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Exchange traded funds (ETFs) are portfolio-based assets typically organized around a specific investment goal. Investors invest in ETFs by purchasing shares of the portfolio on public exchanges. When the listed share price of an ETF dips significantly below the portfolio’s net asset value (NAV), the fund is at a “discount.” This is generally a good opportunity to buy the fund, since its administrators will typically respond to a discount by reducing the number of shares in circulation to bring the price back up. Here’s what you need to know.

","

If you want to add ETFs and other investments to your portfolio, a financial advisor can help you develop a strategy to maximize returns.

","

What Are ETFs?

","

ETFs are portfolio-based investment products. Each fund holds a collection of assets typically arranged around a specific theme or financial goal. For example, an ETF might invest in the technology sector by holding industry stocks, or it might invest exclusively in high-yield bonds. Investors buy shares of an ETF and can receive yields, dividends and other returns on a basis proportional to their ownership.

","

Shares in an ETF are sold on public exchanges like the New York Stock Exchange (NYSE). They are highly liquid assets that can be bought and sold as freely as shares of stock.

","

The value of an ETF is based on its overall collection of assets. This allows funds to invest in more growth-oriented products like stocks while the fund’s inherent diversity offers a measure of stability. An investor will not collect the outsized gains of a single high-performing stock, for example, since lower-performing assets will weigh the portfolio down. Nor will they suffer the losses of a single crashing stock due to the returns of higher-performing assets.

","

What Is an ETF Discount?

","

","

Due to its nature as a portfolio asset, an ETF operates much like a mutual fund. Both investment vehicles are measured based on net asset value (NAV). This is the total value of assets represented by each share in the fund. It is measured as the combined value of all assets the portfolio owns, less any liabilities, divided by the fund’s number of shares.

","

However, while a mutual fund’s share value is largely determined by its NAV, an ETF’s share value is determined by share price. Since an ETF is a liquid, market-traded product, that share price can fluctuate in real time based largely on supply and demand. Greater demand relative to the existing supply of an ETFs shares will drive the price up. Falling demand relative to the existing supply of an ETFs shares will drive the price down.

","

Due to this liquidity, an ETF’s share price can relatively easily move off of its NAV. If heavy buying drives an ETF’s share price significantly above its NAV, the fund is trading for more than it is worth. This is known as a premium.

","

If heavy selling drives an ETF’s share price significantly below its NAV, the fund is trading for less than it is worth. This is known as a discount.

","

For example, say that ABC Fund has issued 8,000 shares. It holds the following assets:

","

1,000 shares of stock at $10 per share
500 shares of stock at $20 per share
1,500 shares of stock at $15 per share

","

In this case, ABC Fund would have a net asset value of $53.12. (Total assets = $10 *1,000 + $20 * 500 + $15 * 1,500 = $42,500 / 8,000 shares)

","

If ABC Fund currently trades for $53 per share, the fund would be considered fairly priced since its share price is close to its net asset value. However, say that trading drops for ABC Fund, driving its share price down to $45. In this case, ABC Fund is trading at a 16% discount.

","

How Do ETF Discounts Affect Your Trades?

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When an ETF trades at either a premium or a discount, the administrator will typically attempt to bring the fund’s share price back in line with the NAV. This is done through either creation or redemption.

","

When an ETF trades at a premium, the administrator will create new shares and issue them to market participants. This helps reduce the market price by increasing supply relative to the demand.

","

When an ETF trades at a discount, the administrator will redeem shares by collecting them from market participants. This takes shares out of circulation, helping to raise the market price by reducing supply relative to the demand.

","

For investors, this can create an opportunity. Every publicly traded ETF will publish its NAV, typically calculated daily at the close of the market. Investors who see that an ETF has begun trading at a discount, or who see a fund’s underlying assets moving toward discount rates before the close of trading, can buy into the fund. It is likely that the fund administrators will redeem shares to raise the price, making this a good opportunity to buy.

","

Bottom Line

","

","

When an ETF’s share price is significantly lower than its net asset value, this is known as trading at a “discount.” When this happens the ETF will typically attempt to raise the share price through the redemption process, removing shares from circulation to reduce the supply relative to demand.

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Investment Planning Tips

","$52","

Photo credit: ©iStock.com/AzmanL, ©iStock.com/Lordn, ©iStock.com/nensuria

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Building a recession-proof stock portfolio can help investors weather economic downturns with greater stability and confidence. While no portfolio can be entirely recession-proof, selecting resilient stocks from defensive sectors and diversifying your investments can help you mitigate the impact of a market downturn. A financial advisor can work with you to diversify your portfolio to […]

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","

How a Recession Can Impact the Market and Your Portfolio

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Investing during a recession differs significantly from investing in a thriving market. In a normal market, economic growth typically boosts consumer spending, business expansion and corporate earnings, which in turn supports rising stock prices.

","

However, a recession generally brings a slowdown in economic activity, reduced consumer spending and lower business profits. As companies cut costs, freeze hiring and scale back operations, stock prices can fall across the board and volatility increases.

","

For investors, a recession can create losses in their portfolio, particularly for cyclical stocks in sectors like retail, travel and luxury goods, which are more sensitive to economic conditions. Many cyclical stocks tend to underperform during recessions as consumers cut back on non-essential purchases and businesses tighten budgets.

","

On the other hand, defensive stocks – those in sectors like healthcare, utilities and consumer staples – can hold their value better during economic downturns, as these sectors provide essential goods and services that remain in demand regardless of economic conditions.

","

Managing a portfolio in a recession means adapting to the increased risks and focusing on assets that provide stability and defensive growth. For many investors, this may involve shifting away from high-growth, high-volatility sectors and increasing holdings in stocks and assets that have shown resilience in past recessions.

","

The Importance of Diversification

","

Diversification is a key strategy for protecting a portfolio during a recession. By spreading investments across different asset classes and sectors, investors can reduce the risk of heavy losses if one area of the market suffers. A diversified portfolio includes a mix of stocks, bonds and other assets that may not move in the same direction during economic shifts.

","

During recessions, diversification becomes especially important because different asset classes respond to economic downturns in unique ways. For example, while stocks may decline, certain bonds or defensive sector stocks may continue to perform well. This helps to create balance and reduce the likelihood of substantial losses.

","

Diversifying across industries, asset classes and geographies can further increase the portfolio’s resilience, helping to protect your investments through economic ups and downs.

","

How to Build a Recession-Proof Stock Portfolio

","

","

No stock portfolio is completely recession-proof, but you can still build a diversified stock portfolio aimed at withstanding economic downturns. A diversification strategy would include different asset classes, including defensive and growth-oriented stocks.

","

To start building a recession-resistant portfolio, prioritize companies with strong fundamentals, stable earnings and low debt levels. Companies that provide high dividends may also offer added stability, as dividend payments provide regular income and can help offset declines in stock prices.

","

Companies with a history of solid performance during past recessions may be worth considering, too, as they have demonstrated resilience in difficult economic conditions.

","

Maintaining a balance between defensive and growth-oriented stocks is also important. Defensive stocks provide stability, while growth stocks, particularly those with strong market positions and sustainable demand, may still offer returns even in downturns. Here are some investments to consider when creating a portfolio.

","

Defensive Sectors to Consider for a Recession

","

When building a recession-resistant portfolio, focusing on historically resilient sectors can provide added stability. Here are some sectors to consider, along with examples of top stocks:

","$6a","

Other Investments to Consider

","

In addition to stocks, there are other types of investments that can help create a recession-resistant portfolio. Here are some alternative investments to consider:

","$6b","

Bottom Line

","

","

Building a recession-proof stock portfolio involves selecting investments that are more likely to hold their value during economic downturns. By focusing on defensive sectors, diversifying your holdings and considering alternative investments, investors can create a more resilient portfolio that balances stability with growth potential. While no portfolio can be entirely immune to a recession, taking these steps can help minimize risk and better protect your wealth through periods of economic uncertainty.

","

Investment Planning Tips

","$6c","

Photo credit: iStock.com/filadendron, iStock.com/filadendron, iStock.com/

"],"experts":null,"link":"/portfolio-management/recession-proof-stock-portfolio","published":{"datetime":"2024-11-14","readable":"November 14, 2024"},"shareInfo":{"title":"How to Build a Recession-Proof Stock Portfolio","origin":"/investing/recession-proof-stock-portfolio"},"isNewsArticle":true},{"id":"cG9zdDoyNzIxNTA=","databaseId":272150,"postId":272150,"author":{"node":{"id":"dXNlcjoz","databaseId":3,"userId":3,"avatar":{"url":"https://secure.gravatar.com/avatar/47938df052bf0a5283bd6b77ab786737?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"SmartAsset employs a team of writers and editors with years of experience in the editorial, news and personal finance industries. Some staff members also hold the Certified Educator in Personal Finance (CEPF®) designation from the Institute for Financial Literacy.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Michael","fullName":"SmartAsset Team","lastName":"Carvin","name":"SmartAsset Team","postCount":{"pageInfo":{"offsetPagination":{"total":1477,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mcarvin","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxOTQ5MQ==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19491,"categoryId":19491,"link":"https://smartasset.com/beginner-investing/articles","name":"Investing for Beginners","postCount":{"pageInfo":{"offsetPagination":{"total":574,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"beginner-investing","ancestors":{"nodes":[{"name":"Investing","slug":"investing","__typename":"Category"}],"__typename":"CategoryToAncestorsCategoryConnection"},"parent":{"node":{"name":"Investing","id":"dGVybTo1MzE4","slug":"investing","__typename":"Category"},"__typename":"CategoryToParentCategoryConnectionEdge"},"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$6d","date":"2025-01-07T12:00:00","excerpt":"

\n","featuredImage":{"id":"cG9zdDoyNzIxNTQ=","databaseId":272154,"altText":"An investor researching how to calculate the overhead ratio for a company.","date":"2024-12-18T18:43:55","fileSize":140785,"mimeType":"image/jpeg","modified":"2024-12-18T18:46:09","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2025/01/iStock-1218054680.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-12-18","readable":"December 18, 2024"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjoxMTc=","databaseId":117,"userId":117,"avatar":{"url":"https://secure.gravatar.com/avatar/9fffe2eb35204e151b68731435d247c5?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Arturo Conde is a senior editor at SmartAsset. He has a master’s from the Graduate School of Journalism at Columbia University and a bachelor’s from the College of Arts and Science at New York University. As a certified educator in personal finance, he edits and writes content that focuses on retirement, investments, home buying and other financial topics.\r\n\r\nArturo is a bilingual native in English and Spanish, and also writes as a freelance journalist for NBC News, among other publications. His articles have been published in Fusion, Univision, City Limits, the NACLA Report on the Americas and WhoWhatWhy, as well as La Opinión A Coruña newspaper in Spain.","additionalMeta":{"expertise":"Financial Planning, Retirement Planning, Investment Planning, Tax Planning","__typename":"User_Additionalmeta"},"email":null,"firstName":"Arturo","fullName":"Arturo Conde, CEPF®","lastName":"Conde, CEPF®","name":"Arturo Conde, CEPF®","postCount":{"pageInfo":{"offsetPagination":{"total":38,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"aconde","__typename":"User"},"reviewedBy":null,"writtenBy":{"id":"dXNlcjoz","databaseId":3,"userId":3,"avatar":{"url":"https://secure.gravatar.com/avatar/47938df052bf0a5283bd6b77ab786737?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"SmartAsset employs a team of writers and editors with years of experience in the editorial, news and personal finance industries. Some staff members also hold the Certified Educator in Personal Finance (CEPF®) designation from the Institute for Financial Literacy.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Michael","fullName":"SmartAsset Team","lastName":"Carvin","name":"SmartAsset Team","postCount":{"pageInfo":{"offsetPagination":{"total":1477,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mcarvin","__typename":"User"},"factCheckedBy":null,"secondEditor":null,"hideAuthor":true,"__typename":"Post_Multiplebylinesbyrole"},"adTargetingOverrides":{"fieldGroupName":"adTargetingOverrides","pageGroupNewKey":null,"__typename":"Post_Adtargetingoverrides"},"seo":{"canonical":"https://smartasset.com/investing/overhead-ratio","metaDesc":"The overhead ratio shows how much of a company’s revenue goes to overhead costs, such as rent, utilities and administrative salaries.","metaKeywords":"","metaRobotsNofollow":"follow","metaRobotsNoindex":"index","readingTime":4,"title":"How to Calculate Overhead Ratio","__typename":"PostTypeSEO"},"slug":"overhead-ratio","status":"publish","title":"How to Calculate Overhead Ratio","uri":"/investing/overhead-ratio","tags":{"nodes":[{"name":"news-sitemap","__typename":"Tag"}],"__typename":"PostToTagConnection"},"__typename":"Post","adPageGroupOverride":null,"bylines":{"writtenBy":null,"editedBy":{"id":"dXNlcjoxMTc=","databaseId":117,"userId":117,"avatar":"$6e","description":"Arturo Conde is a senior editor at SmartAsset. He has a master’s from the Graduate School of Journalism at Columbia University and a bachelor’s from the College of Arts and Science at New York University. As a certified educator in personal finance, he edits and writes content that focuses on retirement, investments, home buying and other financial topics.\r\n\r\nArturo is a bilingual native in English and Spanish, and also writes as a freelance journalist for NBC News, among other publications. His articles have been published in Fusion, Univision, City Limits, the NACLA Report on the Americas and WhoWhatWhy, as well as La Opinión A Coruña newspaper in Spain.","additionalMeta":"$6f","email":null,"firstName":"Arturo","fullName":"Arturo Conde, CEPF®","lastName":"Conde, CEPF®","name":"Arturo Conde, CEPF®","postCount":"$70","slug":"arturo-conde-cepf","__typename":"User"},"reviewedBy":null,"factCheckedBy":null,"secondEditor":null},"category":{"id":"dGVybToxOTQ5MQ==","children":"$73","databaseId":19491,"categoryId":19491,"link":"https://smartasset.com/beginner-investing/articles","name":"Investing for Beginners","postCount":574,"slug":"beginner-investing","ancestors":"$75","parent":"$78","__typename":"Category"},"isModifiedBeforePublished":true,"contentBlocks":["

The overhead ratio measures how much of a company’s total revenue is spent on indirect costs. This metric is useful for identifying areas where costs can be reduced to improve profitability. Analyzing the overhead ratio helps businesses make better decisions about budgeting, resource use and planning. For investors, it provides insight into whether a company manages its expenses efficiently and is a good fit for their investment portfolio. A financial advisor can help interpret this ratio and its impact on your investment decisions.

","

What Is Overhead?

","

Overhead includes business expenses that are not directly tied to producing a product or service but are necessary for daily operations. These costs, such as rent, utilities and administrative salaries, do not directly generate revenue. Managing overhead is important because it affects pricing and profitability. Overhead costs are typically classified into fixed, variable and semi-variable categories:

","

Fixed overheads remain constant regardless of business activity levels, such as rent or insurance.
Variable overheads fluctuate with production output, like utility bills or raw material costs.
Semi-variable overheads have both fixed and variable components, such as a salaried employee who earns overtime pay.

","

Managing overhead efficiently is key to maintaining strong profit margins and staying competitive. Controlling these costs helps businesses improve profitability. This can be done by reviewing expenses regularly and finding ways to cut costs without affecting quality or operations. Examples include negotiating better lease terms or using energy-efficient equipment to save money.

","

What Is the Overhead Ratio Used For?

","

The overhead ratio is a key financial metric that measures how well a business manages its operating expenses when compared with its revenue. It shows how much of a company’s income goes toward overhead costs like rent, utilities and administrative expenses. A lower overhead ratio means the company is controlling expenses effectively, leaving more revenue for growth and profit, which can make it appealing for various investment strategies.

","

For business owners and financial managers, the overhead ratio helps identify areas where cost reductions can be made without compromising the quality of products or services. This approach helps maintain financial health and also enhances competitiveness in the market. Understanding and optimizing the overhead ratio can increase profitability and long-term sustainability.

","

Overhead Ratio Formula

","

To calculate the overhead ratio, divide total overhead costs by total revenue and multiply by 100 to get a percentage. For example, if a company has $50,000 in overhead costs and $200,000 in revenue, the overhead ratio is 25%, meaning 25% of the revenue covers overhead expenses. A lower overhead ratio is generally better, as it leaves more revenue for reinvestment or profit.

","

Businesses can use the overhead ratio to make budgeting and planning decisions. Regularly tracking this metric helps identify trends and adjust spending to improve financial performance. For example, if the overhead ratio rises, the company may need to cut unnecessary costs. Financial advisors can assist by providing guidance on managing overhead and improving business efficiency.

","

Comparing the overhead ratio to industry benchmarks helps evaluate performance. Different industries have varying standards for acceptable overhead ratios, so understanding these differences is essential when analyzing a company’s results.

","

Bottom Line

","

","

The overhead ratio shows how much of a company’s revenue goes to overhead costs, such as rent, utilities and administrative salaries. Calculating this ratio helps businesses evaluate efficiency and find areas to reduce expenses. Regularly tracking the overhead ratio supports better budgeting and resource allocation. Controlling overhead costs can improve competitiveness and support long-term success.

","

Investment Planning Tips

","$7a","

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Futures trading strategies offer ways for investors to profit from market trends and price movements. Traders can speculate on price directions, manage risk, or hedge investments. Common strategies include going long for rising prices, going short for falling prices, spread trading for price differences, and arbitrage for market inefficiencies. Each strategy carries risks, so investors […]

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","

1. Going Long

","

Taking a long position in futures trading means buying a contract with the belief that the asset’s price will increase by the contract’s expiration date. This strategy is suitable for traders who expect the asset’s value to rise based on market indicators or external factors.

","

As an example, let’s say an investor predicts that the price of crude oil will rise due to an anticipated production cut. They purchase a crude oil futures contract at $70 per barrel, locking in that price with the expectation that it will climb in the coming months. If the price rises to $80 per barrel by the contract’s expiration, the investor can sell the contract at this higher rate, earning a $10 per barrel profit.

","

A specific strategy known as breakout trading seeks to capitalize on significant price movements by entering trades when prices move outside established support or resistance levels. For long strategies, an upward breakout suggests an opportunity to enter a trade as a sustained upward movement may follow.

","

Going long can increase returns with leverage, but it also increases the risk of losses if prices drop. To manage risk, some investors use stop-loss orders, which automatically close their position when prices hit a certain level.

","

2. Going Short

","

Going short, or selling a futures contract, is based on the expectation that the asset’s price will decrease. This strategy is useful when market indicators suggest a potential downturn, allowing traders to profit if the asset’s price falls by the contract’s end.

","

Suppose a trader expects corn prices to drop due to a forecasted surplus from a strong harvest season. They sell a corn futures contract at $6 per bushel. If the price drops to $5 per bushel by the contract’s expiration, they can repurchase the contract at this lower price, pocketing a $1 per bushel profit.

","

Short positions carry the risk of unlimited loss if the asset’s price unexpectedly increases. To mitigate this, some traders set stop-loss orders to exit the trade if prices rise above a certain level, helping to control potential losses.

","

3. Spread Trading

","

","

Spread trading involves taking simultaneous long and short positions on related assets to benefit from the price differential, or spread, between them. This strategy works well for traders looking to profit from relative price movements without being exposed to the full volatility of a single asset.

","

Consider an investor who believes that heating oil prices will rise faster in the near term compared to crude oil due to seasonal demand. They enter a “crack spread” by buying a heating oil futures contract while simultaneously shorting a crude oil contract. If heating oil prices increase and crude oil prices remain stable, the spread between the two widens, allowing the trader to profit.

","

Another form of spread trading is a “calendar spread,” where the trader buys and sells contracts on the same asset with different expiration dates. For example, a wheat trader might buy a July futures contract and sell a December contract, expecting that the near-term price will rise relative to the later price. Success in spread trading requires knowledge of seasonal and market factors that affect price differentials.

","

4. Arbitrage

","

Arbitrage seeks to take advantage of minor price discrepancies between markets or exchanges, where a trader simultaneously buys and sells the same or similar futures contracts. Though typically used by institutional investors, individual traders with access to fast trading platforms may also employ this low-risk strategy.

","

Arbitrage requires precise timing and is often conducted by high-frequency trading systems. While generally low-risk, arbitrage can involve significant capital and specialized software, as well as rapid market access to capture these fleeting opportunities.

","

As an example, let’s say a gold futures contract is trading at slightly different prices on two exchanges – say $1,500 on one and $1,505 on another. An arbitrageur buys the contract on the lower-priced exchange while selling it at the higher price on the second exchange. By locking in the $5 difference per unit, they secure a low-risk profit, as long as the transactions are executed quickly enough before the discrepancy disappears.

","

Bottom Line

","

","

Futures market trading strategies provide different opportunities for investors to engage in financial markets, including speculation, hedging and exploiting price inefficiencies. Knowing the risks of each strategy could help traders choose approaches that fit their financial goals and risk levels.

","

Investment Planning Tips

","$92","

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