Financial Topics Archives

Q: How are ETF Fees Calculated?

When it comes to calculating the cost of owning an ETF, an investor needs to factor in management fees, expense ratios, and commission fees.

Q: How are ETF Fees Deducted?

ETF fees are deducted from the Net Asset Value of the fund itself, taken directly from returns that could otherwise go to the investor.

Nov

2024

ETF Fees: How Are They Deducted & How Much Do They Cost?

By Matthew Zeitlin | Growing Wealth, invest, Investing | Comments Off

Because exchange-traded funds (ETFs) are typically passively managed and based on market index, ETFs tend to have lower overall fees as compared with many mutual funds.

In addition, the way ETFs are structured these funds typically generate fewer trades and thus the costs to run the fund (including applicable taxes) are also lower than mutual funds.

When it comes to calculating the cost of owning an exchange-traded fund (or ETF), an investor needs to factor in not just management fees and expense ratios, but also the costs associated with trading the ETFs.

Key Points

• Exchange-traded funds (ETFs) generally have lower fees than mutual funds due to their passive management and reduced trading costs.

• The total cost of owning an ETF includes management fees, expense ratios, and trading costs, which can impact an investor’s returns.

• Management fees and expense ratios are expressed as a percentage of the fund’s net asset value, helping investors understand annual costs.

• Unlike some mutual funds, ETFs typically do not have front-end load fees. However, they do have expense ratios and may potentially involve commissions, so it’s important to consider all costs when evaluating their cost-effectiveness as an investment option.

• Knowing the expense ratio and other fees is crucial for investors, as these costs can significantly affect long-term investment returns.

Quick ETF Crash Course

An exchange-traded fund is a collection of dozens or even hundreds of securities such as stocks or bonds, that give an investor access to different companies within a single fund. ETFs can be a low-cost way to add diversification to a portfolio.

💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

How ETFs Work

Most ETFs are passive, which means they track an index. Their aim is to provide an investor with exposure to a particular segment of the market in an attempt to return the average for that market.

If there’s a type of investment that you want broad, diversified exposure to, there’s probably an ETF for it.

Though less popular, there are also actively managed ETFs, where a portfolio manager or group of analysts make decisions about what securities to buy and sell within the fund. Generally, these active funds will charge a higher fee than index ETFs, which are simply designed to track an index or segment of the market.

Some of the largest ETFs, reflect large swaths of the market as a whole, similar to index mutual funds (though there are some differences between index mutual funds and ETFs).

ETFs typically reflect formulas investment companies come up with to select stocks or other assets with certain characteristics that make sense in a portfolio. There are also ETFs for commodities and leveraged ETFs that can magnify gains — or losses.

ETF Costs

Like any business, an ETF typically has operational expenses, including management and marketing costs. These costs are passed on to the shareholders of the ETF and are expressed as a percentage called an expense ratio. But ETFs can include other fees and costs as well. Some are easier to find than others.

How Are ETF Fees Calculated?

Investment fees are calculated in a range of ways.

ETF Management Fees

ETFs carry management fees, which tend to cover the technical and intellectual work involved in selecting and managing assets in an ETF.

When you look up the fees of a given ETF, they are shown as a percentage of the ETFs daily assets. One benefit of many ETFs that’s reflected in their low management fees is the lack of what’s known as “management risk” — i.e. the potential losses that may be incurred owing to the guidance of a live portfolio manager.

The Expense Ratio

The overall set of fees for an ETF is known as the expense ratio or the ETF expense ratio. ETFs typically have an expense ratio of 0.05%.

An investor can determine the expense ratio by dividing the annual expenses of the investment by the fund’s total value, though the expense ratio is also typically found on the fund’s website. Knowing the expense ratio will help an investor understand exactly how much money they will spend investing in an ETF fund annually.

For example, if an investor puts $1,000 into an ETF that has an expense ratio of 0.2%, they will pay $20 in fees every year.

ETF Commission Fees

One benefit of ETFs is that you can trade them like any other asset you buy or sell on an exchange, such as a stock or a bond. But as with those assets, investors may be charged a commission when buying and selling ETFs.

Some brokers no longer charge commissions or specifically offer commission-free ETFs. But the availability of these depends on both the ETFs “sponsor” and the brokerage or platform used to buy and sell the funds.

How Are ETF Fees Deducted?

ETF fees are calculated as a percent of the ETFs net asset value, averaged out over a year. These ETF fees are not paid directly — you don’t write a check to the ETF sponsor to pay the management fees. Instead they’re deducted from the Net Asset Value (NAV) of the fund itself, taken directly from returns that could otherwise go to the investor.

The SEC offers an example of just how important fees are: “If an investor invested $10,000 in a fund that produced a 5% annual return before expenses and had annual operating expenses of 1.5%, then after 20 years the investor could have roughly $19,612. But if the fund had expenses of only 0.5%, then the investor would end up with $24,002 — a 23% difference.”

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

ETF Fees vs Mutual Fund Fees

One fee advantage ETFs have over mutual funds is that ETFs don’t have a front-end load fee. This is an expense associated with the selling of mutual funds that incentivizes brokers to sell one over the other.

Generally speaking, both ETF fees and mutual fund fees have been dropping in recent years as investors move to more passive strategies and providers of these productions compete on providing the lowest cost investment.

That said, though there are exceptions, ETFs tend to be more passive and thus have lower funds. They also don’t have some of the sales costs associated with mutual funds and their intensive marketing apparatuses.

If an ETF tracks an index, buyers can easily compare one provider’s fund to another and select the one with the lowest fee. This process can drive management fees and charges down as providers compete for business.

The Takeaway

ETF fees can be relatively low compared to mutual funds, but as with any investment fees, it’s good to know the potential costs upfront. Knowing an ETF expense ratio and other potential costs can go a long way toward helping an investor understand their total costs for investing in the fund.

For long-term investors, understanding the costs associated with different securities is important as fees can eat into returns. You may want to consider your investment costs when setting up your portfolio.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹

*If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.

SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.
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Nov

2024

How to Calculate the Debt-to-Equity Ratio

By Samuel Becker | Growing Wealth, Investing | No Comments

The debt-to-equity ratio (D/E) is one of many financial metrics that helps investors determine potential risks when looking to invest in certain stocks.

Companies also use debt, also known as leverage, to help them accomplish business goals and finance operating costs. Calculating a company’s debt-to-income ratio requires a relatively simple formula investors can use on their own or with a spreadsheet.

Key Points

• The debt-to-equity ratio (D/E) is a financial metric that compares a company’s total liabilities to its shareholder equity, indicating its reliance on debt for financing.

• Calculating the D/E ratio involves dividing total liabilities by shareholder equity, with the resulting figure helping investors assess potential risks associated with a company’s financial structure.

• A high D/E ratio may suggest a company is overleveraged, making it riskier for investors, while a low ratio could indicate underutilization of debt for growth opportunities.

• Different industries have varying acceptable D/E ratios, with capital-intensive sectors often operating with higher ratios due to their borrowing needs for growth.

• The D/E ratio is just one of many indicators investors should consider, as it should be contextualized within industry standards and accompanied by a broader analysis of a company’s financial health.

What Is the Debt-to-Equity Ratio?

The debt-to-equity ratio is one of several metrics that investors can use to evaluate individual stocks. At its simplest, the debt-to-equity ratio is a quick way to assess a company’s total liabilities vs. total shareholder equity, to gauge the company’s reliance on debt.

In other words, the D/E ratio compares a company’s equity — how much value is locked up in its shares — to its debts. Among other things, knowing this figure can help investors gauge a company’s ability to cover its debts. For example, if a company were to liquidate its assets, would it be able to cover its debt? How much money would be left over for shareholders?

Investors often use the debt-to-equity ratio to determine how much risk a company has taken on, and in return, how risky it may be to invest in that company. After all, if a company goes under and can’t cover its debts, its shares could wind up worthless.

💡 Quick Tip: When people talk about investment risk, they mean the risk of losing money. Some investments are higher risk, some are lower. Be sure to bear this in mind when investing online.

What Is Leverage?

To understand the debt-to-equity ratio, it’s helpful to understand the concept of leverage. A business has two options when it comes to paying for operating costs: It can either use equity, or it can use debt, a.k.a. leverage.

The company can use the funds they borrow to buy equipment, inventory, or other assets — or to fund new projects or acquisitions. The money can also serve as working capital in cyclical businesses during the periods when cash flow is low.

While it’s potentially risky to use leverage — a company might have to declare bankruptcy if it can’t pay its debt — borrowed funds can also help a company grow beyond the limitation of its equity at critical junctures.

The term “leverage” reflects the hope that the company will be able to use a relatively small amount of debt to boost its growth and earnings. Wise use of debt can help companies build a good reputation with creditors, which, in turn, will allow them to borrow more money for potential future growth.

Understanding Different Types of Debt

Not all debt is considered equally risky, however, and investors may want to consider a company’s long-term versus short-term liabilities. Generally speaking, short-term liabilities (e.g. accounts payable, wages, etc.) that would be paid within a year are considered less risky.

A company’s ability to cover its long-term obligations is more uncertain, and is subject to a variety of factors including interest rates (more on that below).

The Debt-to-Equity Ratio Formula

Calculating the debt-to-equity ratio is fairly straightforward. You can find the numbers you need on a listed company’s balance sheet.

To calculate the D/E ratio, take the company’s total liabilities and divide it by shareholder equity. Here’s what the debt to equity ratio formula looks like:

D/E = Total Liabilities / Shareholder Equity

How to Calculate the Debt-to-Equity Ratio

In order to calculate the debt-to-equity ratio, you need to understand both components.

Total Liabilities

This component includes a company’s current and long-term liabilities. Current liabilities are the debts that a company will typically pay off within the year, including accounts payable. Long-term liabilities are debts whose maturity extends longer than a year. Think mortgages on buildings or long-term leases.

Equity

The equity component includes two portions: shareholder equity and retained earnings. Shareholder equity is the money investors have paid in exchange for shares of the company stock. Retained earnings are profits that the company holds onto that aren’t paid out in the form of dividends to shareholders.

Excel Formula for Debt-to-Equity Ratio

Using excel or another spreadsheet to calculate the D/E is relatively straightforward. First, using the company balance sheet, pull the total debt amount and the total shareholder equity amount, and enter these numbers into adjacent cells (e.g. E2 and E3).

Then, in cell E4 enter the formula “=E2/E3”, and this will give you the D/E ratio.

Debt-to-Equity Example

To look at a simple example of a debt to equity formula, consider a company with total liabilities worth $100 million dollars and equity worth $85 million. Divide $100 million by $85 million and you’ll see that the company’s debt-to-equity ratio would be about 1.18. In other words, the company has $1.18 in debt for every dollar of equity.

When using a real-world debt to equity ratio formula, you’ll probably be able to find figures for both total liabilities and shareholder equity on a company’s balance sheet. Publicly traded companies will usually share their balance sheet along with their regular filings with the Securities and Exchange Commission (SEC).

Putting the D/E in Context

Remember that arriving at this ratio is just that: a single number that reveals a certain aspect of a company’s potential performance, but doesn’t tell the whole story. It’s essential to compare a company’s D/E ratio to that of other companies in its industry.

In addition, there are many other ways to assess a company’s fundamentals and performance — by using fundamental analysis and technical indicators. Experienced investors rarely rely on one measure to evaluate a stock.

What Is a Good Debt-to-Equity Ratio?

Once you’ve calculated a debt-to-equity ratio, how do you know whether that number is good or bad?

As a general rule of thumb, a good debt-to-equity ratio will equal about 1.0. However, the acceptable rate can vary by industry, and may depend on the overall economy. A higher debt-to-income ratio could be more risky in an economic downturn, for example, than during a boom.

Recommended: Investing During a Recession

For example, if a company, such as a manufacturer, requires a lot of capital to operate, it may need to take on a lot of debt to finance its operations. A company like this may have a debt equity ratio of about 2.0 or more.

Other companies that might have higher ratios include those that face little competition and have strong market positions, and regulated companies, like utilities, that investors consider relatively low risk.

Companies that don’t need a lot of debt to operate may have debt-to-equity ratios below 1.0. For example, the service industry requires relatively little capital.

Modifying Debt-to-Equity Ratio

As noted above, it’s also important to know which type of liabilities you’re concerned about — longer-term debt vs. short-term debt — so that you plug the right numbers into the formula.

For example, if you have two companies, each with $2.5 million in shareholder equity, and $2.5 million in debt, their D/E ratios would be the same: 1.0.

But let’s say Company A has $2 million in long-term liabilities, and $500,000 in short-term liabilities, whereas Company B has $1.5 million in long-term debt and $1 million in short term debt. The long-term D/E ratio for Company A would be 0.8 vs. 0.6 for company B, indicating a higher risk level.

Depending on the industry they were in and the D/E ratio of competitors, this may or may not be a significant difference, but it’s an important perspective to keep in mind.

What Does a Company’s Debt-to-Equity Ratio Say About It?

A debt-to-equity-ratio that’s high compared to others in a company’s given industry may indicate that that company is overleveraged and in a precarious position. Investors may want to shy away from companies that are overloaded on debt.

Not only that, companies with a high debt-to-equity ratio may have a hard time working with other lenders, partners, or even suppliers, who may be afraid they won’t be paid back.

In some cases, creditors limit the debt-to-equity ratio a company can have as part of their lending agreement. Such an agreement prevents the borrower from taking on too much new debt, which could limit the original creditor’s ability to collect.

It is possible that the debt-to-equity ratio may be considered too low, as well, which is an indicator that a company is relying too heavily on its own equity to fund operations. In that case, investors may worry that the company isn’t taking advantage of potential growth opportunities.

Ultimately, businesses must strike an appropriate balance within their industry between financing with debt and financing with equity.

What Does It Mean for a Debt-to-Equity Ratio to Be Negative?

There could be several reasons for a negative debt-to-equity ratio, including:

• Interest rates are higher than the returns

• A negative net worth (more liabilities than assets)

• A financial loss after a large dividend payout

• Dividend payments that surpass investor’s equity in the firm

So, what does this mean for investors?

Negative D/E ratios may tell investors that the company indicates investment risk and shows that the company is not financially stable. Therefore, investing in such a company may result in a loss for investors.

💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.

Which Industries Have High Debt-to-Equity Ratios?

The depository industry (banks and lenders) may have high debt-to-equity ratios. Because banks borrow funds to loan money to consumers, financial institutions usually have higher debt-to-equity ratios than other industries.

Other industries with high debt-to-equity ratios include:

• Non-depository credit institutions

• Insurance providers

• Hotels, rooming houses, camps, and other lodging places

• Transportation by air

• Railroad transportation

Effect of Debt-to-Equity Ratio on Stock Price

The debt-to-equity ratio can clue investors in on how stock prices may move. As a measure of leverage, debt-to-equity can show how aggressively a company is using debt to fund its growth.

The interest rates on business loans can be relatively low, and are tax deductible. That makes debt an attractive way to fund business, especially compared to the potential returns from the stock market, which can be volatile. And sometimes an aggressive strategy can pay off.

For example, if a company takes on a lot of debt and then grows very quickly, its earnings could rise quickly as well. If earnings outstrip the cost of the debt, which includes interest payments, a company’s shareholders can benefit and stock prices may go up.

The opposite may also be true. A highly leveraged company could have high business risk. If earnings don’t outpace the debt’s cost, then shareholders may lose and stock prices may fall.

Having to make high debt payments can leave companies with less cash on hand to pay for growth, which can also hurt the company and shareholders. And a high debt-to-equity ratio can limit a company’s access to borrowing, which could limit its ability to grow.

Debt-to-Equity (D/E) Ratio vs the Gearing Ratio

The debt-to-equity ratio belongs to a family of ratios that investors can use to help them evaluate companies. These ratios are collectively known as gearing ratios.

Here’s a quick look at other gearing ratios you may encounter:

Equity Ratio

This ratio compares a company’s equity to its assets, showing how much of the company’s assets are funded by equity.

Debt Ratio

This looks at the total liabilities of a company in comparison to its total assets. On the surface, this may sound like the debt ratio formula is the same as the debt-to-equity ratio formula. However, the total debt ratio formula includes short-term assets and liabilities as part of the equation, which the debt-to-equity ratio discounts. Also, this ratio looks specifically at how much of a company’s assets are financed with debt.

Time Interest Earned

This ratio helps indicate whether a company has the ability to make interest payments on its debt, dividing earnings before interest and taxes (EBIT) by total interest. Most of the information needed to calculate these ratios appears on a company’s balance sheet, save for EBIT, which appears on its profit and loss statement.

How Businesses Use Debt-to-Equity Ratios

Businesses pay as much attention to debt-to-equity as individual investors. For example, if a company wants to take on new credit, they would likely want their debt-to-equity ratio to be favorable.

Banks and other lenders keep tabs on what healthy debt-to-equity ratios look like in a given industry. A debt-to-equity ratio that seems too high, especially compared to a company’s peers, might signal to potential lenders that the company isn’t in a good position to repay the debt.

Publicly traded companies that are in the midst of repurchasing stock may also want to control their debt-to-equity ratio. That’s because share buybacks are usually counted as risk, since they reduce the value of stockholder equity. As a result the equity side of the equation looks smaller and the debt side appears bigger.

How Can the Debt-to-Equity Ratio Be Used to Measure a Company’s Risk?

While acceptable D/E ratios vary by industry, investors can still use this ratio to identify companies in which they want to invest. First, however, it’s essential to understand the scope of the industry to fully grasp how the debt-to-equity ratio plays a role in assessing the company’s risk.

Many companies borrow money to maintain business operations — making it a typical practice for many businesses. For companies with steady and consistent cash flow, repaying debt happens rapidly. Also, because they repay debt quickly, these businesses will likely have solid credit, which allows them to borrow inexpensively from lenders.

Therefore, even if such companies have high debt-to-equity ratios, it doesn’t necessarily mean they are risky. For example, companies in the utility industry must borrow large sums of cash to purchase costly assets to maintain business operations. However, since they have high cash flows, paying off debt happens quickly and does not pose a huge risk to the company.

On the other hand, companies with low debt-to-equity ratios aren’t always a safe bet, either. For example, a company may not borrow any funds to support business operations, not because it doesn’t need to but because it doesn’t have enough capital to repay it promptly. This may mean that the company doesn’t have the potential for much growth.

IPOs and Debt-to-Equity Ratios

Many startups make high use of leverage to grow, and even plan to use the proceeds of an initial public offering, or IPO, to pay down their debt. The results of their IPO will determine their debt-to-equity ratio, as investors put a value on the company’s equity.

So in the case of deciding whether to invest in IPO stock, it’s important for investors to consider debt when deciding whether they want to buy IPO stock.

The Limitations of Debt-to-Equity Ratios

Debt-to-equity ratio is just one piece of the puzzle when it comes to evaluating stocks. Whether the ratio is high or low is not the bottom line of whether one should invest in a company. A deeper dive into a company’s financial structure can paint a fuller picture.

A company’s accounting policies can change the calculation of its debt-to-equity. For example, preferred stock is sometimes included as equity, but it has certain properties that can also make it seem a lot like debt. Specifically, preferred stock with dividend payment included as part of the stock agreement can cause the stock to take on some characteristics of debt, since the company has to pay dividends in the future.

If preferred stock appears on the debt side of the equation, a company’s debt-to-equity ratio may look riskier. If it’s included on the equity side, the ratio can look more favorable.

In some cases, companies can manipulate assets and liabilities to produce debt-to-equity ratios that are more favorable. Additionally, investors may want to keep an eye on interest rates. If they’re low, it can make sense for companies to borrow more, which can inflate the debt-to-equity ratio, but may not actually be an indicator of bad tidings.

Finally, the debt-to-equity ratio does not take into account when a debt is due. A debt due in the near term could have an outsized effect on the debt-to-equity ratio.

As a result of temporary imbalances like these, investors may want to compare debt-to-equity ratios from various time periods to get an idea of a company’s normal wage, or whether fluctuations are signaling more noteworthy movement within the company.

Investing in Businesses With SoFi

Investors can use the debt-to-equity ratio to help determine potential risk before they buy a stock. As an individual investor you may choose to take an active or passive approach to investing and building a nest egg. The approach investors choose may depend on their goals and personal preferences.

Investors who want to take a more hands-on approach to investing, choosing individual stocks, may take a look at the debt-to-equity ratio to help determine whether a company is a risky bet.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

What is a good debt-to-equity ratio?

Generally speaking a D/E ratio of about 1.0 doesn’t raise any red flags, but it’s important to consider the needs of the company, its industry, and its competitors, as any of these factors might justify a higher debt-to-equity ratio.

How do you interpret debt-to-equity ratio?

Taking a broader view of a company and understanding the industry its in and how it operates can help to correctly interpret its D/E ratio. For example, utility companies might be required to use leverage to purchase costly assets to maintain business operations. But utility companies have steady inflows of cash, and for that reason having a higher D/E may not spell higher risk.

What is considered a bad debt-to-equity ratio?

A D/E ratio of about 1.0 to 2.0 is considered good, depending on other factors like the industry the company is in. But a D/E ratio above 2.0 — i.e., more than $2 of debt for every dollar of equity — could be a red flag. Again, context is everything and the D/E ratio is only one indicator of a company’s health.

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

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Nov

2024

Sunroof vs Moonroof: How To Choose

By Kelly Boyer Sagert | Budgeting & Goals, Insurance | Comments Off

Today, the term “sunroof” is typically used to refer to any panel or window in the roof of a vehicle that may pop up or slide open to allow air to circulate inside the cabin. A moonroof is a type of sunroof that features a stationary glass panel. There are many different sizes, shapes, and styles of sunroofs.

If you’re deciding which one to choose for a new car, we’ll share the differences and the pros and cons of each.

Key Points

• A sunroof is a panel on a car’s roof that can slide open.

• Sunroofs can be electric or manual, and may come in sliding or pop-up versions.

• Moonroofs, which have become more popular recently, have fewer mechanical issues.

• Sunroofs can add weight, reduce headroom, and increase insurance costs, but enhance ventilation and space perception.

• Moonroofs may require more AC use due to heat absorption, and repairs can be costly if they break.

What Is a Sunroof?

“Sunroof” has become a generic term for any panel or window in a car’s roof. More specifically, a sunroof is usually a panel located on the top of a vehicle that slides back to reveal a window or opening in the roof. The panel is usually opaque, matching the vehicle’s body color. It can be electric or manual.

Sunroofs can come in sliding or pop-up versions. Sometimes, a sunroof’s panel can be completely removed.

What Is a Moonroof?

“Moonroof” is a term introduced in 1973 by a marketing manager at Ford. A moonroof is a type of sunroof, made of transparent glass. It may be stationary or slide back, but can’t be removed. New cars typically have moonroofs instead of sunroofs.

A “lamella” moonroof has multiple glass panels that slide back and provide a scenic view. A panoramic moonroof has fixed glass panels that cover most of the vehicle’s roof and extend to the backseat.

Moonroof vs Sunroof Differences

As mentioned above, a sunroof is typically a painted metal panel that blends into the rest of the car roof and that slides open or can be removed. A moonroof is essentially a window in the roof, whose glass panel may or may not slide open.

Pros and Cons of a Sunroof

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Pros:

• Opening the sunroof can give motorists a sense of being in a convertible without the expense.

• A sunroof can make the interior space feel larger and keeps it well ventilated, reducing the need for air conditioning.

• The opaque panel prevents the car from overheating on sunny days.

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Cons:

• A sunroof can add weight to a vehicle and leave less headroom.

• It can also be tempting for passengers — especially children — to extend their hands or head through the roof. However, manufacturers (and common sense) caution that it’s unsafe.

• Although sunroofs can add to a car’s value, they can also cost more to insure. (You can find out how much by shopping around on online insurance sites.)

• The moving parts are vulnerable to jamming, which can lead to pricey repairs.

• Attempts to retrofit a sunroof may not be successful, with leaks being a common complaint. Factory-installed sunroofs are more reliable than ones using aftermarket parts.

Pros and Cons of a Moonroof

Because a moonroof is a type of sunroof, most of the sunroof pros and cons above also apply to moonroofs. However, there are a few additional considerations:

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Pros:

• In recent years, the moonroof has become more popular than the sunroof.

• Drivers appreciate how they allow sunlight in even when closed.

• Because there are no moving parts, a moonroof isn’t prone to mechanical problems.

• Moonroofs typically come with a sliding sunshade inside, allowing people in the car to decide how much sun protection they’d like.

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Cons:

• Because the glass absorbs heat, you may need to run your AC more on hot days.

• If a moonroof breaks, it can be expensive to fix.

Safety Considerations for Sunroofs and Moonroofs

As mentioned, it can be tempting to reach through or stand up in a vehicle with a sunroof or moonroof. For safety reasons, once the car is turned on, the driver and passengers should be seated and buckled.

Sunroofs and moonroofs also make a car more susceptible to break-ins, since there’s one more entry point for thieves to smash or pry open.

In case of a collision, there is additional risk of glass shattering, which can cause injury.

Maintaining a Sunroof or Moonroof

As with any car feature, regular maintenance of your sunroof is recommended. And knowing how to DIY can help you save money on car maintenance. Mostly, that means keeping it clean. Here’s how:

1. First, use a hand brush to sweep debris off the roof.

2. Wipe down moving parts with a microfiber cloth.

3. Clean the glass with a product without ammonia or vinegar.

4. Lubricate moving parts with a lightweight automotive grease or WD-40.

How to Choose: Sunroof or Moonroof

When deciding between a moonroof and sunroof, consider your area’s climate and how much use you expect to get from the feature. It can also be helpful to ask friends or family who have experience with one or the other style for their opinions.

If money is a concern, a sunroof will cost $1,000-$1,500 more in a new car. Not having a sunroof can also help lower your auto insurance premiums.

In the end, it comes down to personal preference.

Recommended: How to Lower Car Insurance

The Takeaway

A sunroof refers to any opening or window in a car roof. A moonroof is a type of sunroof that usually features a stationary glass panel. There are many types, sizes, and styles of sunroofs, from electric to manual, pop-up to removable. Sunroofs will cost more upfront and possibly in maintenance fees and insurance. However, drivers and passengers will enjoy better light and air circulation, even without the air conditioner.

When you’re ready to shop for auto insurance, SoFi can help. Our online auto insurance comparison tool lets you see quotes from a network of top insurance providers within minutes, saving you time and hassle.

SoFi brings you real rates, with no bait and switch.

FAQ

Is a moonroof better than a sunroof?

Moonroofs do have advantages over sunroofs, including a lack of mechanical parts that require regular maintenance and can break down. Otherwise, it’s a matter of personal preference.

What are the disadvantages of a sunroof car?

A sunroof adds to the cost of the vehicle and likely to your insurance premiums. Sunroofs also make a car more vulnerable to break-ins and break-downs of mechanical parts.

Photo credit: iStock/AscentXmedia

Auto Insurance: Must have a valid driver’s license. Not available in all states.
Home and Renters Insurance: Insurance not available in all states.
Experian is a registered trademark of Experian.
SoFi Insurance Agency, LLC. (“”SoFi””) is compensated by Experian for each customer who purchases a policy through the SoFi-Experian partnership.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOPRO-Q424-006

Nov

2024

What Does Flood Insurance Cover?

By Kim Franke-Folstad | Family Finances, Insurance, servicing | Comments Off

Flood insurance is designed to help homeowners, renters, and business owners cover losses caused by a flood. You can buy it to protect a building, the possessions in that building, or both.

Most standard homeowners policies don’t cover flood damage. So this separate insurance coverage is your best option for repairing or replacing property after rising water rises enters your home. In some areas, mortgage lenders can make buying flood insurance mandatory. Even if your lender doesn’t require flood insurance, you may want to consider it.

Read on for information that can help you decide if a flood policy should be part of your insurance coverage.

Key Points

• Flood insurance covers direct physical losses due to floods, including damage to the building and its contents.

• Coverage extends to foundation walls, electrical and plumbing systems, and major appliances.

• Personal property such as clothing, furniture, and electronics are also covered under flood insurance.

• The National Flood Insurance Program offers up to $250,000 for building and $100,000 for personal property damage.

• Flood insurance does not cover items outside the building, cars, or business interruption losses.

What Is Flood Insurance?

According to the Federal Emergency Management Agency (FEMA), just one inch of floodwater can cause up to $25,000 in damage. And that damage probably won’t be covered by your homeowners or renters insurance. You can, however, purchase a standalone flood insurance policy to help cover your losses.

A flood insurance policy is meant to cover losses directly caused by flooding or, as FEMA describes it, “an excess of water on land that is normally dry, affecting two or more acres of land or two or more properties.”

If your sewer backed up after heavy rainfall, or rising inland or tidal waters flooded your property, the damage would likely be covered by flood insurance. But if the backup wasn’t caused by flooding, the damage wouldn’t be covered by flood insurance. (Whether it’s covered by your homeowners insurance depends on your individual policy.)

Most people get their flood policy through the National Flood Insurance Program (NFIP), which is managed by FEMA and works with a network of insurance companies across the country. But some private insurance companies also offer their own flood policies, which are not government-backed.

Find Affordable Renters Insurance.

Compare quotes from the top renters insurance companies you know and trust to find your best price.

What Is Included in Standard Flood Insurance?

The NFIP offers two types of flood insurance coverage: one that covers buildings and another that covers the owner’s or renter’s personal contents.

A policy purchased through the NFIP can reimburse up to $250,000 in building damage and typically covers:

• Foundation walls, anchoring systems, and staircases

• Detached garages

• Electrical and plumbing systems

• Furnaces and water heaters

• Fuel tanks, well water tanks and pumps, and solar energy equipment

• Appliances, including refrigerators, stoves, and built-in dishwashers

• Permanently installed cabinets, paneling, and bookcases

• Permanently installed carpeting and window blinds

An NFIP policy can provide up to $100,000 in personal property damage, and typically covers:

• Personal belongings, such as clothing, furniture, and electronic equipment (TVs, computers, etc.)

• Valuables (like original artwork and furs) up to $2,500

• Portable and window air conditioners

• Washers and dryers

• Microwave ovens

• Carpets that may not be included under building coverage

• Curtains and other window coverings

What Doesn’t Flood Insurance Cover?

There are a few things NFIP flood insurance doesn’t cover, even if the damage is directly caused by flooding. Items that aren’t covered include:

• Any property that’s outside the insured building (such as a well, septic system, deck or patio, fences, seawall, hot tub or pool, and landscaping)

• Cars and most other self-propelled vehicles and their parts

• Cash, coins, precious metals, stock certificates, and other valuable paperwork

• Damage from mold or mildew that could have been prevented by the property owner

• Financial losses caused by an interruption in business

Flood insurance also doesn’t cover costs incurred if you have to live in temporary housing because of damage to your property. Unfortunately, neither will the “loss of use coverage” you may have through your homeowners policy. (Loss of use coverage pays those expenses only when the reason you’ve been displaced is covered by your homeowners policy.)

What Does Flood Insurance Cover in the Basement?

The NFIP’s coverage for flood damage in the basement is limited to some specific (usually permanent or attached) items and cleanup. Some examples of what should be covered include:

• Central air conditioners

• Fuel tanks and the fuel in them

• Furnaces and water heaters

• Sump pumps, heat pumps, and well water tanks and pumps

• Electrical outlets, switches, and junction and circuit breaker boxes

• Elevators, dumbwaiters, and related equipment

• Unfinished drywall for walls and ceilings

• Attached stairways and staircases

• Foundation elements and anchoring systems required for building support

Most personal property kept in the basement isn’t covered, including clothing, computers, TVs, and furniture.

Where Can You Get Flood Insurance?

Federal flood insurance isn’t sold directly by the federal government. Instead, you can buy NFIP policies through private insurance companies, under what’s known as a Write Your Own (WYO) program.

The NFIP partners with more than 50 insurance companies, so you may be able to work with the same insurance agent or broker who helped you purchase your home and auto policies to get flood coverage.

You can get help finding an NFIP provider online at floodsmart.gov/flood-insurance-provider or by calling the NFIP at 877-336-2627. You also can also check into any private, non-government-backed flood insurance policies that are offered in your area.

You may want to look at including flood insurance as part of your overall personal insurance planning. Don’t wait until you hear predictions of a storm heading your way to start inquiring about a policy, though. There is typically a 30-day waiting period for a flood insurance policy to go into effect.

How Much Does Flood Insurance Cost?

Like most insurance, the cost of a flood policy can depend on the coverage type (building and/or personal contents), the size and age of the building covered, the risk level in your location (based on your flood zone), and other factors, including whether you’re buying a private or NFIP policy.

According to the Federal Emergency Management Agency (FEMA), the average cost of one year of coverage with an NFIP policy is $786. And though that’s not nearly as much as the average cost of a homeowners policy, it can still be a hit to many household budgets.

You may be able to lower the cost of a flood policy by choosing a higher deductible. You can also elevate your home’s electrical panels, heating and cooling systems, and other utilities so they’re less vulnerable to water damage.

For renters, the NFIP offers contents-only policies for as low as $99 annually.

You can also look for a competitive quote on a private flood policy that isn’t backed by FEMA and the NFIP. Just make sure you’re getting a fair price from a stable company that is capable of paying out claims in the event of a major flood.

When Is Flood Insurance Required?

If you have a government-backed mortgage and your home or business is in a high-risk flood area, you are required to have flood insurance. If you don’t have a government-backed loan, your lender may still require that you purchase a flood policy. Even lenders in moderate- to low-risk locations may make it a loan requirement.

Who Should Buy Flood Insurance?

Knowing your designated flood zone can help you decide whether you want to prioritize purchasing flood insurance. You can find your zone by entering your address at the FEMA Flood Map Service Center at MSC.FEMA.gov.

Structures in zones A and V are at the highest risk, while those in zones B, C, and X are considered at moderate to minimal risk. Keep in mind, though, that you can still experience flood damage even if you don’t live in a high-risk zone. According to NFIP data, more than 20% of all insurance claims come from moderate- to low-risk zones.

If you’re moving to a new area where flood insurance isn’t required, you may want to speak with your real estate agent or neighbors about the area’s history and potential for flooding.

How Much Flood Insurance Do You Need?

In many ways, shopping for flood insurance is similar to how you buy homeowners insurance: Calculating how much you’ll need will depend on what you plan to protect and what it might cost to replace if it’s destroyed.

In fact, whether you go with an online insurance company or a traditional insurer, your homeowners insurance company may give you an idea of what it might cost to rebuild or repair your home if it’s damaged. Then you can add on the value of your furnishings and other personal possessions to decide how much flood insurance you need. (If you’re a renter, you can purchase a policy that covers only your belongings.)

Remember, there are limits to how much coverage you can get through an NFIP policy ($250,000 for a building and $100,000 for the contents). If your needs go beyond those limits, you may want to consider buying excess flood insurance through a private flood policy.

Recommended: Does Renters Insurance Cover Floods?

The Takeaway

An average flood insurance policy for homeowners costs $786 a year. But most homeowners insurance policies don’t cover flood damage, which can leave a big gap when it comes to protecting your home and belongings. Purchasing a separate flood insurance policy can help fill that gap, and it can be an important part of your overall insurance planning.

Flood policies can cover the building itself, its contents, or both. Make sure you understand what isn’t covered by your policy, such as personal belongings stored in the basement or outside.

If you’re a new homebuyer, SoFi Protect can help you look into your insurance options. SoFi and Lemonade offer homeowners insurance that requires no brokers and no paperwork. Secure the coverage that works best for you and your home.

SoFi brings you real rates, with no bait and switch.

FAQ

What losses are covered by flood insurance?

A flood insurance policy covers direct physical losses caused by a flood. That could mean repairing or replacing your home, or the furnishings and other belongings in your home, or both.

How do I know if I’m in a flood zone?

Everyone is in a flood zone, but some areas are at a higher risk than others. You can find your zone by entering your address at the FEMA Flood Map Service Center at MSC.FEMA.gov.

Is flooding covered by homeowners insurance?

Some types of water damage are covered by a standard homeowners policy, but flooding usually is not.

Photo credit: iStock/onurdongel

Auto Insurance: Must have a valid driver’s license. Not available in all states.
Home and Renters Insurance: Insurance not available in all states.
Experian is a registered trademark of Experian.
SoFi Insurance Agency, LLC. (“”SoFi””) is compensated by Experian for each customer who purchases a policy through the SoFi-Experian partnership.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOPRO-Q424-007

Nov

2024

Similarities and Differences Between Initial and Maintenance Margin

By Michael Flannelly | Growing Wealth, invest, Investing | Comments Off

Initial and maintenance margin are separate margin requirements investors must adhere to when trading on margin. The two requirements are similar in that they are both sums of money that the broker requires the investor to have in their account to open or maintain a position with a margin loan. The main difference between the two is that the initial margin is the amount of money required to open a position, while the maintenance margin is the amount needed to keep a position open.

Investors interested in trading on margin need to understand the similarities and differences between initial and maintenance margin. Moreover, knowing how to calculate maintenance margin may help investors from being subject to a margin call or other adverse outcomes.

What Is Initial Margin?

Initial margin is the minimum amount of cash or collateral an investor must deposit in a margin account in order to buy securities on margin.

Initial Margin Requirements

The initial margin requirement is expressed as a percentage of the total purchase price of a security. The Federal Reserve Board’s Regulation T requires a minimum initial margin of 50% for stock purchases, meaning investors must have cash or collateral to cover at least half of the market value of stocks they buy on margin. However, Regulation T only sets the minimum for margin accounts. Stock exchanges and brokerage firms can set their initial margin requirement higher than 50% based on a stock’s volatility, the state of the markets, or other considerations.

How Initial Margin Works

If you meet the initial margin requirement, your broker will provide you with a margin loan to cover the rest of the trade’s purchase price. For example, if the initial margin requirement is 50% and an investor wants to purchase $6,000 of a stock, then the investor will have to cover an initial margin of $3,000 with cash or other equity and borrow $3,000 from the broker to make the trade.

Investors use margin trading as a way to increase their buying power. In the example above, if the investor bought the same amount of stock in a cash account, then they would need $6,000 in cash to make the trade. But by using a margin, the investor doubles their buying power by using only $3,000 to buy $6,000 worth of stock.

However, using margin involves risk, and may lead to more significant losses than buying stock
directly in a cash account. If a trade declines below the threshold, investors will need to bring it back up to effectively pay back the margin loan.

What Is Maintenance Margin?

Maintenance margin is the minimum amount of equity an investor must have in their margin account to keep a position open after making a trade. The margin equity in the account is the value of securities minus the amount of the margin loan borrowed to make the trade. If the account’s equity falls below the maintenance margin, the broker may issue a margin call or close out the investor’s trade.

Maintenance Margin Requirements

Maintenance margin is usually expressed as a percentage of the position’s value. The Financial Industry Regulatory Authority (FINRA), which regulates maintenance requirements, says maintenance margin must be at least 25% of the total market value of the securities bought on margin. However, like initial margin, brokerage firms may have higher maintenance requirements, depending on various factors like market volatility and liquidity.

How Maintenance Margin Works

Suppose an investor purchased $6,000 worth of stock by paying $3,000 in cash and borrowing $3,000 from their broker, and the broker has a 25% maintenance margin requirement. If the market value of the stock drops from $6,000 to $5,000, the investor’s equity will now be $2,000 ($5,000 – $3,000 margin loan) and the maintenance margin will be $1,250 ($5,000 x 25%). In this case, the investor still has enough equity to cover the maintenance margin.

However, if the stock’s value drops to $3,500, the investor will no longer have enough equity to cover the maintenance margin requirement. The investor’s account has $500 in equity ($3,500 – $3,000), while the maintenance margin is $875 ($3,500 x 25%). The broker will likely issue a margin call, requiring the investor to deposit additional funds into the account or sell some assets to increase the equity in the account.

The broker may also sell some of the investor’s holdings without notifying them to bring the account back up to the maintenance margin level.

The purpose of the maintenance margin is to protect the broker in case the value of the securities in the account falls.

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 4.75% to 9.50%* and start margin trading.

*For full margin details, see terms.

Initial Margin vs Maintenance Margin

Here’s a quick look at how initial margin and maintenance margin stack up:

Initial Margin vs Maintenance Margin
Initial Margin	Maintenance Margin
50% minimum initial margin requirement regulated by the Federal Reserve Board’s Regulation T	25% minimum maintenance margin requirement regulated by FINRA
Initial margin is deposited at the start of a trade	Maintenance margin must be maintained throughout the life of a trade

Similarities

Initial margin and maintenance margin are similar in that they are both used as deposits to cover potential losses in a margin account. The two margin requirements are both calculated as a percentage of the value of the account’s assets.

Additionally, both initial margin and maintenance margin can be increased or decreased by an exchange or brokerage firm depending on a stock’s volatility, the financial situation of a client, and other factors.

Differences

The initial margin is the amount of cash or collateral an investor must deposit with a broker when buying or selling an asset on margin. In contrast, the maintenance margin is the minimum amount of equity an investor must maintain in their account to keep the account open and avoid a margin call.

Another difference between the two is that the initial margin is typically higher than the maintenance margin.

Calculating Initial and Maintenance Margin

There are formulas for calculating both initial margin and maintenance margin. Note that the examples below may not include margin figures that are indicative of a typical brokerage firm, or of SoFi.

Initial Margin Calculation

The formula for calculating initial margin is:

Initial margin = initial margin percentage x total purchase price of security

So, if a brokerage firm has an initial margin percentage of 65% and an investor wants to buy $10,000 worth of stock ABC, then the initial margin would equal $6,500:

$6,500 initial margin = 65% initial margin percentage x $10,000 total purchase price

In this scenario, the investor would need to have $6,500 in an account and borrow $3,500 with a margin loan.

Maintenance Margin Calculation

The formula to calculate maintenance margin is:

Maintenance margin = Total value of securities owned on margin x maintenance margin percentage

So, if a brokerage firm has a maintenance margin percentage of 30% and an investor holds $1,000 of stock XYZ (100 shares at $10 per share) in their margin account, then the maintenance margin would equal $300:

$300 = $1,000 x 30% maintenance margin percentage

In this scenario, the investor would need to have $300 in equity in their margin account to avoid being subject to a margin call.

Investing Tips From SoFi

Understanding the nuances of initial and maintenance margin is essential before investors start trading on margin. Utilizing margin can help investors increase their buying power, but it comes with more risk, like the chance for margin calls.

If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.

Get one of the most competitive margin loan rates with SoFi, from 4.75% to 9.50%*

FAQ

Why is initial margin higher than maintenance margin?

The initial margin is higher because the Federal Reserve Board’s Regulation T sets a 50% minimum initial margin requirement, while FINRA sets a lower 25% minimum maintenance margin requirement.

How do you calculate maintenance margin?

Maintenance margin is the minimum equity an investor must have in the margin account after making a trade. Maintenance margin is expressed as a percentage of an investor’s total trade. Investors can calculate maintenance margin by multiplying the maintenance margin percentage by the total value of the margin account.

Photo credit: iStock/PeopleImages

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.

¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

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