A universe of securities generally refers to a set of securities that share a common feature. For example, the broad universe of stocks for a U.S. investor will include all listed companies, large and small, and may also include foreign companies listed as American depositary receipts (ADRs). For some investors, a narrower universe may be used that is constrained to only value stocks or those with a market cap above some minimum threshold.
Key Takeaways
- A universe of securities refers to the complete set of securities that share some common feature or features.
- The scope of features used to define a universe of securities can be broad or narrow depending on an individual investor’s goals and preferences.
- Universes of securities often begin at the level of asset class and then become narrower by filtering parameters such as company size, credit quality, type or sector, and so on.
Insights into the Universe of Securities
The concept of universes of securities can be applied for various purposes. Institutional investment managers typically specify a universe of securities, defining some of the investing parameters for a managed fund. Broadly, investors may allocate different portions of their personal portfolios based on various security universes with differing risk-reward characteristics.
A universe of securities can be broad or narrow based on defined parameters and can vary among different investors or portfolio managers. The investable universe, or market portfolio, includes all tradeable assets. In reality, most investors do not invest so broadly, and thus a universe of securities could typically encompass all the securities in a particular asset class. Within asset classes, universes are often focused on factors such as capitalization or industry.
Investors often consider broad universes of securities when building a diversified portfolio and may segregate universes by fixed income and equity. For example, an investor with a conservative risk tolerance may prefer focusing on the entire universe of fixed income investments for the fixed income portion of their portfolio, as the risk of loss is generally lower than other market investments. On the other hand, an investor seeking slightly higher returns and risk might focus on the broader universe of equities.
Within the fixed income asset class, there are various universes to consider. Many investors and managed funds segregate fixed income by term to maturity. Generally, shorter-term maturities have lower interest rate risk, while longer-term maturities have higher interest rate risk. Other fixed income universes might include government, municipal, or corporate bonds. Further segregation can be based on credit quality or geographic location. Often, a specific index forms the basis for a universe of securities.
The equity market also features various segregation parameters for universes. Equities are commonly divided by market capitalization, resulting in large, mid, and small-cap universes. Other universes might focus on geography, growth versus value, or sector. In the equity market, indexes are also frequently used to define a universe of securities.
Universe Analysis for Savvy Investments
Universes of securities are often the crux of research studies and analysis that assist all kinds of investors. Active traders crafting investment strategies around specific universes often analyze the historical characteristics of the universe of securities to glean insights on future trades and trading analysis.
Consider a technical trader focusing on small-cap stocks. This trader’s analysis would predominantly target a universe of small-cap stocks rather than a broader market universe like the S&P 500 or Russell 3000. By analyzing the small-cap universe, they might use historical time series analysis on indices like the Russell 2000 to identify various characteristics and regressive tendencies. A wide variety of software is available for traders to develop forward-looking forecasted security prices.
Related Terms: asset class, market capitalization, fixed income, equity, investment portfolio.
