A pooled investment vehicle is one way to put your money into the stock market alongside other investors. There are several ways to pool money to invest if you’re looking for an alternative to trading individual stocks. Some are better known than others and they each have their advantages and disadvantages. As you shape your portfolio and pursue your investment goals, consider what pooled investments could do for you. You could also work with a financial advisor who can help you analyze how these investments might fit into your overall portfolio.
What Is a Pooled Investment Vehicle?
Generally speaking, a pooled investment vehicle is one in which multiple investors take part. Each investor adds money to the pool to buy shares of the investment. Basically, it’s one large portfolio funded by several investors. Returns are realized in the form of dividend or interest distributions and/or price appreciation as the investment’s per-share price rises.
Pooled investments are overseen by a management team. This team makes decisions about which securities to buy or sell within the investment. In exchange, investors pay an expense ratio to hold the investment. This expense ratio reflects the cost of owning the fund on a yearly basis.
You can buy pooled investments through a taxable brokerage account or through a tax-advantaged account, such as your employer’s 401(k) plan or an individual retirement account. If you’re investing through an employer’s plan, your range of investment options will be determined by the plan administrator. If you’re investing through an IRA or a taxable account, fund choices are dictated by the brokerage that holds your account.
Pooled Funds vs. Pooled Investment Vehicles
A pooled fund is typically the same thing as a pooled investment vehicle. These terms are generally used interchangeably although sometimes when someone refers to a pooled fund they might be referring to a group pension fund. Those funds are for a specific group of people that invest money in a variety of investments and get access to the fund through their source of employment as a retirement perk. Pooled funds can also be referring to any type of financing for an investment that requires multiple people to contribute, such as buying investment real estate or a business.
Types of Pooled Investments
There are several paths you can follow to pool your investment dollars. Some you may be more familiar with than others. Here are some of the most widely known investment vehicles that are considered to be pooled investments.
1. Mutual Funds
Mutual funds are a type of open-ended investment that can include stocks, mutual funds, bonds or other investments. An open-ended fund means that the company that owns the fund can create new shares on demand to sell to investors. When an investor owns their shares, the fund can buy them back.
A mutual fund can be actively or passively managed. An actively managed fund means the fund manager is actively making decisions about what investments to buy or sell within the fund. Passive funds may track an index, such as the S&P 500 or the Nasdaq, and attempt to match its performance. These funds typically have a lower expense ratio compared to actively managed funds.
2. Exchange-Traded Funds (ETFs)
An exchange-traded fund (ETF) combines the characteristics of a mutual fund and a stock. On the fund side, ETFs hold a collection of investments. This can include stocks, bonds, real estate and commodities. What’s different is that while mutual funds have their price set once per day at the close of trading, ETFs trade throughout the day on an exchange just like a stock.
ETFs can also be actively or passively managed. Compared to mutual funds, both active and passive ETFs tend to have lower expense ratios. Passively managed ETFs can also be more tax-efficient since fund holdings turn over less often. This results in fewer capital gains tax events for investors.
3. Hedge Funds
A hedge fund is a pooled investment vehicle that’s run by a money manager or registered investment advisor. The fund manager is responsible for using investor funds to buy and sell investments, according to a set strategy. For example, there are hedge funds that are funds of funds, others that invest exclusively in emerging markets and some that focus just on real estate.
Hedge funds can offer diversification because hedge fund managers can pursue investment strategies that may not be an option with mutual funds or ETFs. The downside is that they can be more expensive where fees are concerned. They may be less liquid, too, potentially making it more difficult to sell shares if needed.
4. Closed-End Funds
Closed-end funds work the opposite of open-end funds. With this type of fund, the number of shares available to investors is limited. These funds are most often associated with an initial public offering (IPO) when a company offers shares of stock on the open market for the first time. This is a way for startups to raise capital to fund future growth.
A closed-end fund could yield better returns than an open-ended fund if the company performs well. The downside is that they can also be more volatile and it can be difficult to calculate an accurate estimate of what a company is actually worth.
5. Real Estate Investment Trusts (REITs)
A real estate investment trust or REIT is a way for investors to own real estate without actually owning property. A REIT company buys properties to invest in, then you buy shares of the REIT. These types of pooled investments can own a wide range of property types, including hotels and resorts, public storage units, commercial office buildings, apartments and single-family homes.
Aside from not having to deal with the headaches of being a landlord, REITs can also offer income in the form of dividends and a hedge against stock market volatility. You also get some of the pass-through tax benefits associated with owning real estate, such as depreciation.
6. Unit Investment Trusts (UITs)
A unit investment trust (UIT) is something you may not have heard of, but it falls under the category of pooled investments. A UIT is a company that buys stocks, bonds and other securities and then offers them to investors as redeemable units. UITs differ from open-end or closed-end mutual funds because have an expiration date. Once that date is reached, the UIT is dissolved and assets are distributed among investors in proportion to their ownership share.
7. Pension Funds
Pension funds are a bit different than the other vehicles because you, as the beneficiary, don’t typically get to choose how the pooled funds are invested. Instead, you’re promised a certain retirement benefit and to receive that benefit you’ll typically contribute to the pension fund for a number of years. The money invested in that fund is invested by a committee and they decide which investments are selected.
Pros and Cons of Pooled Investment Vehicles
Investing in pooled funds, REITs or UITs can offer some broad advantages. Diversification is an obvious one since owning a pooled investment can give you exposure to multiple asset classes and sectors in a single vehicle. The more diversified you are, the better equipped you are to manage risk in your portfolio.
Pooled investments can also be more convenient and accessible, compared to investing in individual stocks. Typically, employer-sponsored retirement plans don’t allow you to buy individual stocks, but you might be able to invest in those same stocks through a mutual fund or ETF. A pooled investment vehicle also offers investors the chance to invest in opportunities that are typically only available to large-scale investors. Buying a pooled fund through a brokerage account can also be an easier way to focus on a particular sector.
Buying and holding pooled investments can also be more cost-efficient compared to trading stocks. Brokerage accounts can charge commission fees for trades so frequent buying and selling could nibble away at your returns.
Broadly speaking, the cons to watch out for with pooled investments include volatility and liquidity risk. Some types of pooled investments are more liquid than others, which is something to be aware of if you don’t want to tie up a large chunk of money in one place. Individual investments can also be more volatile than others, depending on their underlying holdings.
The Bottom Line
Pooled investment vehicles can take different forms and some might be more appealing than others. Checking the performance, fees, risk rate and underlying holdings of any pooled investment vehicle is key when determining whether to buy in. With a little research, you may be able to diversify your portfolio and reach your goals in no time.
Tips for Investors
- Consider talking to a financial advisor about the merits of pooled investment vehicles. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Remember to consider a fund’s tax profile when investing. For example, a passively managed ETF that has fewer capital gains events might be better suited to your taxable brokerage account, while actively managed funds might be better held in your IRA or 401(k). The goals is to manage your investments with tax efficiency so you can potentially minimize the amount of tax you owe on gains over time.
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