investment

Fact checked by Kirsten Rohrs Schmitt
Reviewed by Chip Stapleton

The Direxion Daily S&P Biotech Bull 3X Fund (NYSEARCA: LABU) is an exchange traded fund (ETF) that seeks to replicate 300% of the daily performance (before fees and expenses) of its underlying index, the S&P Biotechnology Select Industry Index. LABU seeks daily leveraged investment results and is intended as a short-term trading vehicle, not a long-term investment holding. You should not expect the fund to provide three times the return of the benchmark’s cumulative return for periods greater than a day.

Key Takeaways

• The Direxion Daily S&P Biotech Bull 3X Fund (LABU) is an ETF that seeks to replicate 300% of the daily performance of its benchmark, the S&P Biotechnology Select Industry Index.
• The fund invests primarily in swap agreements and futures contracts that provide daily leveraged exposure to the benchmark index.
• LABU represents an opportunity for short-term speculation on U.S. biotechnology stocks.
• It is a daily leveraged ETF and should not be held for even moderate periods of time due to its high market volatility and leverage risks.
• Other fund risks include compounding risk, derivatives risk, counterparty risk, intra-day investment risk, rebalancing risk, and healthcare sector risk.

Understanding Direxion Daily S&P Biotech Bull 3X Fund (LABU)

The word “bull” in the title indicates that the fund is meant to appreciate when the underlying index performs well. Direxion does have an inverse sister fund for LABU: The Direxion Daily S&P Biotech Bear 3X Shares ETF (LABD).

Unlike a traditional ETF, LABU is not a collection of holdings designed to mirror an index. Instead, this fund is a daily 3x leveraged bet on the performance of the S&P Biotechnology Select Industry Index (SPSIBITR). This is accomplished primarily through exposure to swap agreements and futures contracts that provide daily leveraged exposure to the index.

The underlying index is spread out over 134 different equity securities in the biotechnology and healthcare sectors. As of January 2025, the smallest weight was in Monte Rosa Therpeutics.

LABU Characteristics

LABU was released to the public on May 28, 2015, and many viewed it as a direct challenge to the ProShares Ultra NASDAQ Biotechnology ETF (BIB).

The net expense ratio for LABU is 0.96%. However, administrative fees do not really matter much for daily traded funds because an investor is exposed to them for so short a period of time. Trading fees and other account expenses are much more important for this ETF. These fees occur independently from the investment and vary depending on platform and brokerage.

The ETF has net assets of $799.77 million. The fund invests at least 80% of its net assets in financial instruments that track the underlying index. As of Sept. 30, 2021, the index top five holdings are Neurocrine Biosciences, Abbvie Shares, Gilead Sciences, Biomarin Pharmaceutical, and Utd Therapeut.

$546 billion

The projected size of the biotechnology industry market.

Other LABU Considerations

Any funds that pursue daily leverage are riskier than alternatives without leverage. Leveraged ETFs magnify the gains and losses of their underlying indexes. If the S&P Biotechnology Select Industry Index suffers losses of 10% over the course of one trading day, an investor holding LABU is liable to lose up to 30% or more.

As an extreme case, it is possible for an investor to lose all of their money if the underlying index moves more than 33% on a given trading day. Also, daily leveraged ETFs are ill-suited for long holding periods. The return for LABU will suffer time decay; the day-to-day volatility in the fund’s returns often mitigate its leveraged design.

The Direxion prospectus for LABU lists various other risks investors should be aware of when considering an investment in the ETF. These include the effects of market volatility and compounding, derivatives risk, counterparty risk, intra-day investment risk, rebalancing risk, and healthcare sector risk.

Ideal Investors in LABU

LABU is probably best suited for traders with a high risk tolerance seeking short-term exposure to biotech equities. As a 3x leveraged ETF, LABU is best used for intraday or short-term momentum trading rather than long-term holding due to the compounding effects of daily rebalancing. Active traders may use LABU to capitalize on price swings driven by FDA approvals, earnings reports, or macroeconomic trends affecting biotech valuations.

Institutional investors and hedge funds may incorporate LABU into tactical allocation strategies. For instance, this could be useful in a bullish market environment or when positioning for anticipated sector-wide catalysts such as something like a regulatory shift. LABU may also serve as a short-term hedging tool within a broader portfolio.

Experienced retail investors with sector-specific expertise may use LABU for short-term speculation, particularly those who track clinical trial results, biotech M&A activity, or index momentum. However, due to decay from daily rebalancing, LABU is not usually used by passive investors or those without strict risk management protocols.

What Is the Direxion Daily S&P Biotech Bull 3X ETF?

LABU is a leveraged ETF designed to provide investors with 300% of the daily performance of the S&P Biotechnology Select Industry Index. This means that for each 1% increase in the index on a given day, LABU aims to increase by approximately 3%, before fees and expenses. Conversely, if the index decreases by 1%, LABU is designed to decrease by about 3%.

How Does LABU Achieve Its 3X Leverage?

To achieve its triple leverage, LABU primarily invests in financial instruments such as swap agreements and futures contracts that provide daily exposure to the S&P Biotechnology Select Industry Index. These derivatives allow the fund to amplify the daily movements of the underlying index.

What Is the Underlying Index of LABU?

LABU tracks the S&P Biotechnology Select Industry Index.

How Does LABU Compare to Similar ETFs?

LABU could be compared to the ProShares Ultra Nasdaq Biotechnology ETF (BIB), However, BIB seeks to replicate only twice (not 3x) the daily performance of the Nasdaq Biotechnology Index,

The Bottom Line

LABU is designed for and best used by sophisticated investors. Interested buyers should understand the risks of using leverage and the consequences of daily leveraging, and they should be comfortable in a daily monitoring capacity for their investments.

This ETF represents an opportunity for short-term speculation on biotechnology stocks in the United States. It should not be held for even moderate periods of time, and it cannot reasonably form part of a core or satellite portfolio.

Reviewed by Somer Anderson

Earnings management refers to the deliberate manipulation of a company’s financial statements to meet specific financial targets or portray a desired image of financial health. Companies may use accounting practices like adjusting revenue recognition, altering expense timing, or restructuring costs to smooth earnings, meet analyst expectations, or influence stock prices. While some forms of earnings management are legal and fall within the flexibility of accounting standards, excessive or deceptive practices can mislead stakeholders and potentially violate regulations.

Key Takeaways

• Earnings management refers to a company’s deliberate use of accounting techniques to make its financial reports look better.
• Earnings management can occur when a company feels pressured to manipulate earnings in order to match a pre-determined target.
• Excessive earnings management can lead a company to misrepresent facts on its financial statements, which can cause the Securities and Exchange Commission (SEC) to impose fines and other punishments.
• Different types of earnings management include moving earnings from one reporting period to another in order to paint a better picture or manipulating the balance sheet to hide liabilities and inflate earnings.

Understanding Earnings Management

Before diving into what earnings management is, it is important to have a solid understanding of what we mean when we refer to earnings. Earnings are the profits of a company. Investors and analysts look to earnings to determine the attractiveness of a particular stock. Companies with poor earnings prospects will typically have lower share prices than those with good prospects. Remember that a company’s ability to generate profit in the future plays a very important role in determining a stock’s price.

That said, earnings management is a strategy used by the management of a company to deliberately manipulate the company’s earnings so that the figures match a pre-determined target. This practice is carried out for income-smoothing. Thus, rather than having years of exceptionally good or bad earnings, companies will try to keep the figures relatively stable by adding and removing cash from reserve accounts (known colloquially as “cookie jar” accounts).

Types of Earnings Management

Here are a few ways companies can manage their earnings. Note that there may be areas below that are still legal and within the bounds of what is acceptable treatment.

Accrual-Based Earnings Management

Accrual-based earnings management involves manipulating accounting entries to alter reported financial outcomes without changing actual business activities. This method uses discretionary accruals, such as recording revenue prematurely or deferring expenses, to create a more favorable profit picture. While these practices are often within the flexibility of accounting standards, they can mislead stakeholders if they are done to intentionally cross over accounting periods (i.e. report revenue in one period instead of another).

Real Earnings Management

Real earnings management focuses on altering actual business operations to meet financial targets, impacting cash flow and operational decisions. Examples include offering large discounts to boost short-term sales, delaying expenses like advertising, or overproducing inventory to lower the cost of goods sold. These strategies, also not always illegal, can compromise long-term business health for immediate financial gains.

Big Bath Accounting

Big bath accounting involves recognizing significant losses or write-offs in a single period to clean up the financials and make future periods look more profitable. Companies often use this strategy during already poor-performing years, writing down assets or restructuring operations. While it resets the financial baseline, it can distort the true performance of the period. The company might temporarily be too aggressive in writing costs off.

Cookie Jar Reserves

Cookie jar reserves involve creating excessive reserves during profitable periods and using them in less profitable times to smooth earnings over time. For example, a company might overstate liabilities or allowances and reverse them later to boost earnings when needed. This approach can help stabilize earnings but often lacks transparency while also not properly reflecting what is actually happening from period to period.

Income Shifting

Income shifting manipulates the timing of revenue and expenses to influence financial results across reporting periods. This can involve deferring revenue to future periods or accelerating expenses into the current period to reduce taxable income or smooth earnings. Although this method may comply with accounting rules, it can create misleading financial statements if done excessively or fraudulently.

Earnings Management vs. Fraud

Earnings management and fraud are two distinct concepts in financial reporting. They can sometimes overlap. Companies may engage in earnings management to meet analysts’ expectations, smooth income over time, or align with internal targets. When it is done to intentionally mislead the market or investors, it is considered fraud.

Fraud refers to intentional manipulation or misrepresentation of financial information. Fraudulent activities often involve overstating revenues or hiding liabilities – much like earnings management practices.

The key difference between earnings management and fraud lies in intent and transparency. While earnings management may involve aggressive but permissible accounting practices, fraud involves deliberate deception and misstatement of facts. Companies that engage in earnings management usually follow generally accepted accounting principles (GAAP). It’s when practices are taken too far that it’s considered fraudulent.

Earnings Management and Sarbanes-Oxley

The Sarbanes-Oxley Act of 2002 was a significant legislative response to corporate scandals such as Enron (discussed below). This act introduced stringent requirements for financial reporting, including enhanced internal controls, more rigorous auditing standards, and increased transparency.

Section 404 of the Sarbanes-Oxley Act, for example, mandates that companies assess and report on the effectiveness of their internal controls over financial reporting. The act also holds CEOs and CFOs personally responsible for the accuracy of their company’s financial statements, with penalties for fraudulent reporting. These changes were designed to curb earnings management practices that veered into manipulation and foster a more trustworthy financial environment.

Despite these regulations, the challenge of monitoring earnings management persists, as companies often find ways to operate within the boundaries of the law. The SEC uses tools like mandatory periodic filings like the 10-K and 10-Q to gauge ongoing performance and financial reporting of public companies. In addition, the SEC continually updates its guidance on accounting standards, working with organizations like the Financial Accounting Standards Board (FASB) to address emerging issues in earnings management.

Examples of Earnings Management

One example of earnings management is when a company adopts an accounting procedure that makes it appear the company is generating higher earnings over a short-term time period. The widely publicized collapse and bankruptcy of energy giant Enron Corporation in December 2001 is an example of this.

The company used fake holdings and off-the-books accounting principles to manipulate its balance sheet. The purpose of this was to hide the company’s liabilities and inflate earnings. With the company’s balance sheet looking better, Enron was able to project better financial health. By reporting higher revenue, it was able to reflect higher profitability (even though a lot of that revenue had technically not yet been earned yet).

Investors can sometimes glean important insights into changes in a company’s accounting and reporting practices by reviewing the footnotes of the financial statements, which is where a company must disclose such changes.

Detecting Earnings Management

Financial statement manipulation comes in a variety of forms. Investors who know what to look for can sometimes detect earnings management by performing a financial statement analysis of a company’s quarterly and annual reports.

Here are some signs a company might be using earnings management techniques to distort its financial statement figures:

• Claiming revenue growth that doesn’t come with a corresponding growth in cash flows.
• Reporting increased earnings that only occur during the fiscal year’s final quarter.
• Expanding fixed assets beyond what is considered normal for the company and/or industry.
• Exaggerating an asset’s net worth by neglecting to use the correct depreciation schedule.

What Is Earnings Management?

Earnings management refers to the use of accounting techniques to influence financial reports. Companies may adjust their earnings to meet analysts’ expectations or smooth out fluctuations, though these practices must comply with accounting standards.

Is Earnings Management Legal?

Yes, earnings management is legal as long as it stays within the bounds of generally accepted accounting principles.

How Does Earnings Management Impact Financial Statements?

Earnings management can distort a company’s financial health by making it appear more profitable or stable than it truly is. This can mislead investors and other stakeholders while also hiding accurate information from regulatory agents.

Why Do Companies Engage in Earnings Management?

Companies may engage in earnings management to meet investor expectations, secure financing, smooth out earnings volatility, or avoid triggering regulatory or covenant breaches. These practices help maintain market confidence, though they can distort the company’s true financial health.

The Bottom Line

Given that earnings management can skew a company’s true financial picture, it’s important that investors perform as much due diligence as possible before making an investment decision. Although the different methods used by managers to smooth earnings can be very confusing, the important thing to remember is that the driving force behind managing earnings is to meet a pre-specified target (often an analyst’s consensus on earnings). As the great Warren Buffett once said, “Managers that always promise to ‘make the numbers’ will at some point be tempted to make up the numbers.”

Reviewed by Khadija Khartit

The average profit margin for companies in the banking sector can fluctuate greatly depending on financial market conditions. However, the International Monetary Fund (IMF) predicts that globally the banking sector will continue to post declining profits through 2025 due to the ongoing tightening of financial conditions.  This could also be attributed to, in part, the rising service and price competition in this sector from the fintech startups taking market share in many segments of banking, namely, lending, payments, insurance, mortgage, and so on.

In this article, we’ll compare the profit margins for different types of institutions within the banking sector. Plus, we’ll highlight some of the metrics investors and analysts use to evaluate banks as potential investment opportunities.

Key Takeaways

• In the United States, profit margins for regional banks tend to be higher than the profit margins for money center banks.
• To correctly analyze banks, it’s important to compare companies that operate similarly, serve the same marketplace, and are similar in size.
• Three key metrics for investors to use when evaluating companies in the banking sector as potential investments are net interest margin, efficiency ratios, and the return on assets (ROA) ratio.

Comparisons of Bank Profit Margins

It is somewhat difficult to even talk about an average profit margin for the banking industry as different types of institutions may post different margins. We’ll discuss more about those differences later in this article. For now, understand that the profit margin for regional banks tends to be higher than that of money center banks, 24.89% on average as of Q2 2024. Money center banks operate with lower profit margins, averaging a net margin of around 21.9%.

Since money center banks deal in very large capital amounts, an almost 22% net profit for a given money center bank may represent an absolute dollar amount substantially higher than the amount represented by a 24.89% profit margin realized by a regional bank.

A proper analysis would only compare banks similar in the major business they conduct, their sizes, and the specific marketplaces they serve. It isn’t valid to compare a regional retail bank to a large investment bank, nor is it valid to compare an investment bank in India to an investment bank in the United States.

Note

With double-digit projected CAGR until 2030, consider how fintech start-ups may disrupt the profit margins of traditional banking institutions.

Metrics for Assessing Banks

Investors and analysts can use equity valuation metrics to assess banks. Three commonly used metrics are net interest margin, efficiency ratios, and return on assets.

Net Interest Margin

The net interest margin is, for banks, a similar measure to gross profit margin for most companies, calculated by subtracting total interest expense from the bank’s total interest income. Interest income for banks comes primarily from issuing loans. Interest expenses represent the interest that banks must pay on the variety of deposit accounts held by the bank’s customers.

As of the second quarter of 2024, the average net interest margin for U.S. commercial banks was 2.56%. The net interest margin can vary depending on the type and size of the bank. For example, between 2011 and 2023, the net interest margin for bank holding companies with assets greater than $750 billion consistently trended lower than the net interest margin for bank holding companies with assets between $50 billion and $750 billion.

Efficiency Ratios

Efficiency ratios are another commonly used metric for evaluating banking firms. Efficiency ratios measure how well a company utilizes its resources to make a profit. These ratios also help companies measure their performance against pre-determined goals and against their competitors in the same industry.

The goal for banks is to keep efficiency ratios low because they represent non-interest operating expenses as a percentage of the bank’s total income. Efficiency ratios for the banking industry typically fall between 60% and 70%, but had a sharp spike in 2023 up to 80%.

Return on Assets Ratio

The return on assets (ROA) ratio is important to companies in the banking sector because it determines how profitable the company is relative to its total assets. A bank’s ROA ratio is calculated by dividing the net, after-tax income by its total assets. Because banks are highly leveraged, even a seemingly low 1% or 2% ROA can still represent large revenues and profits. For the second quarter of 2024, U.S. commercial banks had a ROA of 1.04%.

Why Banking Profit Margins Vary

Not all banks are created equal, so the profit margins of different financial institutions will vary. Here’s a high-level rundown of why one type of lending institution’s profit margin may be higher than another

First, different types of banks derive their income from varying sources. Retail banks primarily earn interest income from consumer products like mortgages, car loans, and credit cards. These products, while stable, often have lower profit margins due to intense competition and regulatory limits on fees. On the other hand investment banks generate income through activities like advisory services, underwriting, and trading. These are higher-margin but more volatile revenue streams. Commercial banks, serving businesses with services like trade finance and cash management, see margins tied to the quality and scale of business activities. Meanwhile, specialty banks such as private banks cater to high-net-worth clients, offering personalized services at a premium, resulting in higher profit margins.

The operational costs of different banks can also vary. Retail banks often operate extensive branch networks, which increase expenses for staffing, utilities, and real estate. Digital-only banks have fewer fixed costs due to their lack of physical branches but may face lower margins initially due to significant spending on customer acquisition and technology development. Therefore, even the profit margin between two different types of retail banks (online vs. brick-and-mortar) can substantially vary.

Finally, there’s always some external economic factors to think about. Retail and commercial banks are highly sensitive to interest rate changes which directly affect their net interest margins. Plus, certain types of banks face higher competition which helps drive down pricing.

What Is the Average Profit Margin in the Banking Sector?

Profit margins in the banking sector typically very heavily vary by region and bank type. On average, banks have net profit margins ranging somewhere between 15% and 30% (as seen by the rates throughout this article). Retail banks are often at the lower end due to high operational costs and investment banks achieve higher margins through advisory services and trading activities.

How Does Net Interest Margin (NIM) Affect Bank Profitability?

Net interest margin is a metric that reflects the difference between the interest income generated from loans and the interest paid on deposits. A higher NIM indicates efficient lending practices and higher profitability, but it is highly sensitive to changes in interest rates and loan defaults.

How Do Interest Rates Impact Bank Profit Margins?

Rising interest rates generally benefit banks by widening the spread between what they earn on loans and what they pay on deposits. However, prolonged low interest rate environments compress margins, especially for retail banks reliant on traditional lending.

How Do Fintech Companies Affect Traditional Bank Margins?

Fintech companies disrupt traditional banks by offering lower-cost and more customer-friendly alternatives, such as digital loans or payment platforms. This forces banks to lower fees or invest in expensive digital transformation, compressing their margins.

The Bottom Line

Banks typically achieve profit margins very roughly around 25%, influenced by their business models, revenue streams, and operating efficiency. Key factors include net interest margins, regulatory requirements, and cost structures, which vary across retail, commercial, and investment banks.

How to calculate your home equity loan payments

Fact checked by Timothy Li
Reviewed by Doretha Clemon

Home equity is the difference between your mortgage balance and its current market value. You can borrow that amount using a home equity loan, using the equity you’ve built up in your house as collateral. Then, just like a regular mortgage, you repay it as a fixed monthly payment.

This payment depends on three main factors: how much you borrow, how long you borrow it, and the interest rate. In this article, we’ll show you how these elements affect your monthly payment, give some typical values, and explore some additional costs of home equity loans.

Key Takeaways

• A home equity loan uses home equity—the difference between your home’s value and mortgage balance—as collateral.
• You receive the loan as a lump sum and repay it in equal monthly payments. 
• Monthly payments for home equity loans depend on the amount borrowed, the length of time to pay it back, and the interest rate. 
• Borrowing $500,000 over 30 years at a low interest rate will mean much lower monthly payments than borrowing the same amount over five years at a high interest rate.
• Make sure to factor in the other costs associated with home equity loans when you calculate the cost of your loan.

Understanding Home Equity Loan Payments

The monthly payments for home equity loans depend on three main factors: how much you borrow, the length of time that you have to pay it back, and the interest rate you are offered. All of these factors can greatly impact the amount you owe each month. Let’s look at how they interact.

Loan Amount

The more you borrow, the more you’ll have to pay back per month. But you can’t borrow all the equity you’ve built in your home because banks underwrite second mortgages like other home loans. Each bank has guidelines that dictate how much they can lend based on your property’s value and creditworthiness. This is expressed in a measure known as the combined loan-to-value (CLTV) ratio. A bank typically may be able to lend you 80% of the value of your home, less the money you still owe on your first mortgage. 

Because of this, you have to have a lot of equity in your home, and your home has to be worth quite a lot of money to borrow $500,000. This would be a large home equity loan, in other words. You could borrow $500,000 if, for example, your home is worth $750,000 and you have $100,000 left on your mortgage (because $750,000 × 0.80 = $600,000 – $100,000 = $500,000).

Loan Term

The term of a loan is the number of years needed to pay it off. For a given amount and interest rate, a longer term will have lower monthly payments but will charge more total interest over the life of the loan. Typically, the term of an equity loan can be anywhere from five to 30 years, but the lender must approve the length of the term.

Interest Rate

The interest on the loan also affects your monthly payments. In turn, the interest rate that you are offered depends on a wide variety of factors. Usually, a longer loan term has a higher interest rate. Like other mortgages, your loan and interest rate eligibility depends on your employment history, income, and credit score. The higher your score, the lower the risk that you pose of defaulting on your loan and the lower your rate.

As home equity loans are secured against your home, banks typically offer very competitive interest rates for these loan types—usually close to those of first mortgages. Compared with unsecured borrowing sources, such as credit cards, you’ll pay less in financing fees for the same loan amount.

Interest rates on a home equity loan are fixed, hence the fixed payments. The interest rate is higher than that of a HELOC, but it won’t fluctuate with the market like the HELOC variable rate does.

Home Equity Loan Payment Examples

By taking into account all three of these factors, it’s possible to calculate indicative monthly payments for a $500,000 home equity loan. Here are the basic monthly repayments for a $500,000 loan at different interest rates and different term lengths:

Other Costs

These basic monthly repayments aren’t the only costs associated with home equity loans, though. When you take out a home equity loan, you’ll likely have to pay many of the same closing costs associated with a first mortgage, such as loan processing, origination, appraisal, and recording fees.

In addition, lenders may require you to pay points—prepaid interest—at closing time. Each point is equal to 1% of the loan value. On a $100,000 loan, for example, one point would cost you $1,000. Points lower your monthly interest rate, which might help you in the long run. However, if you’re considering paying the loan off early, this kind of up-front interest doesn’t work in your favor.

These are all one-off payments and won’t affect your standard monthly loan repayments. However, they can add thousands of dollars to the cost of a home equity loan, so it’s important to be aware of them.

Important

Make sure to consider both the interest rate and the loan term when calculating the cost of a home equity loan. A longer term will lower your monthly payments, but you’ll pay more in interest over the loan’s lifetime.

How are Home Equity Loan Payments Calculated?

The monthly payments for home equity loans depend on three main factors: how much you borrow, the length of time that you have to pay it back, and the interest rate you are offered.

What Is the Interest Rate on a Home Equity Loan?

It varies, but as home equity loans are secured against your home, banks typically offer highly competitive interest rates for these loan types—usually close to those of first mortgages.

How Much Home Equity Can I Borrow?

Each bank has guidelines that dictate how much they can lend based on your property’s value and creditworthiness. This is expressed in a measure known as the combined loan-to-value (CLTV) ratio. A bank typically may be able to lend you 80% of the value of your home, less the money you still owe on your first mortgage. To borrow $500,000, for example, you have to have a lot of equity in your home, and your home has to be worth quite a lot of money.

The Bottom Line

A home equity loan uses your home’s equity—the difference between its value and your mortgage balance—as collateral. You receive your loan as a lump sum and pay it back in equal monthly payments.

The monthly payments for home equity loans depend on three main factors: how much you borrow, the length of time that you have to pay it back, and the interest rate you are offered. Borrowing $500,000 over 30 years at a low interest rate will mean much lower monthly payments than borrowing the same amount over just five years at a high interest rate. At 5% interest over 15 years, you should expect to pay around $4,000 per month.

Other costs are associated with home equity loans, so make sure that you also take these into account when calculating the cost of your loan.

Reverse mortgages outside the 50 states

Fact checked by Vikki Velasquez
Reviewed by Doretha Clemon

Puerto Rico, the U.S. Virgin Islands, and Guam are popular choices for retirees who own vacation homes outside the continental United States. But as you reach retirement age, you may be thinking about moving permanently to your vacation property in one of these places. Taking out a reverse mortgage may also be part of your retirement planning. Fortunately, you can take out a reverse mortgage on your property in Puerto Rico, the U.S. Virgin Islands, or Guam.

All three places are U.S. territories, which means you can get a reverse mortgage just as you would on property in the 50 states. However, if you plan to retire to the property, you will need to pay attention to the residency rules that govern reverse mortgages.

Key Takeaways

• A reverse mortgage can be an effective tool for overseas retirement, either as a source of living expenses or a way to buy a vacation home. 
• You can take out a reverse mortgage on a property in Puerto Rico, the U.S. Virgin Islands, or Guam. 
• Just make sure you know the residency rules for reverse mortgages. Failure to do so could result in your lender foreclosing on your loan.
• Consider a cash-out refinance, home equity loan, or home equity line of credit (HELOC) as an alternative to a reverse mortgage to access your home equity more easily.

Reverse Mortgages Outside the 50 States

Puerto Rico, the U.S. Virgin Islands, and Guam are all part of the United States. This means they are covered by the U.S. Department of Housing and Urban Development (HUD). As such, it’s possible to take out a federally insured reverse mortgage in these territories, so long as you can find a lender.

A reverse mortgage may be attractive for many retirees. If you already own a vacation property in one of these places and want to move there permanently, taking out a reverse mortgage on the property could provide you with a reliable source of income in retirement.

Alternatively, if you own property in the 50 states but want to buy a second home overseas, you can use a reverse mortgage to withdraw a lump sum from your home’s equity and use it to buy a place in Puerto Rico, the U.S. Virgin Islands, or Guam. 

Both options are perfectly legal. However, you need to know the residency rules governing reverse mortgages. To have a reverse mortgage on a property, it needs to be your principal residence, meaning that you spend the majority of the year there. This is why you can’t have two reverse mortgages at the same time.

Planning Is Key

These rules may affect your overseas retirement planning in a variety of ways:

• If you take out a reverse mortgage on an overseas property, make sure you’ve paid off any reverse mortgage on your house in the 50 states. If you don’t and are away from it for more than six months at a time, then your lender has the right to foreclose on the loan. This could mean that you lose your primary house.
• If you take out a reverse mortgage in the 50 states to pay for your retirement living expenses overseas, you won’t be able to live permanently in your vacation home. This is for the same reason: If you are away from the property on which you have a reverse mortgage for more than six months, you are regarded as having moved houses and are at risk of foreclosure.

As long as you keep these rules in mind, there is no reason why a reverse mortgage can’t be a part of your retirement planning in Puerto Rico, the U.S. Virgin Islands, or Guam.

Important

Reverse mortgages come in three different forms. The first and most common is called the home equity conversion mortgage (HECM). Almost all reverse mortgages offered by lenders on homes valued below $1.15 million are HECMs. Homeowners may also consider jumbo reverse mortgages for homes valued higher than this limit. There’s also the single-purpose reverse mortgage that can be approved through local and state governments.

Reverse Mortgages in Puerto Rico

Puerto Rico is a U.S. territory, and its political status remains a source of tension between the island and the U.S. federal government. However, this gray area doesn’t affect reverse mortgages. Reverse mortgages have been available in Puerto Rico for decades, and they work in exactly the same way as they do in the 50 states. 

That said, there has been a high rate of foreclosure on reverse mortgages issued on the island over the past five years, and many seniors have lost their homes as a result. HUD responded by providing homeowners under foreclosure with resources that can help them understand and mitigate this risk.

Reverse Mortgages in the U.S. Virgin Islands

The situation is similar in the U.S. Virgin Islands. Because the Virgin Islands are a territory of the United States, borrowers are eligible to receive a reverse mortgage through HUD in exactly the same way that residents of the 50 states can, and the same rules apply to these mortgages.

The market for reverse mortgages in the U.S. Virgin Islands is much younger than in other parts of the U.S. This means that while homeowners in the rest of the U.S. have a choice of many reverse mortgage providers, the options for reverse mortgage lenders in the islands is smaller.

Note

Both the U.S. Virgin Islands and Guam used to have a higher maximum claim amount for HECMs than the rest of the country. As of 2025, the maximum amount that you can access via a reverse mortgage in these territories is the same as anywhere else in the country: $1,209,750.

Reverse Mortgages in Guam

Getting a reverse mortgage in Guam is the same as in Puerto Rico or the U.S. Virgin Islands. The island has the same political status as Puerto Rico, meaning it is an unincorporated territory of the U.S. and thus is also covered by HUD. Reverse mortgages in Guam work in exactly the same way as they do in the rest of the U.S., and the same rules apply.

How Do Reverse Mortgages Work?

A reverse mortgage allows homeowners over the age of 62 to use the equity in their property to borrow money. The funds can be distributed as a lump-sum payment, fixed monthly payments, or a line of credit. The borrower doesn’t have to make payments on the loan, which becomes due when the homeowner dies, moves away permanently, or sells their home.

Can I Get a Reverse Mortgage in Puerto Rico?

Yes, you can get a reverse mortgage in Puerto Rico just as you would in the 50 U.S. states. The same rules regarding residency and requirements apply.

Can I Get a Reverse Mortgage in the U.S. Virgin Islands?

Because the U.S. Virgin Islands are a territory of the United States, borrowers are eligible to receive a reverse mortgage through the U.S. Department of Housing and Urban Development in the same way that residents of the 50 states can. The same rules for residency and property upkeep apply to these mortgages.

Can I Get a Reverse Mortgage in Guam?

As with Puerto Rico, reverse mortgages in Guam work the same way as they do in the rest of the U.S., and the same rules apply.

The Bottom Line

A reverse mortgage can be an effective tool for an overseas retirement, as either a strategy to fund living expenses or a way to buy a vacation home. You can take out a reverse mortgage on property in Puerto Rico, the U.S. Virgin Islands, or Guam. Just make sure you know the residency rules that apply to reverse mortgages because breaking them could lead your lender to foreclose on your loan.

One thing to note is that a reverse mortgage may not be the right solution for you if you want to use the equity in your home. You may want to consider doing a cash-out refinance. Alternatively, you may want to apply for a home equity or a home equity line of credit (HELOC). Although these two options require monthly payments, they come with lower fees, so you’ll be able to keep more money in your pocket.

Reviewed by Khadija Khartit
Fact checked by Katrina Munichiello

Zillow vs. Trulia: An Overview

If you’ve ever tried to rent, buy, or sell a home, or even just checked to see how much your home is worth, you’ve probably used Zillow (Z) or Trulia. Both websites are real estate databases that provide for-sale and rental listings to the general public and connect people with real estate agents, and they share some key characteristics. They are also part of the same company: The Zillow Group acquired Trulia for $3.5 billion in February 2015.

Both sites present listings using photos, a detailed description, prices, and information about neighborhoods. Property information presented on each site is generally similar because they both draw on MLS listings. Visitors can use a specific set of criteria to search for homes on each site including price, the number of bedrooms, type of structure, square footage, and lot size.

While the two are fairly similar, there are several key differences that set the two sites apart. Zillow offers what it calls Zestimates, which are estimates of home values based on publicly available information.

Graphically, each site presents listings in a different way, which provides the user with a different experience. For example, when you search for listings in a city on Zillow, the search results are on the right side with a map of the area on the left. The experience is flipped on Trulia, where the search results are on the left with the map on the right.

We’ll look a little more at this, and at the two sites in detail, below.

Key Takeaways

• Zillow and Trulia are real estate databases that offer for-sale and rental listings and connect people with listing agents.
• Zillow provides users with a highly graphic experience when searching for properties, while Trulia has a simpler website design.
• Zillow offers Zestimates—estimated market value for an individual property—and lists properties in both the U.S. and Canada.
• Trulia gives users a visual breakdown of the monthly costs for a property as well as crime map data.
• Both Zillow and Trulia share the same corporate owner after Zillow acquired Trulia in 2015.

Zillow

Zillow was founded in 2006. Based in Seattle, the company was formed by two former Microsoft executives, Rich Barton, and Lloyd Frink. According to its website, Zillow is “the leading real estate and rental marketplace” for consumers, connecting them to the information and real estate professionals they need to buy, sell, or rent a home. More than 160 million properties are listed on the site as of the third quarter of 2024, including those that are not currently on the market.

Zillow is free to use for both owners, listing agents, and landlords. The majority of its revenue comes from selling advertising space on its suite of sites—Zillow, Trulia, and Hotpads, among others—to property management companies, mortgage lenders, and other businesses.

Compared to Trulia, Zillow’s user experience is much more graphical. On the left side, you’ll see a map of all available properties in your search area that fit the criteria selected. Clicking on each pulls up a small thumbnail with the address, price, number of bedrooms and bathrooms, and listing company.

Individual properties are located on the right-hand side of the screen, starting with the latest listings on the market.

Property information is easily accessible:

• Across the top, you’ll see a grid showing five photos of the property; click on “see all photos” to scroll through more.
• Key information is pooled just under the main photo grid including price, the number of bedrooms and bathrooms, square footage, and location.
• Just underneath the key data, you’ll find information about the property—type of dwelling (such as single family residence), year it was built, and size of the lot.
• Beneath this is a detailed description of the property provided by the realtor, with features of the home, other homes in the community, and community information. The number of days on the site, how many views the property has had, and how many times other users have saved it are also listed.
• “Facts & features” provides bulleted lists of the interior features, the property, and more.
• A “Contact” button allows you to connect instantly to the realtor or person responsible for the listing by sending a message, or you can click to request a tour.

Another feature Zillow offers is its Zestimates. This is the site’s estimated market value for an individual property. The website emphasizes that Zestimates are only a starting point to determine the value of a home and shouldn’t be taken as an official appraisal.

The Zestimate is calculated on a daily basis using a series of data gathered from public sources and from users. The site also provides a Zestimate forecast, which predicts what the price of the home will be after one year. This figure is based on current home and market information.

You can also stay updated on trends and research in the real estate and housing market through Zillow’s research tab. This section is divided into different sections for the latest news, data, markets, buying and selling, renting, and policies involving the market.

3.2%

The median error rate for Zestimates of for-sale homes, according to Zillow. Zestimates of off-the-market homes have a higher error rate, at around 7.52%. Since these figures are from Zillow, both figures should be taken with a grain of salt.

Trulia

Trulia is another popular real estate website. The company was founded in 2005 and still has its headquarters in San Francisco.

Just like Zillow, Trulia offers real estate listings for prospective home buyers, sellers, and renters. Also like Zillow, Trulia makes most of its money from advertising.

Even though the company is now owned by Zillow, it provides users with a somewhat different, simpler experience online. Search results yield a map on the right-hand side and listings on the left. Once you click on a particular listing, the key information—price, address, number of bedrooms and bathrooms, square footage, and an estimate of the monthly mortgage payment—is listed just below a grid of property photos.

Scroll down and you’ll find a detailed description of the property provided by the listing agent, features, and similar homes in the area. A price history offers insight into when and how often the property has sold in the past.

Warning

While Zillow and Trulia can both estimate the value of a home, these estimates are no substitute for a professional home appraisal.

Zillow vs. Trulia: Key Differences

Although the two services share the same owner, there are still several differences. Zillow is more international than Trulia, listing homes in several Canadian cities as well as the United States.

In addition, there are also variations in how they estimate home prices. Zillow’s “Zestimate” claims to be accurate to within 3.2% for on-the-market homes, using a proprietary formula based on public and user data.

The Trulia Estimate is derived from the Zestimate, although it also considers other variables. Trulia claims its 34 neighborhood map overlays give consumers more insight into what it’s like to live in a home and the neighborhood. Trulia also provides a visual breakdown of the monthly costs for the property, including mortgage payment, property taxes, home insurance, any association fees, and mortgage insurance. This gives prospective buyers an idea of whether they can afford a particular residence.

Other Competitors

While Zillow’s acquisition of Trulia made it a clear market leader in terms of real estate searching, there are many smaller sites such as Redfin, Homesnap, and Realtor.com that offer similar functionality. In some cases, these competitors may offer additional features that are not available on Zillow or Trulia.

For example, Redfin employs a team of real estate agents whose compensation is directly tied to their user ratings. This gives Redfin agents a clear incentive to help find the best match between homeowners and potential buyers.

Another competitor, Foreclosure.com, is tailored specifically to the most price-sensitive consumers. This site is specifically geared for cheap homes, allowing users to search online for dwellings that are currently in foreclosure. Although there are some risks associated with buying foreclosed homes, the savings can be worthwhile for a careful investor.

What Is the Difference Between Zillow and Trulia?

Although Zillow and Trulia have the same corporate owner, there is some difference in the interface for both websites. Zillow has a more graphic experience for searching for a home, while Trulia has a relatively simple design. In addition, Zillow, unlike Trulia, goes beyond the U.S. in its listings. According to the site, properties are listed for a variety of Canadian cities including Toronto, Vancouver, Ottawa, Calgary, Edmonton, and Kelowna.

How Do You List a Home on Zillow and Trulia?

The first step to listing a home on either website is to open a Zillow account and claim your home by searching for the address. Then you can set your price, upload photos, and include details about your home before submitting the listing for approval. Once a listing is submitted to Zillow, it will appear on Trulia within about 24 hours.

How Accurate Are Zillow and Trulia Estimates?

Both Zillow and Trulia rely on sophisticated algorithms to estimate the price of real estate properties, based on location, size, neighborhood data, and the recent sales of nearby properties. Like other algorithms, they are not always reliable—sometimes one will be more accurate than the other, and sometimes both are way off. Although both tools can be used for a ballpark idea of home pricing, there is no substitute for a professional home appraiser.

The Bottom Line

Zillow and Trulia are two of the most popular real estate websites. Trulia is owned by Zillow, so both sites contain the same listings and information on properties. Choosing one over the other will depend on the user experience and features you want.

Reviewed by Somer Anderson

When you travel around the world, it’s not uncommon to find that the United States dollar (USD) has become engrained in a foreign country’s economy.

While official dollarization may be well-documented, the murky world of unofficial dollarization is not. Unofficial dollarization occurs when a country’s people use the U.S. dollar for their transactions on a daily basis but the country’s government hasn’t classified it as legal tender.

Read on to learn more about the dollar’s unofficial status as the world’s currency, why it is so popular, and how U.S. dollars that move into and out of the U.S. are tracked.

Key Takeaways

• Dollarization is the substitution of the U.S. dollar for a country’s domestic currency.
• Foreign countries may choose dollarization when their own currencies become unstable and ineffective.
• The U.S. dollar is a popular currency because it’s stable and hasn’t been deliberately devalued more than once.
• Unofficial dollarization occurs when the U.S. dollar is used widely in a foreign country but isn’t that country’s legal tender.

The World’s Reserve Currency

During the eighteenth and nineteenth centuries, the British pound reigned as the world’s reserve currency.

In the twentieth century, the U.S. dollar laid claim to this title. In fact, it has been the dominant reserve currency since the end of World War II.

Types of Dollarization

Dollarization is a term that can fall into three categories:

1. Official dollarization: The dollar is the only legal tender; there is no local currency. Examples of this can be seen in El Salvador and Ecuador.
2. Semi-dollarization: A country uses both its own currency and the U.S. dollar interchangeably as legal tender. Panama, Nicaragua, and Cambodia are good examples of countries that do this.
3. Unofficial dollarization: In many countries in the developing world, the dollar is widely used and accepted in private transactions, but it is not classified as legal tender by the country’s government.

While many people associate dollarization with the U.S. dollar, the association is not exclusive. The euro, South African rand, Russian ruble, New Zealand dollar and Australian dollar are also accepted outside their countries, although in a localized nature.

For example, the Russian ruble is accepted in a number of countries associated with the old Soviet Union.

Foreign Reserve Currencies

Foreign reserve currencies are the currencies that the central banks of various countries hold in reserve for use under different circumstances.

For example, a country might hold a reserve of another country’s currency to pay for goods from that other country.

In addition, a country might need such currency reserves to make payments on debt owed to foreign countries. Or, it may need the reassurance of access to financial markets that a reserve of a particular currency, such as the USD, provides.

Here is a breakdown of the allocations of foreign currencies held in reserve that countries reported to the International Monetary Fund, as of the fourth quarter of 2024:

• U.S dollars: 57.39%
• Euro: 20.02%
• Japanese yen: 5.82%
• British pound sterling 4.97%
• Canadian dollars: 2.74%
• Australian dollars: 2.27%
• Chinese renminbi: 2.17%
• Swiss francs: 0.16%
• Combined other currencies: 4.46%

Note

Surprisingly, the U.S. government does not have to provide approval for another country to use its currency as legal tender.

The Popularity of the U.S. Dollar

Stability is one of the major factors that explains why a number of countries have adopted the U.S. dollar as their official currency or hold it in reserves.

The U.S. dollar has only been deliberately devalued once—as part of the Roosevelt administration’s gold policy—and its notes have never been invalidated.

For countries all too familiar with bank failures, devaluation and inflation, the stability of the U.S. dollar brings with it a certain amount of peace of mind. Business is easier to conduct when a stable currency is used.

Additionally, foreign countries like the U.S. dollar because of the political stability of the U.S. They’re known to maintain reserves in the currency of a country such as the U.S. that has large, liquid financial markets.

This reassures other governments that they can tap financial resources at critical times. For example, certain governments hold U.S. government bonds because they should have no trouble selling them for cash, if need be.

Downside of Dollarization

Unofficial dollarization can be so prevalent in some countries that more U.S. currency is in circulation than local currency.

Once this happens, it can be difficult to reverse. Ironically, the very stability that dollarization brings can be a curse to local governments, as they lose the power to control inflation and fiscal policy.

However, what’s difficult for a government is a blessing to others who simply want to conduct daily, private transactions without trouble.

The U.S. dollars circulating in foreign countries can present other problems. For example, $100 bills have a reputation of being vulnerable to counterfeiting. As a result, they also tend to be the ones that are most rejected or discounted around the world.

And long gone are the days when bills denominated in $500, $1,000, $5,000 and even $10,000 circulated. That’s because money launderers love large U.S. bills. And they prefer the anonymity of U.S. dollars as they move them around the world.

Flow of Dollars Overseas and Back to U.S.

To get a better handle on how many U.S. dollars are outside of the U.S., the U.S. Customs Service tracks cross-border flows through its Currency and Monetary Instrument Reports (CMIR).

It’s required to be filed whenever someone or some business ships or carries out of the U.S. more than $10,000. Likewise, it’s required whenever more than $10,000 is brought back into the U.S.

It’s the most important source of information on the movement of U.S. dollars. Large financial institutions specialize in the transportation of large wholesale bulk shipments of U.S. dollars. The shipper must record on the CMIR, the size, origin and destination of the shipment.

How Many U.S. Dollars are Held in Foreign Exchange Reserves?

As of the third quarter of 2024, $6,796.98 billion were held in foreign exchange reserves.

What Is the Difference Between Official and Unofficial Dollarization?

Official dollarization refers to circumstances where a foreign country has designated the U.S. dollar as its legal tender. Unofficial dollarization refers to the wide and daily use of the U.S. dollar in foreign countries that have not declared it to be legal tender.

Will the U.S. Dollar Always Be the World’s Currency?

Not necessarily. But it probably will be as long as the U.S. continues to have a stable currency, a stable government that maintains the country’s financial well-being, strong and liquid financial markets, and a healthy financial system.

The Bottom Line

Stability, acceptability, and anonymity are all reasons why the U.S. dollar has become and will continue to be into the foreseeable future the world’s currency of choice.

Despite its popularity, however, don’t become too enamored of the U.S. dollar. No currency has held on to the title of “currency of choice” forever.

Reviewed by Margaret James

Walt Disney (DIS) is a global entertainment company that operates a broad range of businesses, including making its famous movies. Its business also includes theme parks, resorts, a cruise line, broadcast TV networks, and related products. Disney also produces live entertainment events and produces and streams a wide range of film and TV entertainment content through its digital streaming services.

The top individual shareholders of Disney are Christine M. McCarthy, Robert A. Iger, and Kevin A. Lansberry. The top institutional shareholders Vanguard Group, BlackRock. (BLK), and State Street. (STT).

Disney’s 12-month trailing net income and revenue are $2.35 billion and $88.45 billion respectively. The company’s market cap is about $212.94 billion. These financial data are as of 2024.

Here’s a more detailed look at Disney’s six biggest shareholders.

Key Takeaways

• Walt Disney offers and operates numerous entertainment-related companies around the world.
• The Vanguard Group holds more than 146 million shares of Disney and is the company’s top shareholder as of 2024.
• Christine McCarthy is Disney’s top individual insider shareholder with almost 208,000 shares.

Top 3 Individual Insider Shareholders

Christine M. McCarthy

Christine M. McCarthy owned a total of 207,788 Disney shares as of January 2024, representing 0.01% of the company’s total shares outstanding.

McCarthy first joined Disney in 2000 and served as the company’s treasurer and chief financial officer (CFO). She was responsible for overseeing the company’s worldwide finances. She stepped down in June 2023.

McCarthy was executive vice president and CFO of Imperial Bancorp before joining Disney. She also serves on the board of the Procter & Gamble (PG).

Robert A. Iger

Robert A. Iger owned a total of 204,899 Disney shares as of January 2024, representing 0.01% of the company’s total shares outstanding.

Iger is Disney’s chief executive officer (CEO). He served as the company’s CEO and chairman from 2005 through 2020 and as executive chairman and chairman of the board through 2021. He dramatically expanded Disney’s size and reach through internal growth and a series of major acquisitions during his time as CEO, including Pixar (2006), Marvel (2009), Lucasfilm (2012), and 21st Century Fox (2019).

Iger’s net worth was estimated to be $350 million as of 2023.

Important

The term insider refers to people in senior management positions and members of the board of directors, as well as people or entities that own more than 10% of the company’s stock. It has nothing to do with insider trading in this context.

Safra A. Catz

Safra A. Catz owned 11,131 shares of Disney as of January 2024. This represents less than 0.01% of the company’s total shares outstanding.

Catz was nominated to Disney’s board of directors in January 2024. Election and confirmation take place at the 2024 annual shareholders meeting.

Catz has served as CEO of Oracle since 2014 and was president of Oracle (ORCL) for a decade before that. She’s been with Oracle in various and numerous roles since 1999. She served as president from 2004 through 2014.

Top 3 Institutional Shareholders

Institutional investors hold the majority of Disney’s shares at about 67.49% of total shares outstanding as of March 2024.

Vanguard Group

Vanguard Group owns 146.3 million shares of Disney, representing 8% of total shares outstanding, according to the company’s preliminary proxy filing for 2024.

The company is primarily a mutual fund and exchange-traded fund (ETF) management company with about $7.6 trillion in global assets under management (AUM).

The Vanguard S&P 500 ETF (VOO) is one of the company’s largest exchange-traded funds (ETFs) with about $1.1 trillion as of February 2024.

BlackRock

BlackRock owns 120.9 million shares of Disney, representing 6.6% of total shares outstanding, according to the company’s preliminary proxy filing for 2024.

The company is primarily a mutual fund and ETF management company with approximately $9.09 trillion in AUM.

The iShares Core S&P 500 ETF (IVV) is among one of BlackRock’s largest ETFs with approximately $404.4 billion in AUM as of March 2024.

State Street

State Street owns 75.67 million shares of Disney, representing 4.13% of total shares outstanding.

The company is primarily a manager of mutual funds, ETFs, and other assets with approximately $4.13 trillion in AUM.

The SPDR S&P 500 ETF Trust (SPY) is among one of State Street’s largest ETFs with approximately $479.2 billion in AUM.

Disney Diversity & Inclusiveness Transparency

As part of our effort to improve the awareness of the importance of diversity in companies, we offer investors a glimpse into the transparency of more than just the Disney shareholders. We highlight the company’s commitment to diversity, inclusiveness, and social responsibility as a whole. Find out how Disney reports the diversity of its management and workforce.

The ✔ shows if Disney discloses its data about the diversity of its board of directors, C-Suite, general management, and employees overall across a variety of markets.

What Is the History of Disney World?

Walt Disney opened Disneyland in California in 1955. It drew very few visitors from the eastern portion of the United States so Disney eventually opened Disney World, another theme park in Florida, in 1971. Disney World consists of theme parks, water parks, golf courses, and 27 resort hotels situated on more than 40 square miles.

What Are Some Other Companies That Disney Owns?

Disney spans a broad range of entertainment-related companies in five business segments ranging from parks and resorts to media and consumer products. Some of the more well-known include the Disney Cruise Line, ESPN, Twentieth Century Film, Marvel, and Hollywood Records.

What Is Disney’s Stock Price?

Yahoo! Finance put Disney’s stock price at about $97.05 in July 2024 with a high of about $124 and a low of more than $78 over the preceding year.

The Bottom Line

Disney is one of the most well-known names in entertainment. As a public company, Disney must disclose certain details about its finances, including quarterly and annual earnings, as well as beneficial ownership. The top three individual owners of the company include Christine McCarthy, Bob Iger, and Safra Catz while the top institutional shareholders are Vanguard, BlackRock, and State Street.

Fact checked by Vikki Velasquez
Reviewed by Doretha Clemon

Flip on a light, toast a bagel, crank up the heat: Most of us take for granted the electricity running things in our daily lives and never think about the national power grid that delivers energy to our homes.

With the possible exception of Texans.

Key Takeaways

• Texas opted for its own power grid at the turn of the 20th to the 21st century.
• Natural gas and wind generate most of Texas’s electricity and its infrastructure wasn’t winterized against freezing temperatures, leading to the 2021 winter blackout.
• Diversifying its energy sources beyond natural gas and wind, as well as winterizing and updating the grid, could help the state avoid future blackouts.

Power by Texans, for Texans

The U.S. power grid is divided into three sections: One serves the west, another the east, and the final portion is reserved for the state of Texas—power generated by Texans, for Texans.

You may have heard about the state’s energy problems after a massive ice storm hit in February 2021. Temperatures plummeted, and as people flipped on heaters to stay warm, the surge in demand surpassed Texas’s capacity to generate electricity, and parts of the state went dark—for days.

Why Is Texas on Its Own?

At the turn of the 20th century, states saw power as a necessity and began regulating companies to ensure energy was provided equitably. Regulations were established covering which companies could sell electricity and how much they could charge. Texas, seeking to avoid federal and interstate rules, opted out. Instead, the state’s power companies merged to create bigger companies and share power without exporting any over state lines.

Other states saw this as a good idea, but they couldn’t generate enough energy to reliably serve their residents. Texas was different because of its size: It covers two time zones, meaning some parts of the state require peak power an hour later than the rest of the state, and some parts throttle demand back an hour earlier than other parts. This permits Texas’s power authority, the Electric Reliability Council of Texas (ERCOT), to produce sufficient energy for its customers. ERCOT produces power for 90% of the population, with other states’ grids providing the rest.

Why Did the Grid Perform So Poorly in the Storm?

In Texas, just over 44% of the power comes from natural gas-powered steam generators. Another approximately 25% is generated by wind turbines.

Natural gas wells and wind turbines weren’t weatherized in Texas’s normally mild climate. So when winter ice storm Uri hit the state, these sources mostly failed. Texas’s power demand usually peaks during hot summers, with minimal need for heating during mostly mild winters. But during the 2021 winter storm, residents stayed home, pushing demand beyond the already diminished capacity.

The state wasn’t prepared for the massive storm and falling temperatures. The ice and cold left 4.5 million Texan homes without electricity for days and property damage was estimated up to $20 billion.

Has Texas Solved Its Grid Problem?

Texas passed a law in June 2021 to reform the Electric Reliability Council of Texas (ERCOT) and to weatherize and improve the state’s power grid. The law mandated the weatherization of power generator, natural gas, and transmission facilities, so that they can withstand the impact of extreme weather conditions. Penalties of $1 million could be imposed if the requirements were not met. ERCOT was also required to procure additional power sources.

Despite these weatherization efforts, however, the Texas power grid is still vulnerable. According to ERCOT’s January 2025 Monthly Outlook for Resource Adequacy (MORA), there’s an 80% risk of rolling blackouts if a storm with the force of Uri were to hit Texas in winter 2025. Even a milder storm could cause a 50% risk of blackouts. Electricity demand has continued to grow since 2021, and Texas doesn’t have enough natural gas, coal, and nuclear power plants, as well as long duration batteries, to provide adequate power during winter cold spells, according to Ed Hirs, an energy fellow at the University of Houston. ERCOT’s rate of unplanned power plant outages is the highest in the nation.

Hirs argues that the fix for the system lies not in grid upgrades, but in the Texas legislature. Writing in Forbes, he notes, “Texas replaced its reliable end-to-end electricity supply chain with a severely fragmented system that is 100% government operated. No one can be held accountable. It is exactly like a government bureau out of the old Soviet Union down to its antiquated, computer driven input-output algorithm.” Meanwhile, ERCOT forecasts that energy demand will nearly double by 2030, driven by the need to power AI data centers, crypto mining facilities, hydrogen production plants, and oil and gas companies.

Why Is Texas the Only State With Its Own Power Grid?

Texas wasn’t the only state that wanted to regulate its own power generation, but Texas had the size to pull it off. Straddling two time zones, peak electric use is staggered—people in the eastern portion are turning off lights to go to bed an hour earlier than those in the west and turning lights back on an hour earlier. This permits some evening of demand and helps the state provide enough power in ordinary circumstances.

What Caused the February 2021 Blackouts?

A confluence of circumstances led to power being cut to millions of residents over several days. The first was an unusual winter ice storm, which caused temperatures to plummet and energy demand to soar as people sought to keep their homes warm. Second, the state’s gas and wind supplies hadn’t been winterized—the systems weren’t built for severe winter weather and failed to function in the ice and freezing temperatures.

What Changes Were Required Under the 2021 Texas Laws to Restore the Grid?

The main change was the weatherization of power generation facilities, natural gas facilities, and transmission facilities to handle extreme weather. Failure to weatherize those facilities could result in a penalty of up to one million dollars. The laws also mandated a “Power Outage Alert” where Texans receive an emergency alert whenever the power supply in the state may be inadequate to meet demand. And they established the Texas Energy Reliability Council to improve coordination between state agencies and industry during extreme weather emergencies and extended power outages. 

The Bottom Line

In 2002, Texas replaced its end-to-end electricity supply chain with a government-operated grid for which consumers pay more and get less, Hirs says. With high-demand businesses such as new AI data centers and crypto currency mining facilities being built in the state, major investments are needed in the grid system to supply the required power, and equitable ways to pay for those investments need to be found. Given the ongoing vulnerability of the Texas power grid, it’s impossible to rule out power outages in the state caused by weather or some other event.

Reviewed by Charles Potters
Fact checked by Kirsten Rohrs Schmitt

A tariff is a tax that a governing authority imposes on goods entering or leaving the country. Tariffs typically focus on a specified industry or product, and they are set in place in a controlled effort to alter the balance of trade between the tariff-imposing country and its international trading partners. For example, when a government imposes an import tariff, it adds to the cost of importing the specified goods. This additional marginal cost will theoretically discourage imports, thus affecting the balance of trade.

Governments may opt to impose tariffs for a multitude of reasons, including to protect nascent industries, fortify national defense programs, support domestic employment opportunities, combat aggressive trade policies, and protect the environment.

Key Takeaways

• A tariff is a specific type of tax that a governing body imposes on goods entering or leaving the country. 
• In theory, when a government initiates a tariff program, the additional costs saddled upon the affected items discourages imports, which in turn impacts the balance of trade.
• There are myriad reasons governments initiate tariffs, such as protecting nascent industries, fortifying national defense, nurturing employment domestically, and protecting the environment.

Infant Industries

Tariffs are commonly used to protect early-stage domestic companies and industries from international competition. The tariff acts as an incubator that theoretically affords the domestic company in question the ample runway time it may need to properly nurture, develop, and grow its business into a competitive entity. This is essential for startups, as more than 20% of businesses fail to endure more than one year.

National Defense

If a particular segment of the economy provides products that are critical to national defense, a government may impose tariffs on international competition to support and secure domestic production. This can happen both during times of peace and during times of conflict.

Domestic Employment

It is common for a government’s economic policies to focus on fostering environments that provide its constituents with robust employment opportunities. If a domestic segment or industry is struggling to compete against international competitors, the government may use tariffs to discourage consumption of imports and encourage consumption of domestic goods, in hopes of supporting associated job growth, especially in the manufacturing sector.

Aggressive Trade Practices

International competitors may employ aggressive trade tactics such as flooding the market in an attempt to gain market share and put domestic producers out of business. Governments may use tariffs to mitigate the effects of foreign entities employing unfair tactics.

Important

There are potential downsides to tariffs. For example, they can trigger a spike in the price of domestic goods, which can reduce the buying power of consumers in the nation that imposes the tariffs.

Environmental Concerns

Governments may use tariffs to diminish the consumption of international goods that do not adhere to certain environmental standards.

What Is an Example of a Tariff?

One example of a tariff is the Chicken Tax. This tariff is a 25% tax levied on light trucks imported into the U.S. It was imposed in 1964 in retaliation against European tariffs on American poultry. The original Chicken Tax affected a range of imports, including potato starch, dextrin, and brandy. In the years that followed, the tariff was removed from most products with the exception of light trucks, which continue to face it today.

Another example is the set of tariffs announced by the Trump administration in February 2025 on imports from Canada, Mexico, and China. For imports from Canada and Mexico, Trump announced an additional 25% tariff, though that was put on pause for 30 days. For imports from China, there’s an additional 10% tariff in effect.

What Is the Difference Between a Tariff and a Tax?

The terms “tariff” and “tax” are often used interchangeably. Broadly speaking, a tax is a general reference to any compulsory contribution to a government’s revenues. It can be imposed on individuals, for instance through income taxes, or on particular types of transactions, such as sugary drinks taxes. Tariffs are a type of tax applied on products that are being transported between two jurisdictions.

What Is the Average Tariff in the U.S.?

The average import tariff on industrial goods is 2%. Industrial goods include all non-agricultural products, including cars, metals, clothing, and consumer goods, among others.

The Bottom Line

Governments may impose tariffs for a wide range of reasons, from protecting domestic industries to boosting national defense, responding to aggressive trade tactics, and more. Tariffs are usually tailored to a specified industry or product. They aim to manage the specific balance of trade between a country of import and a country of export. In theory, when a tariff is imposed on an imported product, it increases the cost of said product and theoretically reduces imports.