Reviewed by Thomas J. Catalano
Fact checked by Suzanne Kvilhaug

The income you receive from your 401(k) or other qualified retirement plan doesn’t affect the amount of the Social Security retirement benefit you receive each month, but does affect whether your benefits are taxable. Certain thresholds determine if your income, including your 401(k) distributions, is taxable.

Key Takeaways

• Withdrawals from a 401(k) can begin when an account holder turns 59½ years old.
• Social Security retirement benefits are not affected by 401(k) plans.
• Distributions from a 401(k) may increase your total annual income, affecting the tax on Social Security benefits.

Social Security vs. 401(k) Income

Social Security benefits are determined by the amount of money earned during an individual’s working years and paid Social Security taxes. Social Security taxes the full amount of your compensation in the year you earned it up to a predetermined annual limit established by the Internal Revenue Service (IRS). For 2024, it’s $168,600.

401(k) contributions and withdrawals do not affect Social Security benefits. Contributions to a 401(k) are made with pretax dollars but are subject to Social Security and Medicare taxes. Contributions to a Roth 401(k) are subject to income taxes. You’ll pay your income tax on non-Roth 401(k) distributions in retirement.

Important

Income from Social Security may increase annually if the Social Security Administration approves a cost of living adjustment (COLA), commonly based on inflation. For 2025, recipients can expect a 2.5% increase.

The Tax Impact of 401(k) Savings

Individuals may have to pay income tax on some of their Social Security benefits if their annual combined income—including those 401(k) distributions—exceeds a certain amount. Taxes are not levied on individuals whose total income is less than $25,000 or $32,000 if filing jointly with a spouse.

You may be required to pay taxes on up to 50% of your benefits if your income is between $25,000 and $34,000 or between $32,000 and $44,000 if filing jointly. Up to 85% of your benefits may be taxable if you’re single and earn more than $34,000 or married earning more than $44,000. According to the Social Security Administration (SSA), combined income equals the sum of:

• Adjusted gross income (AGI), which includes earned wages and withdrawals from any retirement savings accounts, like individual retirement accounts (IRAs) and 401(k)s
• Any nontaxable interest
• One-half of your Social Security benefits

Determining Social Security Benefits

The SSA calculates an average monthly benefit amount based on your average income and the years you’re expected to live. You can begin receiving Social Security benefits as early as age 62, but the benefit amount is reduced for each month you collect before you reach your full retirement age.

The full retirement age is 66 if you were born between 1943 and 1954. It increases from age 66 by two months each year until age 67 if you were born between 1955 and 1960. The full retirement age is 67 if you were born in 1960 or later.

In 2024, the maximum monthly benefit at full retirement age is $3,822. Those who wait until age 70 can collect a benefit of up to $4,873.

Visit the SSA website for an estimate of benefits using the online calculator.

Other Retirement Income

Other types of retirement income can affect your benefit amount even if you collect benefits on your spouse’s account. Your benefits may be reduced due to income you receive from a government pension or another job for which your earnings weren’t subject to Social Security taxes. This rule primarily affects people working in state or local government positions, the federal civil service, or those employed with a foreign company.

Social Security benefits will be reduced by two-thirds of a pension from a government position not subject to Social Security taxes. This rule is referred to as the Government Pension Offset. For example, for those eligible to receive $1,200 in Social Security but who receive $900 from a government pension, benefits will be reduced by $600 (2/3 × $900). Your total monthly income of $2,100 ($1,200 + $900) would drop to $1,500 ($600 + $900).

This Windfall Elimination Provision (WEP) reduces the unfair advantage given to those who receive benefits on their account and receive income from a pension based on earnings for which they did not pay Social Security taxes. The WEP reduces Social Security benefits by a certain factor in these cases, depending on the age and birth date of the applicant. But it doesn’t apply if you also have 30 or more years of earnings on which you did pay Social Security taxes.

Social Security Fairness Act

The Social Security Fairness Act, concerning the Windfall Elimination Provision and Government Pension Offset, was signed into law on Jan. 5, 2025. It eliminates the reduction of Social Security benefits while entitled to public pensions from work not covered by Social Security. The Social Security Administration is evaluating how to implement the act.

Are 401(k) Withdrawals Considered Income for Social Security Purposes?

Social Security only considers earned income, such as a salary or wages from a job or self-employment. Withdrawals will be included in income and determine whether your Social Security benefits are taxable and, if so, how much.

Will Working in Retirement Reduce Social Security Benefits?

The Social Security Administration (SSA) will withhold $1 in benefits for every $3 you earn above the annual limit in the year you reach full retirement age. This limit is $59,520 in 2024. The SSA will instead deduct $1 from your benefit payments for every $2 you earn above the annual limit of $22,320 in 2024 if you’re under full retirement age. There is no withholding after you reach full retirement age.

Should I Use My 401(k) Before I Take Social Security?

You must start withdrawals from your 401(k) after age 72 (or age 73 if you turned 72 after Dec. 31, 2022), but you can start withdrawing from your 401(k) plan as early as age 59½. That’s sooner than you’re eligible to begin receiving Social Security benefits. You may want to defer withdrawing from either to maximize retirement income if you still work.

The Bottom Line

Income from a 401(k) doesn’t affect the amount of your Social Security benefits, but it can boost your annual income to a point where those benefits will be taxed. This can be tricky for someone required to withdraw from their 401(k) and collect Social Security. Individuals and couples must factor in tax liabilities when planning for retirement or deciding how large of a 401(k) distribution they should take.

Quarterly earnings calls have long been one of Wall Street’s driest rituals—hours of executives offering pablum about “executing on our strategic initiatives” and “driving operational excellence” before they field questions from analysts. Researchers have even studied whether there’s a method to CEO mumbling and the lousy dad jokes company managers fruitlessly offer to break up the general tedium. One thing all agree on: they’re boring.

So do you have to listen to them? While these quarterly forums often dive into numbing technical details, modern tools make it easy to zero in on the key intel you need. In addition, earnings calls have at times broken away from the dullness they’re known for: Nvidia Corp. (NVDA) investors have packed watch parties that rival those for sporting events, and there’s a growing list of CEOs berating analysts in heated exchanges.

Here’s what you need to know about making the most of earnings calls—without surrendering hours of your time.

Key Takeaways

• Earnings calls provide important context and forward-looking information not available in written reports alone.
• Management’s tone and confidence can reveal crucial insights about performance and prospects.
• Individual investors often get better value from reading call summaries and expert analysis than listening to full calls.

Smart Ways To Track Earnings Calls

You can now skip the live calls entirely using these tools:

• Earnings call transcripts: Many services online offer free transcripts shortly after calls end. You can search the transcripts for “guidance,” “outlook,” “challenges,” or other topics you’re tracking.
• Expert analysis: For larger firms, the financial media typically publish key takeaways within hours, highlighting the most important revelations.

What Really Matters in These Calls?

The most revealing parts aren’t about the raw numbers—they’re provided in PDFs anyway—but from how executives present them. You don’t need an accounting license to spot the following:

• Changes in key metrics: When companies suddenly stop highlighting previously important performance measures or shift to new ones, this often signals problems. For example, in 2021, Meta Platforms Inc. (META) pivoted from discussing user growth metrics to measures of metaverse investments. Then, in another shift in 2023, Meta wasn’t discussing the metaverse at all, as losses had mounted into the tens of billions.
• Forward guidance: Listen for whether they narrow ranges, become more conservative, or drop, giving specific projections entirely.
• Q&A session: This is generally where the most action is. Sharp or defensive responses can reveal the company’s pressure points.
• Strategic shifts: You’ll need to read between the lines when the topic turns to changes in the market, new initiatives, or competitive pressures. You won’t hear “our core business is tanking”—instead, executives speak about “challenging market conditions” (i.e., sales are down) or “streamlining operations” (i.e., layoffs are coming).

Infamous Earnings Calls

The most notorious earnings calls might be from March and June 2008. In the March call, Lehman Brothers‘ CFO used “great” 14 times while assuring investors amid the growing subprime mortgage crisis that it would barely impact the firm’s earnings. Three months later, after another $2.8 billion in losses, she returned to insist the firm’s business was strong. The CFO was fired a month later, and by September, the once high-flying investment bank was out of business.

How Do Earnings Calls Affect the Market?

Earnings calls can trigger significant market moves, often in unexpected ways. A company might report strong numbers but see its stock decline if executives sounded uncertain during the Q&A. Meanwhile, investors might overlook mediocre results if management convincingly explains its strategy for addressing challenges.

Consider Nvidia’s recent earnings calls—they’ve become market events that rival major U.S. Federal Reserve announcements in financial media coverage, potentially triggering stock values shooting up or down by hundreds of billions.

The Bottom Line

While you don’t need to clear your calendar for every earnings call, these quarterly check-ins offer valuable information on your investments. The good news? You can skip the live event and still get what matters through transcripts, media summaries, and analyst reports.

During his campaign, President-elect Donald Trump proposed abolishing the United States Department of Education. If the Education Department was shut down, then the management of federal student loans and other programs could fall to different government departments or even a government corporation. If the latter came to pass, it could also mean that certain borrower protections would cease to exist.

Key Takeaways

• While on the campaign trail, President-elect Donald Trump repeatedly proposed closing the U.S. Department of Education.
• Without the Education Department, other government departments or a government corporation would likely be placed in charge of federal student programs.
• If a government corporation becomes responsible for managing federal student loans, then there’s a good chance that certain borrower protections would no longer be available.

How Federal Education Programs Would Chang

Even if the Department of Education is shuttered, the federal government would still play much the same role in the education system. In all likelihood, its operations would simply be passed to one or more of the other government agencies. The Department of Justice, Department of Labor, or Treasury Department have each been previously suggested as candidates for taking on some of the Department of Education’s responsibilities.

This is almost exactly what Project 2025, a conservative policy written by former members of and collaborators with the first Trump administration, proposes. While Trump’s own Agenda47 doesn’t offer a concrete plan for replacing the Education Department, this document outlines how each of the Department of Education’s offices and programs could be redistributed to other agencies.

Note

Trump has publicly denied having any knowledge of Project 2025, calling the Heritage Foundation’s (the think tank behind Project 2025) plans “absolutely ridiculous and abysmal.” 

Despite this, Trump previously said during a conference the Heritage Foundation is “going to lay the groundwork and detail plans for exactly what our movement will do.” Additionally, he’s nominated several people involved in Project 2025 for positions in his second administration, including Russell Vought, Stephen Miller, Karoline Leavitt, Brendan Carr, and Tom Homan.

One of the more notable recommendations is spinning off the Office of Federal Student Aid’s obligations to a new government corporation. Federal student loans would be overseen by the Treasury, which would also manage collections and defaults. This new federal student loan authority would be tasked with managing the loan portfolio, administering loan applications and disbursements, issuing regulations, etc.

How Borrower Protections Would Change

A government corporation is an agency that’s owned by the government but operates like a private business. If student loans end up being managed by an entity that’s essentially a for-profit, private lender, then there’s a chance federal student loans may become more like their private counterparts.

Private student loans usually charge higher interest rates, for example, and they also tend to have fewer borrower protections. Federal student loans offer several different student debt forgiveness options, including Public Service Loan Forgiveness (PSLF) and income-driven repayment (IDR) plans.

Private student loans don’t typically offer debt forgiveness, and they don’t always allow for deferment or forbearance if you’re having trouble paying back your loans. As a result, this puts borrowers at a greater risk of becoming delinquent or defaulting on their loans.

The Bottom Line

The Department of Education can’t be shut down without a 60-vote supermajority from the Senate. During the 2024 election, Republicans gained four extra seats and now hold a 53-47 majority. That would mean every Republican senator as well as at least seven from other parties would be needed to abolish the Education Department.

While the Department of Education may not actually be going anywhere, the President can likely still reassign enough of the department’s main responsibilities so as to effectively render it defunct. As we wait to see how the next four years shake out for the Education Department, federal student loan borrowers would be wise to stay on top of their student loan payments and try to repay their debt as fast as they feasibly can.

Reviewed by Erika Rasure
Fact checked by Patrice Williams

You can significantly reduce the cost of owning a second home by claiming tax deductions for mortgage interest, property taxes, and rental expenses. You can also deduct interest on certain home equity loans. You also might be able to use a 1031 exchange to defer capital gains taxes. However, when you sell your second home, in most cases (unless you make it your primary residence), you must pay capital gains tax on your entire profit. Here’s what can make owning a second home more affordable.

Key Takeaways

• The Tax Cuts and Jobs Act changed how many tax breaks work, such as reducing the mortgage interest deduction.
• Different rules apply to the mortgage interest deduction depending on whether your second home is considered a personal residence or a rental property.
• If the home is considered a rental property, you can deduct costs related to owning and operating the property.
• You may also be able to pro-rate expenses and deduct costs related to a property based on the time spent as a rental property compared to a personal property.
• You can deduct interest on home equity loans, but only if you use the funds to buy, build, or substantially improve the home.
• When you’re selling your second home, you must pay capital gains tax on the entire profit, unless you make it your primary residence by living in it for at least two of the five years before you sell it.

Mortgage Interest Deduction

The mortgage interest deduction has long been praised as a way to make owning a home more affordable. However, the Tax Cuts and Jobs Act (TCJA), signed into law in December 2017, changed how much you can save through mortgage interest deductions for both primary residences and second homes.

If the second home is considered a personal residence, you must file Form 1040 or 1040-SR and itemize deductions on Schedule A to claim the mortgage interest deduction. Additionally, the mortgage must be a secured debt on a qualified home in which you have an ownership interest.

In most cases, single filers and those who are married and filing jointly can deduct all of their mortgage interest on up to $750,000 of mortgage debt. This rule applies to any personal residence, whether it’s your first or second home. The previous limit was $1 million of mortgage debt, which still applies to home loans taken out before December 16, 2017.

Different tax rules apply to the mortgage interest deduction depending on whether your second home is considered a personal residence or a rental property. With rentals, the number of days you rent the property—as opposed to living in it yourself—also comes into play.

Mortgage Interest Deduction—Personal Residence

If your second property is considered a personal residence, you can deduct mortgage interest in the same way you would on your primary home—up to $750,000 if you are single or married and filing jointly. The limit is $375,000 if you’re married and filing separately.

To qualify for the deduction, the mortgage must be a secured debt on a qualified home you own, and you must itemize your deductions by filing Schedule A. According to the Internal Revenue Service (IRS), a home is “qualified” if it’s your main home or a second home. The home can be a house, condominium, cooperative, mobile home, house trailer, boat, or similar property, as long as it has basic living accommodations (e.g., sleeping, cooking, and bathroom facilities).

Important

The $1 million mortgage interest limit will return in 2025 when the TCJA expires unless lawmakers act to keep the law—or certain portions of the law—in place.

Mortgage Interest Deduction—Rental Property

The rules are more complicated if you rent out your second property for part or all of the year. What matters is the breakdown between personal and rental use. If the IRS views the home as an investment property, you can’t claim the mortgage interest deduction, but you can deduct mortgage interest as a business expense to lower your rental income.

Your use of the property will fall into one of three categories: use often, rent rarely; use rarely, rent often; and use some, rent some.

1. Use Often, Rent Rarely

You don’t have to report rental income to the IRS if you rent your home for 14 days or fewer during the tax year.

The house is considered a personal residence, so you can’t deduct rental-related expenses like advertising and utilities. However, you can deduct mortgage interest and property taxes as you would with any home.And, when you sell the property, it will be treated as a personal residence, not an investment property.

This rule applies even if you rent your home for thousands of dollars per night. Section 280A(g) of the Internal Revenue Code says the money doesn’t need to be included in your gross income, provided you rented the home for fewer than 15 days per year.

2. Use Rarely, Rent Often

Your home is considered a rental property—and not a personal residence—if:

• You rent it out for more than 14 days per year
• Your use of the home doesn’t exceed the greater of 14 days or 10% of the days it’s rented

Because the home is considered a business, you can deduct rental expenses, including mortgage interest, property taxes, insurance costs, property manager fees, utilities, and property depreciation. However, you must report any income from the property as rental income, and that income will be taxed as ordinary income according to your tax bracket.

It’s worth noting that days spent maintaining or fixing the property don’t count as personal use days. So, it’s possible to exceed the 14-day limit if you stay at your property to perform a repair. Plan to document your maintenance activities by retaining receipts to prove you weren’t just vacationing on those days.

If you use your second home for both personal and rental purposes, you generally must divide your total expenses between personal and rental use based on the number of days you used it for each purpose.

3. Use Some, Rent Some

Your second home is considered a personal residence—and not a rental property—if you:

• Rent it for more than 14 days per year
• Use it for more than the greater of 14 days or 10% of the total days the property was rented

This means you can deduct mortgage interest and property taxes as you would with any home. You can deduct rental expenses, but only up to the level of rental income (e.g., you can’t claim rental losses — though there is an exception for up to $25,000 each year, as long as you meet certain criteria).

Here’s a recap of the different scenarios.

Important

If a member of your family uses the property (including your spouse, siblings, parents, grandparents, children, and grandchildren), those days count as personal days unless you are collecting a fair rental price during those family stays.

Home Equity Loan Interest Deduction

In addition to the mortgage interest deduction, you may be able to write off interest on a home equity loan. However, the TCJA has changed these rules as well.

Previously, you could borrow against home equity and take a deduction on the interest regardless of whether you used the proceeds to pay off a credit card, take a vacation, or buy another home. Now, you can deduct interest on home equity debt only if you use the funds “to buy, build, or substantially improve the taxpayer’s home that secures the loan.”

Under these provisions, if you want to deduct interest on a second home, you must have a mortgage on it. If you borrowed against the equity on your first home to finance the purchase of your second home, you can’t deduct the interest. Like a mortgage, you can deduct interest on up to $750,000 in home equity debt if you are single or married and filing jointly ($375,000 if you are married and filing separately).

Warning

The mortgage interest deduction limit applies to all of your mortgage and home equity debt. If you already have $750,000 or more in mortgage debt, you can’t claim an interest deduction on home equity loans exceeding that amount.

Property Tax Deduction

You can deduct property taxes on your second home and, for that matter, as many properties as you own. However, the TCJA has also brought changes that affect those deductions.

Now, the total of state and local tax (SALT) eligible for a deduction—including property and income tax—is limited to $10,000 per tax return, or $5,000 if you’re married and filing separately. Many people who buy a second home may already exceed that limit with their first home, so they may not see additional tax savings from their second home. 

Selling Your Second Home

If you sell your primary residence, you can exclude up to $250,000 in capital gains from your income, or up to $500,000 if you’re married and filing jointly. However, this is for sales of primary residences only. When you sell your second home, you must pay a capital gains tax on your entire profit.

Making the second home your primary home could potentially lessen the capital gains hit. To do so, you would need to live in the second property for at least two years out of the five years before selling it. This would qualify the property as your primary residence. Also, to be eligible for the exclusion, you must not have taken the capital gains exclusion on the sale of another home during the previous two years.

1031 Exchanges

If you hold a second property for business or investment purposes, you might be able to defer capital gains taxes under a 1031 exchange. Known as a like-kind exchange, this involves selling the property and replacing it with a similar property. Both properties must be located in the U.S. When you sell the initial property, you must identify a replacement property within 45 days and acquire it within 180 days. Capital gains are then deferred until the replacement property is sold (although it is possible to continually defer taxes with further like-kind exchanges).

You must meet several conditions to qualify for a like-kind exchange:

• You must own the property for at least two years before selling.
• In each of the two 12-month periods before the sale, you must have rented the property for at least 14 days.
• Your personal use of the property can’t exceed the greater of 14 days or 10% of the days the home was rented.

The replacement property must also meet these same conditions:

• It must be held for at least two years after the like-kind exchange.
• It must be rented for at least 14 days per year.
• The period used for personal enjoyment cannot exceed the greater of 14 days or 10% of the days the home was rented.

Because tax laws are complicated and change periodically, it’s advisable to consult with a qualified real estate tax specialist who can explain relevant tax implications and laws and help you determine the most favorable ownership strategy for your situation.

Example of Second Home Tax Deductions

Imagine a married couple who files jointly. They recently purchased a second home as a vacation retreat. They are excited about their new property and want to explore the potential tax deductions available to them. The couple is considering renting out the property part-time, though they do plan on residing at the property for part of the year.

The couple understands there will be material operating costs and other expenses relating to the property, especially if they decide to rent. Because they aren’t too sure what those expenses will look like, they are amicable to selling the property in the short-term if it makes financial sense.

Consider the following tax deductions the couple may make.

• Mortgage Interest Deduction: Say the couple bought their home after December 2017, and their mortgage does not exceed $750,000. If they file their tax return as a joint return, they may file Schedule A of their tax return and may be able to itemize this deduction.
• Property Tax Deduction: Assume the property taxes on each property the couple owns is $4,000. The couple is may also permitted to deduct the property taxes they pay on their second house. Together with the property taxes for their primary house, these taxes may be itemized on Schedule A. Be mindful that 100% of the property taxes may be deducted, though the aggregate total deduction for state and local taxes is limited to only $10,000 each year.
• Rental Income Deduction: The couple may be qualified for a number of deductions if they choose to rent out their second house for a portion of the year. They are able to write off charges like advertising, cleaning, property management, repairs, and upkeep that are directly connected to renting the property.
• Pro-Rated Expense Deduction: In addition, the couple is planning on residing at their second home from time to time. They can potentially write off a portion of their property taxes and mortgage interest depending on how often they rent out their house as opposed to living there themselves.
• Capital Gains Exclusion: If the couple changes their mind and decides to sell their vacation property in the near future, they might struggle to be eligible for a capital gains exclusion. They would be able to deduct up to $500,0002 in capital gains from their taxable income if they owned and utilized the property as their primary residence for at least two of the five years prior to selling.

Is Rental Income Taxed As Ordinary Income?

Sometimes. If you rent out your home for more than 14 days during the year, you must report the revenue on your tax return, and the net income is taxable as ordinary income. If you rent out your home for 14 or fewer days, you do not have to report or pay taxes on the income.

What Happens If You Don’t Report Rental Income?

If you rent out your home for more than 14 days, you must report the income on your taxes. If you’re required to report the income and you don’t, you’ll be committing tax fraud, which can lead to fines and even jail time. The IRS can discover unreported rental income through tax audits triggered by random selection, computer screening, records matching, and third-party reporting.

Are Second-Home Expenses Tax-Deductible?

Yes, but it depends on how you use the home. If the home counts as a personal residence, you can generally deduct your mortgage interest on loans up to $750,000, as well as up to $10,000 in state and local taxes (SALT). If the home is considered an investment property (according to IRS rules), you can deduct expenses related to owning, maintaining, and operating the property.

Is Home Equity Loan Interest Tax Deductible?

Sometimes. You can deduct the interest you pay on a home equity loan or home equity line of credit (HELOC) only if you use the money to “buy, build, or substantially improve your home.” If you use the funds to pay for, say, a vacation or college, you can’t deduct the interest.

The Bottom Line

If it’s financially feasible, owning a second home can be an excellent investment for vacation or rental purposes, and it could also provide a suitable primary home during retirement. Still, owning any home carries a significant financial burden, from the mortgage and taxes to maintenance and repairs. It’s in your best interest to learn the tax implications for second-home ownership before jumping in, and work with an experienced tax specialist if you need clarification or guidance.

Reviewed by Pamela Rodriguez
Fact checked by Vikki Velasquez

Financial fraud dates back to the year 300 B.C. when a Greek merchant named Hegestratos took out a large insurance policy known as bottomry. The merchant borrowed money and agreed to pay it back with interest when the cargo—in this case, corn—was delivered. If the merchant refused to pay back the loan, the lender could claim the cargo and the boat used for its transportation.

Hegestratos planned to sink his empty boat, keep the loan, and sell the corn. The plan failed, and he drowned trying to escape his crew and passengers when they caught him in the act.

This is the first recorded incident of financial fraud, and there have been many since. This article will focus on the growth of stock market fraud in the U.S., as tracked by a quartet of scandals—all of them devious schemes based on greed and a desire for power.

Key Takeaways

• William Duer committed an insider trading scandal in the late 1700s when he relied on his information edge to keep ahead of the market.
• Ulysses S. Grant, the Civil War general, created a financial panic in 1884 when he could not raise funds to save his son’s failing business.
• In the late 1800s, Daniel Drew used techniques known as a corner, poop and scoop, and pump and dump to defraud stock market investors.
• After World War I, stock pools composed of the wealthy manipulated large stocks such as Chrysler, RCA, and Standard Oil until the market crashed in 1929.

The First Insider Trading Scandal

In 1792, only a few years after the U.S. officially became independent, the nation experienced its first fraud. At this time, American bonds were similar to developing-world issues or junk bonds today—they fluctuated in value with every bit of news about the fortunes of the colonies that issued them. The trick of investing in such a volatile market was to be a step ahead of the news that would push a bond’s value up or down.

Alexander Hamilton, Secretary of the Treasury, began to restructure American finance by replacing outstanding bonds from various colonies with bonds from the new central government. Consequently, big bond investors sought out people who had access to the Treasury to find out which bond issues Hamilton was going to replace.

William Duer, a member of President George Washington’s inner circle and assistant secretary of the Treasury, was ideally placed to profit from insider information. Duer was privy to all the Treasury’s actions and would tip off his friends and trade in his own portfolio before leaking select information to the public that he knew would drive up prices.

Then Duer would simply sell for an easy profit. After years of this type of manipulation, even raiding Treasury funds to make larger bets, Duer left his post but kept his inside contacts. He continued to invest his own money as well as that of other investors in both debt issues and the stocks of banks popping up nationwide.

With all the European and domestic money-chasing bonds, however, there was a speculative glut as issuers rushed to cash in. Rather than stepping back from the overheating market, Duer was counting on his information edge to keep ahead. He piled his ill-gotten gains and that of his investors into the market. Duer also borrowed heavily to further leverage his bond bets.

It all came out—and came crashing down—eventually; Duer and a lot of other New Yorkers were left hanging onto worthless investments and huge debts. Hamilton had to rescue the market by buying up bonds and acting as a lender of last resort.

The Aftermath

William Duer ended up in debtor’s prison, where he died in 1799. The Financial Panic of 1792 was, interestingly enough, the catalyst for the Buttonwood Agreement, which marked the beginnings of the Wall Street investment community and the New York Stock Exchange.

Fraud Wipes Out a President

Ulysses S. Grant, a renowned Civil War hero and U.S. president, only wanted to help his son succeed in business, but he ended up creating a financial panic.

Grant’s son, Buck, had already failed at several businesses but was determined to succeed on Wall Street. Buck formed a partnership with Ferdinand Ward, an unscrupulous man who was only interested in the legitimacy gained from the Grant name.

The two opened up a firm called Grant & Ward. Ward immediately sought capital from investors, falsely claiming that the former president had agreed to help them land lucrative government contracts. Ward then used this cash to speculate on the market. Sadly, Ward was not as gifted at speculating as he was at talking, and he lost heavily.

Of the funds Ward squandered, $600,000 was tied to the Marine National Bank, and soon both the bank and Grant & Ward were on the verge of collapse. Ward convinced Buck to ask his father for more money. Grant Sr., already heavily invested in the firm, was unable to come up with enough funds and was forced to ask for a $150,000 personal loan from William Vanderbilt.

Ward essentially took the money and ran, leaving the Grants, Marine National Bank, and the investors holding the bag. Marine National Bank collapsed after a bank run, and its fall helped touch off the panic of 1884.

The Aftermath

Grant Sr. paid off his debt to Vanderbilt with all his personal effects including his uniforms, swords, medals, and other memorabilia from the war. Ward was eventually caught and imprisoned for six years.

The Pioneering Daniel Drew

The second half of the 19th century saw men such as Jay Gould, James Fisk, Russell Sage, Edward Henry Harriman, and J.P. Morgan turn the fledgling stock market into their personal playground, and their maneuvers weren’t always the most honorable. However, Daniel Drew was a true pioneer of fraud and stock market manipulation.

Drew started out in cattle, bringing the term “watered stock” to our vocabulary—watered stock are shares issued at a much greater value than its underlying assets, usually as part of a scheme to defraud investors. Drew later became a financier when the portfolio of loans he provided to fellow cattlemen gave him the capital to start buying large positions in transportation stocks.

Drew lived in a time before disclosure when only the most basic regulations existed. His technique was known as a corner. He would buy up all of a company’s stocks and then spread false news about the company to drive the price down. This would encourage traders to sell the stock short. Unlike today, it was possible to sell short many times the actual stock outstanding.

Note

Ironically, the first head of the SEC was a speculator and former pool insider, Joseph Kennedy Sr.

When the time came to cover their short positions, traders would find out that the only person holding stock was Daniel Drew and he expected a high premium. Drew’s success with corners led to new operations. Drew often traded wholly owned stocks between himself and other manipulators at higher and higher prices. When this action caught the attention of other traders, the group would dump the stock back on the market.

The danger of Drew’s combined poop and scoop and pump and dump schemes lay in taking a short position. In 1864, Drew was trapped in a corner of his own by Vanderbilt. Drew was trying to short a company that Vanderbilt was simultaneously trying to acquire. Drew shorted heavily, but Vanderbilt had purchased all the shares. Consequently, Drew had to cover his position at a premium paid directly to Vanderbilt.

Drew and Vanderbilt battled again in 1866 over a railroad, but this time Drew was much wiser, or at least much more corrupt. As Vanderbilt tried to buy up one of Drew’s railroads, Drew printed more and more illegal shares. Vanderbilt followed his previous strategy and used his war chest to buy up the additional shares. This left Drew running from the law for watering stock and left Vanderbilt cash-poor.

The Aftermath

The two combatants came to an uneasy truce: Drew’s fellow manipulators, Fisk and Gould, were angered by the truce and conspired to ruin Drew. He died broke in 1879.

The Stock Pools

Until the 1920s, most market frauds affected only the few Americans who were investing. When it was confined largely to battles between wealthy manipulators, the government felt no need to step in.

After World War I, however, average Americans discovered the stock market. To take advantage of the influx of eager new money, manipulators teamed up to create stock pools. Basically, stock pools carried out Daniel Drew-style manipulation on a larger scale.

With more investors involved, the profits from manipulating stocks were enough to convince the management of the companies being targeted to participate. The stock pools became very powerful, manipulating even large-cap stocks such as Chrysler, RCA, and Standard Oil.

Prices continued to spiral upward. Eventually, though, a sense that the market was overvalued began to spread—and investors began to sell. The inflated share prices collapsed, and as the panic spread, the entire stock market crashed in 1929.

The Aftermath

Both the general public and the government were staggered by the level of corruption that had contributed to the financial catastrophe. It’s possible that the news released in October 1929 that the public utility holding companies would be regulated was the actual trigger of the crash. Stock pools took the lion’s share of the blame, leading to the creation of the Securities and Exchange Commission.

What Qualifies As Financial Fraud?

According to the Bureau of Justice Statistics, an office of the Department of Justice, financial fraud is defined as “The intentional misrepresentation of information or identity to deceive others, the unlawful use of a credit or debit card or ATM, or the use of electronic means to transmit deceptive information, in order to obtain money or other things of value.” Fraud can be committed by individuals inside and outside of the organization.

How Do You Investigate Financial Fraud?

To investigate financial fraud, one must analyze a variety of information, including financial records, communications, and transactions in order to identify irregular items and discrepancies. This process involves verifying document authenticity and tracing money. It also involves forensic accounting and digital audits to determine fraudulent activity.

How Should Fraud Be Reported?

There are many ways to report financial fraud. The first step you should take is to contact your local police department to report the fraud. You can report consumer frauds and scams at the FTC on its website at www.reportfraud.ftc.gov. You can report Internet crimes online at the Internet Crime Complaint Center (IC3) at www.ic3.gov. For investment scams, contact the U.S. Securities and Exchange Commission (SEC). You should also contact your bank and cancel any debit or credit cards.

The Bottom Line

With the creation of the SEC, market rules were formalized and stock fraud was defined. Common manipulation practices were outlawed as was the large trade in insider information. Wall Street would no longer be the Wild West where gunslingers like Drew and Vanderbilt met for showdowns.

That isn’t to say that the pump and dump or insider trading has disappeared. In the SEC era, investors still get taken in by fraud, but legal protection does now exist giving investors some recourse.

Compare a standalone robo-advisor vs. an online broker offering robo-advice

Reviewed by Amilcar Chavarria
Fact checked by Suzanne Kvilhaug

Paid non-client of Betterment. Views may not be representative, see more reviews at the App Store and Google Play Store. Learn more about this relationship.

Robo-advisors continue to disrupt traditional investment service models. The number of robo-advisor options can make it confusing to determine which one best suits you. Betterment and E*TRADE Core Portfolios present two intriguing choices that have distinct features but share a common mission of making portfolio management simpler, smarter, and more accessible to everyone. Additionally, both companies are among the winners in our list of the best robo-advisors of 2024, with Betterment winning best for beginners, cash management, tax-loss harvesting, and crypto while E*TRADE Core Portfolios wins best for mobile.

E*TRADE began in 1982 as a discount broker before growing into a top trading platform, eventually expanding into digital investment management by launching Core Portfolios. Morgan Stanley’s 2020 acquisition of E*TRADE further bolstered its position in the industry and has led to a deeper asset pool and new services like tax-loss harvesting. Betterment arrived on the scene with its robo-advisor service in 2010. An early challenger to conventional portfolio management, Betterment continues to think ahead as illustrated by its addition of cryptocurrency portfolios. Compare the two and all that they offer to see if one of these robo-advisors is right for your financial situation.

Key Takeaways of Betterment

• Best robo-advisor for beginners and best for cash management
• Premium service level offers unlimited financial advisor guidance for a variety of planning topics
• Powerful digital tools and calculators for planning multiple goals
• Financial account syncing lets you analyze your finances in detail
• Easy, intuitive sign-up process and site navigation

New investing customers can get up to $1,000 with a qualifying deposit. Terms apply. Get started today.

Key Takeaways of E*TRADE Core Portfolio

• Best robo-advisor for mobile
• Good for investors looking for a straightforward way to invest cash
• Linking of external accounts to the platform isn’t supported
• Narrow range of portfolio options means more suited for new investors than advanced traders
• Existing users of E*TRADE’s classic platform will find Core Portfolios a seamless transition

Account Setup

Betterment

Betterment has a smooth, simple onboarding process with a clear emphasis on a friendly user experience. To get started you’ll share your goals, investment experience, and other personal information to help the system identify a portfolio best geared toward your profile. Accounts can have different investment allocations based on separate goals, ensuring each portfolio accommodates your preferences. Like many robo-advisors, the investment strategy generally follows a passive approach based on modern portfolio theory (MPT) and invests in the market through exchange-traded funds (ETFs) that combine to make up different risk levels (crypto allocations are made separately). While there is no minimum required to open and maintain an account at Betterment, a deposit of just $10 is required to start investing.

E*TRADE Core Portfolios

Creating a Core Portfolios account at E*TRADE is similarly straightforward and intuitive. Before you invest, E*TRADE offers a risk tolerance questionnaire to help assess your investment profile, factor in deposit estimates, and generate potential portfolio allocations. When you’re ready to get started, the Core Portfolios strategy requires at least a $500 initial deposit. In terms of investment approach, E*Trade’s Core Portfolios also follow a classic, passive strategy based on modern portfolio theory. Your money will be invested in ETFs exclusively. Investment advisors are accessible to prospective and current users without an additional fee, although this service is more geared toward getting you set up on the platform.  

Account Setup Verdict: Betterment

The onboarding process at both digital investment advisors is relatively quick, easy, and entirely digital, but we give a slight nod to Betterment here since there is no investment minimum, just $10 to start, compared to E*TRADE Core Portfolios’ $500 minimum.

Account Types

E*TRADE and Betterment both offer the most commonly used investment account types, with a couple of differences. Betterment supports trust accounts and a high-interest cash management option. While E*TRADE Core Portfolios doesn’t offer these accounts, support is provided for Uniform Gifts to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) accounts that Betterment doesn’t offer.

Betterment Account Types

• Individual taxable 
• Joint taxable 
• Traditional individual retirement account (IRA)
• Roth IRA 
• Simplified employee pension (SEP) IRA (for the self-employed and small businesses)
• Rollover IRA
• Trust 
• 529 college savings plan (through Betterment at Work)
• Cash management options

E*TRADE Core Portfolios Account Types

• Individual taxable 
• Joint taxable 
• Traditional IRA 
• Roth IRA 
• SEP IRA 
• Rollover IRA
• Custodial accounts (UGMA and UTMA)

Account Types Verdict: Tie

Betterment and E*TRADE Core Portfolios both have the most commonly used account types. If you are looking for trust accounts, 529 plans, or high-interest cash accounts, then Betterment may have an edge, but the same is true of E*TRADE Core Portfolios if you want a custodial account.

Account Services

Transferring funds into and out of Betterment can be done seamlessly and without a fee by linking your bank to the platform. You can also transfer other investment accounts to the platform with relative ease. Once your money is on Betterment’s platform, you can use cash management services or automate your portfolio management. While these are all helpful tools to manage your money, Betterment does not offer lending services and margin accounts. 

E*TRADE’s Core Portfolios lets you set up regularly scheduled deposits that are easy to adjust as your financial situation changes. Other financial transactions such as withdrawals, transfers, or moving money to other E*TRADE accounts are simple to set up. While financial tools such as margin, stock trading, and options aren’t available through Core Portfolios, you can access these features in other areas of E*TRADE’s product ecosystem. 

Cash Management

Betterment won our best for cash management award for robo-advisors with a strong lineup that includes a checking account, debit card, and high-yield cash reserve account with a 4.00% variable APY.* Combined with portfolio management and financial planning options, Betterment provides various offerings if you’re looking to consolidate your finances under one umbrella.

E*TRADE’s Core Portfolios has limited cash management options in comparison. Cash in the portfolio is swept into a money market account so you can potentially earn a little higher interest than a traditional bank savings account offers. The minimum cash balance in your portfolio is 1% and it is swept into a Morgan Stanley bank deposit program for a yield of 0.01%. While other cash management features such as checking or bill pay aren’t available through Core Portfolios, you can access these options in other areas of E*TRADE’s site. 

*Cash Reserve is only available to clients of Betterment LLC, which is not a bank, and cash transfers to program banks are conducted through the clients’ brokerage accounts at Betterment Securities. For Cash Reserve (“CR”), Betterment LLC only receives compensation from program banks; Betterment LLC and Betterment Securities do not charge fees on your CR balance.

Checking accounts and the Betterment Visa Debit Card provided and issued by nbkc bank, Member FDIC. Checking made available through Betterment Financial LLC. Neither Betterment Financial LLC, nor any of their affiliates, is a bank. Betterment Financial LLC reimburses ATM fees and the Visa® 1% foreign transaction fee worldwide, everywhere Visa is accepted.

Cash Management Verdict: Betterment

Betterment has more options for cash management than E*TRADE’s Core Portfolio, but it is important to note that there are options in E*TRADE’s larger financial ecosystem.

Goal Planning

Betterment

Goal planning is one of the key features of a strong digital investment advisor, and Betterment stands out here thanks to a broad and powerful range of tools, calculators, and goal-planning options. The goals you can choose from include general investing, retirement, major purchases, emergency funds, and education. If you fall behind on your goals, you’ll be prompted to adjust your strategy so you can get back on track. Betterment also allows you to link external financial accounts to the platform so you can get a better sense of your overall picture. Pairing these features with the available digital financial planning tools can help you get an insightful assessment of the likelihood of reaching your financial destination.

E*TRADE Core Portfolios

E*TRADE’s Core Portfolios platform doesn’t focus on goal-planning tools and features. This is intentional, as the experience is geared towards a streamlined portfolio management approach without unnecessarily complicating your dashboard with separate goals. As a result, you’ll use a single bucket of money to fund all of your financial objectives. Reporting progress on your goal is easy to follow, but you won’t receive tailored prompts to help improve your situation. Linking other E*TRADE accounts to the Core Portfolios site can give you a bit more insight, but other financial accounts can’t be synced. E*TRADE does provide you with extensive research and education resources to help supplement the planning experience, with some tools and calculators embedded in these sections. However, these features aren’t located within the Core Portfolios planning experience, limiting their usefulness.

Goal Planning Verdict: Betterment

When it comes to goal planning, Betterment has a clear edge over E*TRADE due to its far more comprehensive range of tools and taking external financial holdings into account. 

Portfolio Construction

Betterment

Betterment uses ETFs exclusively to build portfolios. These allocations are divided up into several subcategories that include:

• Core portfolio with basic diversification and weightings 
• Goldman Sachs Smart Beta portfolio attempting market outperformance
• Socially responsible allocations that score highly for social and environmental factors
• Flexible portfolios that feature general asset classes weighted by investor preferences and additional exposure to commodity and REIT funds
• Income-focused portfolio built with BlackRock ETFs

E*TRADE Core Portfolios

The portfolio makeup of E*TRADE Core Portfolios includes a variety of ETFs that can be combined to make up a variety of risk levels. While the investment strategy closely follows modern portfolio theory across the board, you have the ability to include socially conscious, income-focused, or smart beta ETFs as part of your investment allocation. These allocations are all highly diversified internationally and domestically across equity and fixed income. E*TRADE has increased the pool of assets it is pulling from as part of its tie-up with Morgan Stanley, so there are more global equities of all sizes being used to construct your diversified portfolio. E*TRADE Core Portfolios has also added an all-equity option for users with the highest risk tolerance.

Available Assets

Portfolio Customization

Betterment

Betterment offers a Flexible Portfolio feature which gives you more say over how investments are allocated in your account. All Betterment portfolios let you adjust risk levels, but the Flexible Portfolio lets you go further by choosing amounts to allocate towards specific asset classes. Advanced investors will find this an especially intriguing option to fine-tune their portfolio.

E*TRADE Core Portfolios

E*TRADE offers the ability to customize your allocation as part of the available portfolio tooling. However, this is limited to risk level adjustments and portfolio preference opt-ins such as socially responsible, smart beta, and income-focused ETFs. While these features help align the portfolio to your liking, the level of customization is less than what Betterment offers. 

Portfolio Customization Verdict: Betterment

Betterment’s Flexible Portfolio feature offers more opportunities to customize than E*TRADE Core Portfolios.

Portfolio Management

Automatic rebalancing is one of the fundamental portfolio management strategies that both Betterment and E*TRADE Core Portfolios offer, albeit with slightly different approaches.

Betterment

Betterment can rebalance your portfolio when the allocation drifts beyond your target allocation threshold and when the account balance minimum has been reached or passed. If you link external accounts, you can receive additional recommendations for your goals. 

E*TRADE Core Portfolios

E*TRADE will rebalance your allocation automatically on a semi-annual basis or when the portfolio drifts more than 5% from the initial weighting. A rebalance is also triggered if cash exceeds more than 6% of your holdings. E*TRADE also keeps you informed on market movements that could impact your portfolio allocations.

Portfolio Management Verdict: Tie

Both robo-advisors offer rebalancing features and similarly have a threshold if the account drifts away from its set goals. Although there are some unique differences between the two robo-advisors, such as Betterment allowing external accounts or E*Trade Core Portfolio’s informing investors of market movements, the award could go either way depending on the needs of the investor and what they are looking for in a robo-advisor.

Tax-Advantaged Investing

Ensuring your taxable accounts are tax-optimized is an important aspect of portfolio management. Betterment and E*TRADE Core Portfolios both offer tax-loss harvesting for users who have taxable accounts. Both robo-advisors also undertake tax optimization where tax-advantaged investments like municipal bond funds are prioritized in taxable accounts.

Tax-Advantaged Investing Verdict: Tie

While no two robo-advisors will be identical in how they optimize and tax-loss harvest within a portfolio, both E*TRADE Core Portfolios and Betterment carry out these processes so you can hold on to more of the capital you earn in your portfolio.

Key Portfolio Management Features

Betterment is not a licensed tax advisor. Tax Loss Harvesting+ (TLH+) is not suitable for all investors. Read more at https://www.betterment.com/legal/tax-loss-harvesting and consider your personal circumstances before deciding whether to utilize Betterment’s TLH+ feature. Investing involves risk. Performance not guaranteed.

Security

E*TRADE and Betterment prioritize your financial security to ensure your assets are safeguarded. Standard Securities Investor Protection Corporation (SIPC) coverage is in place on both platforms for missing funds, which covers up to $500,000 total value or $250,000 cash in your account. E*TRADE has excess SIPC coverage through Morgan Stanley to an aggregated limit of $1 billion for securities and $1.9 million per client for uninvested cash. Both platforms also protect your data through encryption, two-factor authentication, and account monitoring. 

Security Verdict: E*TRADE Core Portfolios

Your portfolio is safe at either of these companies, but we give E*TRADE Core Portfolios the edge here due to the excess SIPC coverage it has as part of the larger Morgan Stanley financial universe.

User Experience

Desktop

Betterment investors will find a user-friendly experience throughout the site with financial tools, reporting, and calculators that are intuitive and easy to use. Performance metrics, account details, and dashboard functionality are readily accessible and simple to navigate. If you connect outside accounts to Betterment, you’ll find it relatively effortless to monitor your finances.

The E*TRADE Core Portfolios desktop experience is also relatively simple to maneuver. The tabs, reports, and tools on the pages are spaced out to give an uncluttered feel to the site. Educational resources and research materials are also easy to find. Although account linking is limited to other E*TRADE holdings, you can quickly get a sense of how you are doing financially if you hold more than one account with the brokerage. 

Mobile App 

Betterment scores highly for its mobile experience, ranking 4.7 out of 5 for the iOS version and 4.6 out of 5 for Android. The mobile app has all the features and functionality that you would expect to see on the desktop experience, which is welcome news to users who prefer to access their portfolio from the app.

E*TRADE’s mobile experience is outstanding, winning our best in category for robo-advisors. The mobile app is sleek and exceptionally easy to navigate, especially during the mobile account opening process. Reporting and performance metrics are also very clearly understood. Users of other E*TRADE platforms will find that the Core Portfolios experience is a seamless transition.

Customer Service

Betterment’s customer service team is available by phone and email from 9 a.m. to 6 p.m. ET, Monday through Friday. If you’re part of the Premium Investing service, you’ll have unlimited access to financial planners. The FAQ and site resources are sufficient for most general inquiries as well.

E*TRADE’s phone lines are available 24/7. You can talk to a financial advisor on the phone or walk into a physical location for help. Keep in mind that this advice is generally more limited to ensuring you are set up on the platform correctly. The online FAQs are somewhat limited, although most general inquiries can be answered online. 

Customer Service Verdict: E*TRADE Core Portfolios

Overall, E*TRADE Core Portfolios has better customer service than Betterment because it is easier to get people on the phone to help. Whether this matters depends largely on how you prefer to access help.

Fees

Fees are an important starting point when exploring a relationship with a financial institution so you can be sure that you’re getting the value, products, and support needed to drive your desired financial outcomes. 

Betterment

Betterment provides two separate experiences with different fee structures. The Investing plan includes digital advice, tax-loss harvesting, automatic rebalancing, and the full suite of accounts and portfolios for a 0.25% annual fee or $4 per month for balances under $20,000 that do not deposit at least $250 per month. The Premium Investing plan is priced at 0.65% annually and includes the Investing plan features plus unlimited communication with a certified financial planner. This additional fee is applied to assets in the investment and cryptocurrency accounts, but not cash accounts. For accounts with at least $2 million, there is a fee discount of 0.10%. Additional costs not included in either plan fee are ongoing ETF fund fees, ranging from 0.05% to 0.13%. It is important to note that you don’t have to opt for premiums at higher balances. You can stick with the 0.25% investing product.

E*TRADE Core Portfolios

E*TRADE Core Portfolios has an annual fee of 0.30% of assets under management. This fee is assessed quarterly based on the average daily balance and is deducted from your cash in the account. The portfolios hold between 1% and 6% in cash so that assets don’t have to be unnecessarily liquidated to pay fees. There are no additional trading fees associated with your account, but there are ongoing expenses for the ETFs that make up your portfolio ranging from 0.05% for the lowest cost to 0.16% for some of the SRI or smart beta funds. 

Fees Verdict: Betterment

Both of these robo-advisors offer low fees, but Betterment has a slight edge. The fees at Betterment are balance-dependent, however, so there will be cases in the $500 to $20,000 balance area where E*TRADE Core Portfolios has lower fees if you do not meet Betterment’s $250 monthly deposit.

The Bottom Line

Betterment and E*TRADE Core Portfolios both provide strong portfolio management options to help manage your money in a more cost-effective way than traditional solutions. Deciding between the two offerings depends on your goals, investment background, customization preferences, and desire for additional financial guidance. Existing E*TRADE users looking to simplify and automate their portfolio strategy will find a seamless transition when utilizing the Core Portfolios platform. The ability to link other E*TRADE accounts and an excellent mobile experience are other nice features to keep in mind as well. 

Even so, Betterment clearly stands out for tremendous goal setting, financial planning, cash management, and portfolio customization functionality. The option to link a wide range of external financial accounts and invest in crypto further enhances the money management tools at your disposal. While the premium tier costs slightly more than E*TRADE’s Core Portfolios, Betterment is the only option with balances below $500 and the standard offering is cheaper at most balance levels. There is a little quirk with Betterment costing more on a $4 monthly charge than E*TRADE Core Portfolios on balances between $500 and $16,000. Overall, however, Betterment provides a cheaper and much more robust platform on your journey towards improving your financial standing. 

Is Betterment FDIC Insured?

Your money that is in an investment account with Betterment is not insured by the FDIC. Instead, it’s protected by the SIPC. If you have money in Betterment’s cash reserve account, then it is insured by the FDIC through partner banks. Each partner bank insures your money up to $250,000.  Betterment is not a bank.

FDIC insurance covering up to $2 million at our program banks, subject to certain conditions.

Who Bought E*TRADE?

E*TRADE was acquired by Morgan Stanley in 2020. It was an all-stock transaction.

How We Picked the Best Robo-Advisors

Providing readers with unbiased, comprehensive reviews of digital wealth management companies, more commonly known as robo-advisors, is a top priority of Investopedia. To collect data for our 2024 best robo-advisor awards and rankings, we sent a digital survey with 64 questions directly to each of the 21 companies we included in our rubric. Our team of researchers verified the survey responses and collected any missing data points through online research and conversations with each company directly. The data collection process took place from Jan. 8 to Feb. 9, 2024.

We then developed a quantitative model that scored each company to rate its performance across nine major categories and 59 criteria to find the best robo-advisors. The score for each company’s overall star rating is a weighted average of the criteria:

• Goal Planning – 21.00%
• Portfolio Contents – 17.00%
• Portfolio Management – 17.00%
• Fees – 15.00%
• Account Services – 10.00%
• Account Setup – 5.00%
• Customer Service – 5.00%
• Security & Education – 5.00%
• User Experience – 5.00%

Many of the companies we review for our projects grant our team of expert writers and editors access to live accounts so they can perform hands-on testing. Robo-advisor companies allowed us to do this, as well.

Through this all-encompassing data collection and review process, Investopedia has provided you with an unbiased and thorough review of the top robo-advisors. Read more about how we research and review robo-advisors.

The above material and content should not be considered to be a recommendation. Investing in digital assets is highly speculative and volatile, and only suitable for investors who are able to bear the risk of potential loss and experience sharp drawdowns. Digital assets are not legal tender and are not backed by the U.S. government. Digital assets are not subject to FDIC insurance or SIPC protections.

We independently evaluate all recommended products and services. If you click on links we provide, we may receive compensation.

The S&P 500 Index is generally thought of as broadly representative of the stock market—in fact, to many people the index is the stock market, given that it’s comprised of about 500 large-cap stocks. But it has lately come to be dominated by its largest companies, most of them in the technology sector, to a degree not seen in decades. In fact, the 10 largest stocks accounted for more than a third of the index’s market capitalization for much of 2024.

This concentration has been great for investors so far, with the index rising more than 20% annually for two consecutive years. But consider that the so-called Magnificent 7 stocks—Alphabet (GOOG), Amazon (AMZN), Apple (AAPL), Meta (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA)—accounted for more than half of the index’s 25% gain in 2024. This imbalance could present a risk if the market reverses course and experiences a severe selloff.

Few would escape the pain, given that the index is a common vehicle for investors to gain broad exposure to U.S. stocks, including through 401(k) retirement accounts.

The Market Cap-Weighted S&P 500 Index

The S&P 500 Index is structured so that companies with larger market capitalizations carry greater weight in its performance. Market cap is calculated as the company’s share price multiplied by the total number of shares outstanding. The index’s weighting is adjusted as share prices and the number of outstanding shares change, ensuring it reflects current conditions.

The S&P 500 is also float-adjusted, which means only shares available to the public are used to calculate its weighting. Frequently used as a benchmark by mutual funds and ETFs, it is widely recognized for its broad market coverage and reliable weighting methodology, and is considered a barometer of broader U.S. economic health.

What This Means for the S&P 500

The market-cap weighting gives dominant firms like the Magnificent 7 enormous influence over the index’s overall returns. And when the share prices of these and other tech companies rise, their weighting on the index increases, further reinforcing their influence, including during any selloff.

Performance of the S&P 500 Index in 2024

Investors in U.S. stocks enjoyed another great year in 2024, with the S&P 500 rising 25%. But the details behind the impressive gains reveal how much influence a small minority of stocks can have over capitalization-weighted indexes. The Magnificent 7 accounted for 53% of the S&P 500’s total gain in 2024—without those seven stocks, the index would have risen only 11.75%.

The table below illustrates the performance of each member of the Magnificent 7 in 2024.

What Underperforming Tech Stocks Would Mean

Due to their huge weighting, the same standout gainers such as Nvidia (NVDA), Apple and Amazon would weigh down the S&P 500 if they began underperforming or if broader tech stocks suffered a harsh selloff. The pain would spread to just about everybody with a 401(k), though sectors such as consumer discretionary, communication services and financials would likely help cushion the blow.

Of course, if the tech stocks did underperform other sectors, market caps would change and the index would be rebalanced, diminishing the weighting of tech companies and their influence on the index’s performance. But that might be cold comfort for any investors who lost money, even if only on paper, in the process.

The Bottom Line

The S&P 500’s market-cap weighting and the recent outsized influence of tech companies have been great for investors over the past couple of years, pushing the index to big gains. However, the heavy weighting of a relatively small group of stocks also poses a potential risk—they would exert an oversized influence in pulling the index down during a selloff.

This does not mean the market is due for a selloff. In fact, Goldman Sachs points out that the S&P 500 has rallied more often than it has declined after periods of peak concentration.

Reviewed by Samantha Silberstein
Fact checked by Michael Rosenston

While stable, income-producing bonds warrant a position in any diversified portfolio, there are drawbacks to owning municipal bonds, or “munis.” Though they are exempt from federal taxes and are relatively low-risk, munis are not necessarily exempt from state and local taxes. And their interest rate is typically lower than what corporate bonds offer. For these reasons and more, it’s important to do your due diligence—it’s possible that municipal bonds aren’t the right choice for you.

Key Takeaways

• The interest you receive from muni bonds is free from federal taxes, but there may be state or local taxes or both.
• Your bond interest will be counted as income in calculating the taxable amount of your Social Security income. That could increase the amount you owe.
• The interest rate paid on muni bonds is generally lower than rates for corporate bonds. You need to determine which deal has the better real return.
• As with any bond, there is interest rate risk. If your money is tied up for 10 or 20 years and interest rates rise, you’ll be stuck with a poor performer, and the bond will lose value.

Understanding Municipal Bonds

A municipal bond is a loan to a state or local government or an entity under its control. A government or agency might issue a bond to fund its routine expenses or to undertake a specific public project such as the construction of a bridge.

As with any bond, a muni is an investment in debt. The investor effectively lends a sum of money to a government or agency and is paid a regular stream of interest in return. At the end of a predetermined period of time, the investor’s money is returned.

Why Investors Buy Bonds

Investors buy bonds in order to create a reliable stream of income (from the interest payments) while preserving their capital, since they’re getting their money back in the end.

Many investors devote a portion of their overall holdings to bonds in order to offset the greater risks inherent in almost any other type of investment, notably stocks. That is the purpose of diversification: Low-risk investments cushion potential losses from higher-risk investments.

However, bonds are not risk-free. The risk is that the issuer will default on its debts.

Investors can judge the risk level of a bond they are considering by checking the bond’s rating. All bonds sold in the U.S. are rated by one of three bond-rating agencies: Moody’s Investors Service, S&P Global, or Fitch Ratings. Bond ratings are based on an analysis of the creditworthiness of their issuers.

How Municipal Bonds Differ

The big selling point of municipal bonds is their federal tax-free status. That is, the interest payments are not taxed at the federal level. Some states do not tax municipal bonds, but others do. Some states have no income tax at all, so bond interest is a moot point. Other states don’t tax in-state bonds but do tax out-of-state bonds in some circumstances.

There are a number of reasons to look carefully at municipal bonds before taking the plunge, and to compare them against other choices for investing your money:

• Tax-free municipal bonds are not necessarily entirely free of taxes. As noted, there may be state income taxes on the interest.
• If you receive Social Security, your muni bond interest will count towards your adjusted gross income, thus potentially increasing the taxable amount of your Social Security income.
• Be careful that you don’t choose an inferior return on your money in order to minimize your tax bill.
• Municipal bonds, like all bonds, pose interest rate risk. The longer the term of the bond, the greater the risk. If interest rates rise during the term of your bond, you’re losing out on a better rate. This will also cause the bond you are holding to decline in value.

Use the tax-equivalent-yield formula to compare the real return on a muni bond with a corporate bond.

The formula is: Tax Equivalent Yield = Tax-Free Yield / (1 – Tax Rate).

Translation: That’s the yield that the muni must have in addition to its federal tax-free status to be equal to the yield of a corporate bond.

Comparing Real Returns of Muni Bonds vs. Corporate Bonds

Bonds used to fund local and state government projects like buildings and highways are afforded tax-exempt status at the federal level. Plus, people who purchase bonds issued by their states or localities may not be required to pay state or local taxes on the interest. That means some municipal bonds have tax-free status at all three levels of government.

These tax advantages are offset by lower interest yields. Municipal bonds typically have lower coupon rates than similarly rated corporate issues with comparable maturities. Even if both bonds are investment grade, corporate bonds are generally considered higher risk. Investors are often offered higher yields for taking the risk.

So, when considering munis, investors should compare the yields of taxable investment-grade and government bonds by using the tax-equivalent-yield formula. Tax-equivalent yield (TEY) is the yield that a taxable bond must have to equal or exceed the tax-adjusted yield of a municipal bond. Tax Equivalent Yield = Tax-Free Yield/(1 – Tax Rate). In general, higher-income investors (with theoretically higher tax bills) are likely to benefit more from municipal bonds than individuals in other tax brackets.

Interest Rate Risk

The risks of default by governments that issue muni bonds in the U.S. are low. However, bonds by definition have interest rate risk, which is important to investors who want to sell their bonds on the secondary market.

When interest rates rise, a long-term investor may even face risk to their principal investment. The rise in rates causes the market to lower the value of bonds with lower rates than the current offerings. A bondholder selling a 30-year issue, or other bond, may receive less in principal than the bond initially cost.

Purchasing-Power Risk

Since 2013, annual inflation in the United States has ranged between a low of 0.7% (in 2015) to a high of 7% (in 2021). 2022 and 2023 also saw elevated inflation rates at 6.5% and 3.4% respectively. Otherwise, it was 2.3% or lower throughout that time. This means that a 20-year municipal bond that yields 2.5% to an investor in a 25% tax bracket, or a 3.3% tax-equivalent yield, would offer inflation-beating returns every year—right up until 2021, when it fails to get close to the rate of inflation.

Purchasing-power risk is the biggest potential drawback to investing money long-term in bonds. You’ll get your money back in the end, but it may be worth less to you than it was. Investing solely in low-yielding municipal bonds is a safe approach but it could well mean giving up returns that exceed the rate of inflation and protect your purchasing power. A balance between municipal bonds and (relatively riskier) stocks can offset that risk.

Default Risk

Between 1970 and 2022, the cumulative 10-year default rate averaged over that time period was just 0.15%. This includes not only higher rated municipal bonds, but lower grade ones as well. This is why municipal bonds are classified as low-risk investments.

Despite recent financial stress for governments, defaults have remained low. There was only a single municipal bond default in 2022.

Call Risk

A bond that is issued with a callable option adds another risk to the investor. It means that the issuer can cancel the issue, pay off the principal and stop the interest payments. The issuer wants that option, in case interest rates drop substantially, giving it the opportunity to issue a new bond at a lower interest rate.

Most municipal bonds are callable. Their investors will get their money back, but they’ll have to find a new way to invest that money. A new investment in bonds will earn them less.

Note

The alternative minimum tax can be a tax trap for muni bond investors who have very high income from tax-shielded sources.

Municipal Bond Tax Traps

As noted above, tax-free muni bonds are not always entirely tax-free. Bonds are particularly attractive to older adults seeking a steady stream of income for their retirement needs.

That makes Social Security income the most common pitfall for muni bond investors. Although the bonds are income-tax-free at the federal level, the income from muni bonds is counted toward the investor’s adjusted gross income. A higher adjusted gross income can raise the portion of the taxpayer’s Social Security income that is taxable.

High-income individuals also can run into the alternative minimum tax, which is aimed squarely at taxpayers with substantial income from tax-shielded sources.

How to Invest in Tax-Free Municipal Bond Funds

An investor can buy and sell bonds directly through an online brokerage account. They also can be purchased through a full-service brokerage or a bank.

Another option is to invest in an exchange-traded fund (ETF) or mutual fund that invests in municipal bonds.

What Is the Average Rate of Return on a Tax-Free Municipal Bond?

On January 13, 2025, 10-year AAA-rated muni bonds returned 3.20%. A 20-year AAA-rated bond returned 3.80%. A 30-year AAA-rated bond returned 4.05%.

Can You Lose Money on Municipal Bonds?

You can lose the money you invest in municipal bonds if the issuer defaults. That risk is vanishingly small, considering that defaults on municipal bonds are extremely rare. For example, in 2022 there was only one single default out of the vast amount of municipal bonds outstanding.

You also could lose money on muni bonds if you are forced to sell the bonds on the secondary market at the wrong time. The price you get will be determined by the total dollar amount of the remaining interest payments due, factoring in the prevailing rates available on new issues.

Which States and Cities Have the Best Municipal Bonds?

The best muni bonds from any issuer are rated AAA. They are issued by state and local governments nationwide and their bonds have been deemed AAA by one of the major rating agencies. When a government runs into economic trouble, its bond ratings suffer (but it also will pay a better interest rate in order to attract buyers).

After its 2013 bankruptcy, the city of Detroit missed payments on three of its general obligation bonds. That means it was responsible for three out of seven defaults on muni bonds rated by Moody’s Investors in that year. The city has since managed to work its way back. Its outstanding debt was rated BBB as of April 2024, and the city again has an investment-grade evaluation. In July 2024 it issued its first bonds since bankruptcy.

A bond rated AAA or close to it is one of the best municipal bonds. A bond issued by a local government that is teetering on the brink of bankruptcy is one of the worst. Investors who don’t care to keep an eye on the finances of state and local governments they invest in can invest in a bond mutual fund or ETF. It will be managed by someone who gets paid to pay attention to these things.

Are Municipal Bonds Safe?

A municipal bond, or any bond for that matter, is safe as long as its issuer does not financially collapse. Luckily, that’s highly unlikely in the U.S. bond market.

The bond investor’s best protection is to take care:

• Check the bond rating. Defaults are rare, but they happen. A rating of AAA, AA, or A indicates an issuer that is on a sound financial footing.
• Compare the real return on the municipal bond to other options for your money. It’s always nice to save money on taxes but not at the cost of a better return for a comparable risk elsewhere, such as in high-quality corporate bonds.

The Bottom Line

Municipal or corporate bonds are a great alternative for investors who want to create a reliable stream of income, particularly during their retirement years. Highly-rated bonds are very safe investments compared to almost any other alternative.

Municipal bonds are free of federal taxes. That doesn’t mean that the overall return on a muni bond will be the best available option for you. You still have to do your due diligence to choose the best municipal or corporate bonds for you. Another alternative is to invest in a bond ETF or a mutual fund and let someone else make the choices.

Multi-screen entertainment, film, news, e-commerce, and department stores

Reviewed by Margaret James

Alibaba Group Holdings Ltd. (BABA) is often called “The Amazon of China” in reference to the giant American e-commerce company, Amazon.com Inc. (AMZN). Alibaba was founded in 1999 by 18 people and led by a former English teacher named Jack Ma, who guided the company’s meteoric growth for nearly two decades before stepping down as executive chair in September 2019. The early founders believed that the Internet would be a great leveler, enabling small businesses to leverage innovation and technology in order to grow and compete more effectively in domestic and international markets. Alibaba was born out of that vision and has since grown into a global e-commerce, Internet, and technology company. The company posted a net income of about $9.9 billion on roughly $130.4 billion of revenue during its 2024 fiscal year (FY), which ended March 31, 2024. Alibaba had a market capitalization of $194.7 billion on January 13, 2025.

Alibaba has followed Amazon’s example by expanding into businesses that broaden its base of supply hubs. But Alibaba has also borrowed the model of other FAANG technology companies by branching out into various apps and tech services. This growth is reflected in Alibaba’s broad array of subsidiaries.

Alibaba’s diverse group of tech business lines includes: online retail, such as mobile commerce site Taobao Marketplace, and Tmall, a third-party online and mobile commerce platform for brands and retailers; online wholesale, including 1688.com, as well as international marketplaces Alibaba.com and AliExpress; logistics services such as Cainiao Network, a logistics data platform and global fulfillment network; consumer services like on-demand delivery and local services platform Ele.me, and restaurant and services guide platform Koubei; cloud computing via Alibaba Cloud; financial services, such as Ant Group, and payment services platform Alipay; and AMAP, a mobile digital map that provides navigation and real-time traffic information.

Alibaba and other big tech companies have come under increasing pressure from Chinese regulators over the past year. China is increasingly cracking down on anti-competitive practices and data privacy violations. In April 2021, Alibaba paid a record $2.8 billion fine in the wake of an antitrust investigation.

Alibaba has used major acquisitions as vehicles to broaden its footprint. We look at six of the most important acquisitions in more detail below.

Youku Tudou Inc.

• Type of Business: Multi-Screen Entertainment and Media Company
• Acquisition Price: $1.1 billion for a 16.5% stake; $4.4 billion for the remaining stake.
• Acquisition Date: May 2014 (16.5% stake); April 2016 (remaining stake).

Youku Todou Inc., a Chinese multi-screen entertainment and media company, was founded in 2003. In 2014, Alibaba purchased $1.1 billion of Class A ordinary shares of Youku, which represented a 16.5% equity interest. At the same time, Yunfeng Fund invested $132 million for an approximately 2% equity interest. In April 2016, Alibaba completed the acquisition of Youku by purchasing all remaining issued and outstanding shares for $4.4 billion. Yunfeng Fund held on to its minority interest.

Youku enables users to search, view, and share high-quality video content quickly and easily across multiple devices. This helps Alibaba to generate additional revenue sources through advertising and membership subscriptions. The acquisition appears to be an attempt to displace Netflix, Inc. (NFLX) as the go-to source for streaming TV and film content in China.

Alibaba Pictures Group (formerly ChinaVision Media)

• Type of Business: Film Company
• Acquisition Price: $804 million (controlling stake)
• Acquisition Date: June 2014

Alibaba first acquired a controlling interest in Alibaba Pictures Group, formerly known as ChinaVision Media, in June 2014. A financing transaction the following year led to a dilution of Alibaba’s stake from a controlling to a minority interest. In March 2019, the company purchased newly issued shares of Alibaba Pictures that increased its equity interest to about 51%. Alibaba Pictures became, once again, a consolidated subsidiary of Alibaba.

Alibaba Pictures is an Internet-driven integrated platform involved in a broad range of entertainment-related activities, including content production, promotion and distribution, IP licensing and integrated management, cinema ticketing, and data services. The acquisition demonstrates Alibaba’s push into both the distribution and production of high-quality entertainment.

South China Morning Post (SCMP)

• Type of Business: English-Language Newspaper
• Acquisition Price: $266 million
• Acquisition Date: April 2016

The South China Morning Post is an English-language newspaper headquartered in Hong Kong and was founded in 1903. In April 2016, Alibaba acquired the media business of SCMP Group Ltd. The acquisition included the newspaper, the group’s magazine, recruitment, outdoor media, events and conferences, education, and digital media businesses.

Lazada Group

• Type of Business: E-Commerce Platform
• Acquisition Price: $1.0 billion (54% stake)
• Acquisition Date: April 12, 2016
• Lazada Group, an e-commerce platform headquartered in Singapore, was founded in 2012. In April 2016, Alibaba purchased a 54% equity interest in Lazada worth $1 billion. The subsidiary offers merchants and brands a one-stop marketplace with access to consumers in six Southeast Asian countries (Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam) with an estimated user base of 200 million. The deal will bolster Alibaba’s e-commerce presence outside of China.

Intime Department Store

• Type of Business: Department Store Operator
• Acquisition Price: $692 million (initial investment); $2.6 billion (74% controlling stake)
• Acquisition Date: July 2014 (initial investment); Jan. 10, 2017 (74% controlling stake).

Intime Department Store, one of China’s leading department store chains, was founded in 2005. In 2014, Alibaba invested $692 million in Intime and steadily increased its stake in the company over the next several years. In 2016, Alibaba converted its holdings of convertible debt securities issued by Intime into equity, bringing its stake to 28%. Then, in 2017, Alibaba paid $2.6 billion for a controlling interest. Alibaba increased its stake in Intime to 99% in October 2018. Despite starting out as an e-commerce company, Alibaba’s acquisition of Intime shows it also sees select brick-and-mortar retail businesses as growth opportunities.

Sun Art Retail Group Ltd.

• Type of Business: Hypermarket Operator
• Acquisition Price: $2.9 billion (initial 36.2% stake); $3.6 billion (raises stake to 72%)
• Acquisition Date: Nov. 20, 2017 (initial 36.2% stake); Oct. 19, 2020 (raises stake to 72%)

Sun Art Retail was established in 2000 through a joint venture between Groupe Auchan and Ruentex, whose vision was to develop the market leader in China’s hypermarket sector. By 2011, Sun Art Retail had become one of the largest hypermarket operators in China. The giant offline retailer went public in Hong Kong equity markets in the same year. It established an e-commerce platform two years later. In 2017, Alibaba announced a strategic alliance with Auchan Retail S.A. and Ruentex Group, obtaining an aggregate direct and indirect stake of approximately 36.2% in Sun Art Retail. In October 2020, Alibaba invested an additional $3.6 billion in the retailer to obtain an approximately 72% controlling interest. The investment bolsters Alibaba’s e-commerce offerings and helps to diversify its offline retail channels, similar to Amazon’s purchase of Whole Foods in 2017.

Alibaba Diversity and Inclusiveness Transparency

As part of our effort to improve the awareness of the importance of diversity in companies, we have highlighted the transparency of Alibaba’s commitment to diversity, inclusiveness, and social responsibility. The below chart illustrates how Alibaba reports the diversity of its management and workforce. This shows whether Alibaba discloses data about the diversity of its board of directors, C-suite, general management, and employees overall, across a variety of metrics. We have indicated that transparency with a ✔.

Fact checked by Timothy Li
Reviewed by Gordon Scott

A stock index futures contract binds two parties to an agreed value for the underlying index at a specified future date. For example, the March futures on the Standard & Poor’s 500 Index reflect the expected value of that index at the close of business on the third Friday in March. Trading futures helps to hedge risks and can offer large profits and losses.

Like any derivative, it’s a zero-sum game because one party is long the futures contract and the other short, and the loser must pay the winner the difference between the agreed index futures price and the index closing value at expiration. However, many futures contracts are closed well before the expiration date.

Key Takeaways

• Stock index futures, such as the S&P 500 E-mini Futures (ES), reflect expectations about the price of a stock index at a later time, given dividends and interest rates.
• Index futures are agreements between two parties and are considered a zero-sum game because, as one party wins, the other party loses, and there is no net transfer of wealth.
• While trading in the U.S. stock market is most active from 9:30 a.m. to 4:00 p.m. ET, stock index futures trade nearly 24/7.
• The rise or fall in index futures outside of normal market hours is often used as an indication of whether the stock market will open higher or lower the next day.
• When index futures prices deviate too far from fair value, arbitrageurs deploy buy and sell programs in the stock market to profit from the difference.

Fair Value of an Index Future

Although index futures are closely correlated to the underlying index, they are not identical. An investor in index futures does not receive (if long) or owe (if short) dividends on the stocks in the index, unlike an investor who buys the component stocks or an exchange-traded fund that tracks the index.

The index futures price must equal the underlying index value only at expiration. At any other time, the futures contract has a fair value relative to the index known as the basis.

The basis reflects the expected dividends forgone and differences in financing cost between the index futures and its stock components. When interest rates are low, the dividend adjustment outweighs the financing cost, so the fair value for index futures is typically lower than the index value.

Index Futures Arbitrage

Just because index futures have a fair value doesn’t mean they trade at that price. Market participants use index futures for many different purposes, including hedging, adjusting asset allocation through index futures overlay programs or transition management, or outright speculation on market direction.

Index futures are more liquid than the market in the index’s individual components, so investors are in a hurry to alter their equity exposure trade index futures—even if the price isn’t equal to fair value.

Whenever the index futures price moves away from fair value, it creates a trading opportunity called index arbitrage. The major banks and securities houses maintain computer models that track the ex-dividend calendar for the index components, and factor in the firms’ borrowing costs to compute the fair value for the index in real-time.

As soon as the index futures’ price premium, or discount to fair value, covers their transaction costs (clearing, settlement, commissions, and expected market impact) plus a small profit margin, the computers jump in, either selling index futures or buying the underlying stocks if futures trade at a premium, or the reverse if futures trade at a discount.

Index Futures Trading Hours

Index arbitrage keeps the index futures price close to fair value, but only when both index futures and the underlying stocks are trading at the same time. While the U.S. stock market opens at 9:30 a.m. EST and closes at 4 p.m. EST, index futures trade 24/7 on platforms like Globex, an electronic trading system run by CME Group.

Liquidity in index futures drops outside stock exchange trading hours because the index arbitrage players can no longer ply their trade. If the futures price becomes irregular, they cannot hedge an index futures purchase or sale through an offsetting sale or purchase of the underlying stocks. But other market participants are still active.

Important

Index futures trade on margin, which is a deposit held with the broker before a futures position can be opened. For example, an investor who buys $100,000 worth of futures must put up a percentage of the principal amount and not the entire $100,000.

Index Futures Predict the Opening Direction

Suppose good news comes out abroad overnight, such as a central bank lowering interest rates or a country reporting stronger-than-expected growth in GDP. The local equity markets will probably rise, and investors may anticipate a stronger U.S. market, too.

If they buy index futures, the price will go up. And with index arbitrageurs on the sidelines, until the U.S. stock market opens, nobody will counteract the buying pressure even if the futures price exceeds fair value.

As soon as the New York Stock Exchange opens, though, the index arbitrageurs will execute whatever trades are needed to bring the index futures price back in line—in this example, by buying the component stocks and selling index futures.

Investors cannot just check whether the futures price is above or below its closing value on the previous day, though.

The dividend adjustments to index futures’ fair value change overnight (they are constant during each day), and the indicated market direction depends on the price of index futures relative to fair value regardless of the preceding close.

Ex-dividend dates are not evenly spread over the calendar, either; they tend to cluster around certain dates. On a day when several big index constituents go ex-dividend, index futures may trade above the prior close but still imply a lower opening.

In the Short Term

Index futures prices are often an excellent indicator of opening market direction, but the signal works for only a brief period. Trading is typically volatile at the opening bell on Wall Street, which accounts for a disproportionate amount of total trading volume.

If an institutional investor weighs in with a large buy or sell program in multiple stocks, the market impact can overwhelm whatever price movement the index futures indicate. Institutional traders do watch futures prices, of course, but the bigger the orders they have to execute, the less important the index futures’ direction signal becomes.

Late openings can also disrupt index arbitrage activity. Although the bulk of trading on the NYSE begins at 9:30 a.m. ET, not every stock starts to trade at the same time.

For some stocks, the opening price is set through an auction procedure, and if the bids and offers do not overlap, the stock remains closed until matching orders come in.

Index arbitrage players won’t step in until they can execute both sides of their trades, which means the largest—and preferably all—stocks in an index must have opened. The longer index arbitrageurs stay on the sidelines, the greater the chances that other market activity will negate the index futures direction signal.

What Are Index Futures?

Index futures are financial contracts that allow the buyer to purchase a stock market index at a set price on a set date in the future. Index futures, like other futures, are used to speculate on market movements or hedge against potential losses. Since these futures track an index, like the S&P 500, they don’t represent ownership in individual stocks but rather represent the overall performance of the market segment the index tracks.

What Is the Difference Between Index Options and Index Futures?

While both index options and index futures are financial derivatives, there are important differences. An index option gives the holder the right (but not the obligation) to buy or sell an underlying index at a specified price (the strike price) on or before the expiration date. This allows the holder of the options to benefit from price movements without being obligated to execute the trade. Index futures obligate the contract holder to buy or sell the underlying index at a set price on a future date; as such, futures are binding agreements requiring both parties to settle the contract on expiry.

What Is the Difference Between S&P 500 Futures and the S&P 500?

The S&P 500 is a stock market index that tracks the performance of the 500 largest U.S. companies by market cap, representing a broad segment of the U.S. economy. S&P futures, on the other hand, are financial derivatives that allow investors to buy and sell the value of the S&P 500 at a future date. Futures are used for hedging, speculation, or portfolio management, and their value is based on the expected future value of the S&P 500.

The Bottom Line

If S&P 500 Index futures move higher outside of market hours and suggest the stock market will rise on the opening, investors who wish to sell that day may want to wait until after the market opens before entering their order (or set a higher price limit).

Buyers may want to hold off when index futures predict a lower opening, too. Nothing is guaranteed, however. Index futures do predict the opening market direction most of the time, but even the best soothsayers are sometimes wrong.