What Is Swing Pricing for Mutual Funds?

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Mutual Fund Education

What Is Swing Pricing for Mutual Funds?

David Dierking May 16, 2017

What Is Swing Pricing?

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An Example Using Swing Pricing

Here’s a simple example: XYZ Fund has a price of $20 per share and the fund’s provider sets a swing factor of 0.1% of the NAV for net flows above or below 5% of the prior day’s price. If the fund experiences a net inflow of 10% of NAV, the price of the fund would be adjusted upward to $20.02 ($20 + ($20 * 0.1%)). The same situation would occur with a 10% outflow except that the price would be adjusted downward to $19.98. If a net flow of less than 10% occurs, swing pricing is not implemented and the fund’s price remains at $20.

In order to understand how NAV is determined, check here.

Swing Pricing vs. Fair Value Pricing

  • With fair value pricing, a security’s price is adjusted to an estimated current value if the most recently traded price is considered out of date or stale. On the contrary, swing pricing adjusts the NAV of the fund to account for the costs of high volume buying or selling.
  • Fair value pricing occurs at the security level, whereas swing pricing occurs at the portfolio level.

The Rules Surrounding Swing Pricing

Swing pricing is an optional strategy for fund providers to use and can be applied on an individual fund basis. Whether or not swing pricing is implemented and whether full or partial swing pricing is used is the decision of the fund provider. Under rule 22c-2 of the Investment Company Act, the SEC provides discretion for fund boards to structure fees in a way that is appropriate for achieving anti-dilution goals. Swing pricing may be used for certain funds but not others.

To learn more about SEC’s rules to enhance the liquidity of open-end funds, check out our news article on SEC’s New Liquidity Management Rules.

Benefits of Swing Pricing

Limitations of Swing Pricing

When a partial swing pricing method is used, large flows could still occur that may not be large enough to initiate the swing pricing process. Again, long-term shareholders may feel some minor impact. Therefore, swing pricing policy needs to be monitored and reassessed on a continuous basis to ensure it remains effective.

Full Swing vs. Partial Swing

Swing Pricing Disclosure and Reporting Requirements

While many larger financial institutions already have documented swing pricing policies in place, compliance dates have been pushed back to 2018 in order to allow smaller companies to get all the necessary infrastructure in place to comply with SEC requirements.

To familiarize yourself with regulations governing the mutual fund industry, read about the Investment Company Act of 1940.

The Bottom Line

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