Capped Fund

A capped fund is a fund with specified maximum limitations included in its investing or expense structure.

Capped funds have maximum levels of expenses or holdings associated with the fund’s management. Fund companies can have broad latitude for adjusting expense levels and holdings caps.

Some funds may choose to limit the expense ratio of the fund by detailing a capped expense level. This capped expense level provides investors with a fee ceiling. It is the maximum percentage a fund can charge its shareholders annually for total operating expenses.

Fund companies provide details on capped expense levels in their prospectus documents. Typically, capped expense levels will be instituted for a specified period of time. To renew or revise a capped expense level, the fund must obtain approval from its board of directors. Fund companies may add, revise or revoke expense caps at their discretion, however documentation and disclosure must be provided.

Expense cap changes will affect the annual return of a fund. Any increase in expense cap levels could lead to lower returns, while decreases would help to increase performance.

Investment companies may also choose to cap holdings levels of fund constituents. This can be done at their discretion or it may be part of an investing objective that relies on a capped index. Capped funds and indexes adhere to a maximum level of investment per constituent. This can provide for broader dispersion and keeps a single holding from overly influencing the performance of the fund.

A number of capped funds and capped indexes exist in the investing market. Standard & Poor's (S&P) manages many capped indexes which can be used for passive investment benchmarks. Capped indexes from S&P include the following:

S&P/TSX 60 Capped

S&P/TSX Capped Composite

S&P/TSX Capped Energy

S&P Russia BMI Capped

S&P Italy Large and Mid-Cap Capped

S&P All Africa Capped

DJCI Gas & Oil Capped Component

S&P GSCI Cap Component

BlackRock is one investment manager providing exchange-traded funds (ETFs) managed to capped indexes. The iShares Core S&P/TSX Capped Composite Index is a passively managed index fund that seeks to replicate the holdings and performance of the S&P/TSX Capped Composite Index. In 2017, the Fund closely tracked the benchmark’s performance with a return of 9.05% versus 9.10% for the benchmark. The Fund has total assets of CAD 4.256 billion. It trades on the Toronto Stock Exchange with a net asset value of CAD 25.74.