribute 90%+ of taxable income
Mnemonics that stick
- "A = pay upfront, save later (lower expenses long-term)"
- "B = back-end charge (CDSC), converts to A over time"
- "C = Continuous cost (highest 12b-1), good for short stays"
- "NAV = Net Assets / shares Value — calculated after market close"
- "ETF = Exchange Traded (all day) Fund"
- "Variable annuity = 59½ rule (10% penalty before that age)"
- "REIT = 90% payout rule"
Exam traps
- Mutual fund NAV is calculated ONCE per day after market close — NOT in real time
- Breakpoints are available for Class A shares ONLY — not B or C
- Selling Class B shares to buy Class A to get breakpoints is a prohibited practice (breakpoint selling)
- Variable annuities are SECURITIES — require prospectus and registration
- ETFs trade at market price which can differ from NAV (premium or discount)
- Closed-end funds have a FIXED number of shares — they don't issue new shares for purchases
- UITs have NO active management — the portfolio is fixed at creation
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