Concepts
Straight answers
30 terms, one question and one sourced answer each. Grouped by the topic that uses them.
Tax in investing9 terms
Topic page What is cost basis, and why does everything depend on it? Cost basis is what you paid for a position, adjusted for later events. Gain or loss at sale is price minus basis. A harvested loss lowers the replacement lot's basis; a return-of-capital payout lowers it too; a disallowed wash-sale loss raises it; death resets it to market value. Every lever on this site moves basis or the timing of the sale. What is a donor-advised fund? A charitable account run by a sponsoring charity. You contribute assets, take the full deduction in that year, and recommend grants to charities over later years. Contributing appreciated stock held more than a year deducts its market value with no gain recognized, which makes it the standard way to give low-basis shares. What is the difference between a short-term and a long-term gain? A gain on an asset held more than one year is long-term and taxed at the federal 0, 15 or 20% rates. Held one year or less it is short-term and taxed as ordinary income, up to 37%. For a top-bracket Californian the difference is 17 cents per dollar of gain; California itself taxes both the same. What is the 3.8% net investment income tax? A federal surtax of 3.8% on investment income (interest, dividends, capital gains, rents) for single filers above $200,000 and joint filers above $250,000 of modified adjusted gross income. The thresholds are not indexed. It applies on top of both the 20% long-term rate and the 37% ordinary rate. What makes a dividend qualified? A dividend from a US or qualifying foreign company is qualified, and taxed at the long-term capital gains rate, if the stock was held for at least 61 days in the 121-day window around the ex-dividend date without a hedge. Otherwise it is ordinary income. Most index-fund dividends qualify; option-income fund payouts often do not. What is the step-up in basis at death? When an investor dies, the cost basis of the assets they held resets to their market value on that date (IRC §1014). The gain built up during their life is never taxed. It is the reason a low-basis winner is often best held rather than sold, and the largest tax lever a taxable investor has. What is tax drag? Tax drag is the yearly return a taxable investor loses to tax on a fund's distributions and realized gains, before ever selling. Morningstar's ten-year tax cost ratio puts it near 1.9% a year for the average stock mutual fund and 0.7% for the average stock ETF; the gap comes from how each wrapper handles redemptions. What is tax-loss harvesting? Selling a position that is below its cost to realize the loss, then buying something similar so market exposure barely changes. The loss offsets capital gains, then up to $3,000 of ordinary income a year, and carries forward. The replacement lot starts at a lower basis, so most of the benefit is a deferral rather than a saving. What is the wash-sale rule? Under IRC §1091 a loss is disallowed if you buy substantially identical stock or securities within 30 days before or after selling at a loss. The disallowed loss is added to the replacement's basis. The rule reaches every account the household controls, including a spouse's, and a repurchase inside an IRA forfeits the loss permanently.
Account placement4 terms
Topic page What is asset location? Asset location is the choice of which account type holds which investment: taxable, traditional IRA or 401(k), Roth, or HSA. Return that already gets a low rate (long-term gains, qualified dividends) belongs in the taxable account; return that would be taxed as ordinary income or short-term gains belongs where turnover is not taxed. What is a backdoor Roth, and what is the mega version? A two-step route into a Roth IRA for people above the income limit: contribute to a traditional IRA with no deduction, then convert it to Roth. The 2026 limit is $7,500. The mega version runs through a 401(k) that allows after-tax contributions up to the $72,000 total-additions ceiling, converted to Roth inside the plan. What is an HSA, and why is it called triple exempt? An account for people on a high-deductible health plan. Federally the contribution is deductible, the growth is untaxed, and withdrawals for medical costs are untaxed, hence triple exempt. The 2026 family limit is $8,750. California does not conform and taxes the contributions and earnings every year. What is an IRA rollover, and what goes wrong with it? Moving a workplace 401(k) balance into an IRA, usually after a job change. The plan's default fund does not come along: the money arrives as cash in an account with no default investment. In Vanguard's data, 28% of one year's rollovers were still in cash seven years later.
Funds, wrappers and fees8 terms
Topic page What is a basis point? One hundredth of one percent. 100 basis points is 1%; 9 basis points is 0.09%, or $90 a year on $100,000. Fees, tax drag, and return gaps are quoted this way because the differences look small and the compounding is not. What is direct indexing? Owning the individual stocks of an index in a separately managed account instead of owning a fund that holds them. Each position is a place a loss can be harvested, and the portfolio can exclude or tilt specific stocks. The cost is a management fee (9 basis points at retail, about 115 all-in through an adviser), hundreds of positions, and wash-sale exposure across the household. What is an ETF share class of a mutual fund? A second door into an existing mutual fund, traded on an exchange like an ETF. Investors leaving through the ETF door redeem in kind, and the fund purges its lowest-basis lots that way, so the mutual-fund shareholders stop receiving capital-gain distributions too. One firm's patent on the structure expired in May 2023; the SEC has granted orders to other fund companies since November 2025. What is an exchange fund? A partnership that takes in concentrated stock positions from many investors, each of whom receives units representing a slice of the whole pool, with no gain recognized under IRC §721. The fund must hold at least 20% in non-marketable assets, usually real estate, and investors wait seven years before redeeming in kind at their original basis. What is harvest yield? The losses a harvesting program realized in a year, as a share of the account's value. Providers publish it because it is large in a fresh account: 7.9% for one robo-adviser's 2025 accounts against 0.4% for its 2013 accounts. It is a count of losses, not a return and not the tax saved. What is in-kind redemption, and why does it make ETFs tax-efficient? In-kind redemption is paying a departing ETF investor in stock rather than cash. Under IRC §852(b)(6) the fund recognizes no gain on the stock it hands over, so the manager gives away the lowest-basis lots and the embedded gain leaves the fund untaxed. Mutual funds redeem in cash, must sell, and distribute the gains. What is a Section 351 ETF seeding? Launching an ETF by having investors contribute existing stock portfolios in exchange for fund shares, with no gain recognized under IRC §351. The portfolio must be diversified (no position over 25%, top five under 50%). The ETF then sheds the low-basis lots through in-kind redemptions. 113 such funds and about $21 billion by August 2026, with no IRS ruling. What is a fund's tax cost ratio? Morningstar's measure of how much of a fund's annual return its investors lost to tax on distributions, assuming the highest federal rates and no state tax. Over the ten years to 2024 the average stock mutual fund's was 1.9% a year and the average stock ETF's 0.7%.
Income and option ETFs4 terms
What is a covered-call fund? A fund that owns an index or a basket of stocks and sells call options on it, usually monthly. The option premium becomes a large payout, and the fund gives up the index's gains above the option's strike price. Over long samples the strategy captures slightly less of the upside than the downside, and the large funds trail their indexes by 4 to 11 points a year over their own published windows. What is a return-of-capital distribution? A fund payout that exceeds the fund's earnings for the year. It is not taxed when received; instead it reduces your cost basis by the same amount (IRC §301(c)(2)). Once basis reaches zero, further payouts are capital gains. The tax is deferred to the sale, not removed. What is a Section 1256 contract, and what is 60/40 treatment? Options on a broad-based index (the S&P 500 index itself, not an ETF on it), regulated futures, and a few other instruments. They are marked to market at year-end and any gain is taxed 60% long-term and 40% short-term regardless of holding period, a blended federal rate of 26.8% at the top bracket. California conforms to the timing but taxes both parts the same. What is a structured note, and why does it matter for an income ETF? A debt security issued by a bank whose payout is linked to something else, such as the return of an index plus the premium from selling options on it. Some large income ETFs hold these notes instead of exchange-traded options. The coupon they pay is ordinary income, not a capital gain, so the fund's payout is taxed at the highest rate.
Asset allocation1 term
Topic pageEquity strategies3 terms
Topic page What is a factor, in the sense investors mean it? A stock characteristic, such as a low price relative to book value or strong recent price momentum, that has explained a persistent slice of return differences across stocks in long historical samples. A factor tilt overweights the stocks that score high on one characteristic against the cap-weighted index. What is tracking error? The standard deviation of the return difference between a portfolio and its benchmark. A portfolio run at 2% annualized tracking error typically finishes a year within about 2 points of the index roughly two years out of three, and further away the other one. What is the transfer coefficient? The correlation between a manager's actual portfolio weights and the unconstrained weights a forecast would justify on its own. A long-only mandate cannot short the stocks it dislikes, so it transfers only part of its signal into positions; the original estimate for a typical long-only manager was about 0.6 to 0.8.