Swing Pricing
Definition
Swing pricing is a method of protecting a fund's continuing investors from the cost of other investors' trading. When a fund receives net subscriptions it must buy securities, paying spreads, commissions and market impact; when it receives net redemptions it must sell them, paying the same costs. Without an adjustment those costs come out of the fund's assets and are borne by everyone, so the investors who stay subsidize the ones who trade. Under swing pricing the fund calculates its normal NAV and then, on a day when net flows exceed a preset swing threshold, moves the dealing price up (net inflows) or down (net outflows) by a swing factor that estimates those costs. Every investor dealing that day transacts at the swung price; the fund's holdings are not revalued and the reported NAV for performance is the unswung figure. Full swing pricing applies the factor on every dealing day regardless of flow size; partial swing pricing, the common form, applies it only above the threshold. The mechanism is standard in European UCITS funds and has been permitted for US open-end mutual funds since November 2018 under Rule 22c-1(a)(3), with the swing factor capped at 2 percent of NAV, but almost no US fund has adopted it. Interval funds, tender offer funds and non-traded REITs do not use swing pricing; they charge repurchase fees or anti-dilution levies instead.
Why it matters
Every pooled fund that lets investors in and out at NAV has a dilution problem: the price is struck on the value of the holdings, but turning cash into holdings and holdings into cash costs money, and unless someone is charged for it the cost is spread over everyone. In normal markets the cost is small. In a stressed market, when redemptions are large and the assets being sold are illiquid, it is the difference between the first investors out getting full NAV and the last investors out getting what is left. Swing pricing is the daily-dealing answer to that problem and the reason European bond funds could keep dealing through March 2020 without gating. Its near-absence in the United States is a structural fact of how US fund orders are processed, not a judgment that the problem does not exist, and the US alternatives for semi-liquid vehicles, repurchase fees and early-withdrawal deductions, are cruder because they charge a fixed rate regardless of what the trading actually costs. An investor comparing a UCITS fund with a US mutual fund, or an interval fund with a daily fund, should know which dilution mechanism each uses and who bears the cost when it is not used.
Common misconceptions
- •Swing pricing is not a fee. No money goes to the manager; the price adjustment keeps trading costs inside the fund for the benefit of continuing investors.
- •It is not a revaluation of the portfolio. The holdings are valued normally; only the dealing price is moved, and reported performance uses the unswung NAV.
- •It is not a gate. The fund still deals every day at any size; the price is different on heavy-flow days.
- •A swung price is not a penalty on redemptions only. On heavy-inflow days the price swings up and subscribers pay more, which protects existing holders from the cost of investing new cash.
Technical details
Worked example: partial swing on a redemption day
Corporate bond fund, $1.0 billion net assets, unswung NAV $10.00, swing threshold 1 percent of net assets, swing factor 0.40 percent.
Day 1: net redemptions $6 million, 0.6 percent of assets, below the threshold. Dealing price $10.00. The fund sells $6 million of bonds at an estimated cost of $24,000, borne by all holders as about 0.0024 percent of NAV.
Day 2: net redemptions $25 million, 2.5 percent of assets, above the threshold. Dealing price swings down by 0.40 percent to $9.96. Redeeming investors receive $24.9 million instead of $25.0 million; the $100,000 difference stays in the fund and approximately covers the cost of selling $25 million of bonds.
An investor who subscribed $50,000 on Day 2 also deals at $9.96 and receives 5,020 shares rather than 5,000, because the swing applies to everyone dealing that day in the direction of the net flow.
Reported NAV for Day 2 remains $10.00 less any market move; the fund's performance record is unaffected.
Setting the factor and threshold
Factor components: bid-ask spread of the underlying holdings, dealing commissions and taxes, and an estimate of market impact for the trade size the flow implies; reviewed at least quarterly and more often in stressed markets.
Factor ranges in practice: 0.05 to 0.3 percent large-cap developed equity; 0.2 to 1 percent investment grade credit; 1 to 3 percent high yield, loans, emerging markets and small caps; the US regulatory cap is 2 percent.
Threshold: commonly 0.5 to 3 percent of net assets, set so that ordinary daily flow does not swing the price; some funds use a lower threshold for outflows than inflows.
Governance: a swing pricing committee or the administrator applies the policy; the board or management company approves the factors; the prospectus discloses that swing pricing may be used and the maximum factor but usually not the threshold.
Disclosure: European funds report whether the price was swung on request and disclose the mechanism in the prospectus; the US rule requires the swing pricing policy in the registration statement and a note in the financial statements.
The US rule and why it is unused
Rule 22c-1(a)(3), adopted October 2016, effective November 19, 2018: open-end funds other than money market funds and ETFs may adopt swing pricing; the board approves the policy and the upper limit on the swing factor, which may not exceed 2 percent of NAV; a swing pricing administrator applies it.
Operational block: US funds price at 4 p.m. Eastern but receive most orders from intermediaries and retirement platforms after that time, so net flow is unknown at the pricing point; the rule allows reasonable estimates, but few funds were willing to swing on estimates.
November 2022 proposal: the SEC proposed mandatory swing pricing for open-end funds (excluding money market funds and ETFs) with a hard close requiring orders to reach the fund by 4 p.m.; comment letters from intermediaries and plan recordkeepers argued the hard close was unworkable for retirement plans and time zones; the proposal was not adopted.
Money market funds: instead of swing pricing, the July 2023 reforms imposed a mandatory liquidity fee on institutional prime and tax-exempt funds when daily net redemptions exceed 5 percent, and a discretionary fee on other non-government funds.
Result: swing pricing remains permitted for US mutual funds and effectively absent; the dilution cost in US daily funds is borne by continuing holders.
Swing pricing versus the other anti-dilution tools
Swing pricing: adjusts the dealing price for everyone dealing that day; variable factor; no payment to the manager; used by UCITS and permitted for US mutual funds.
Anti-dilution levy: a separate charge added to subscriptions or deducted from redemptions on heavy-flow days, paid into the fund; same economics as a swing but shown as a charge; UK and European property and semi-liquid funds.
Dual pricing: separate bid and offer prices around the mid NAV, with the spread reflecting dealing costs; older UK unit trusts.
Repurchase fee: a fixed percentage, up to 2 percent under Rule 23c-3, deducted from interval fund repurchases and retained by the fund; not flow-sensitive.
Early repurchase deduction: 2 percent (tender offer funds) to 5 percent (non-traded REITs, shares held under one year), retained by the fund; deters short-term trading rather than pricing the cost of it.
Redemption gates and suspensions: limit quantity rather than adjust price; the tool of last resort that swing pricing is designed to avoid.
What to check in a fund that swings
Maximum swing factor and whether it was raised during 2020 or 2022, which shows how the fund behaves under stress.
Whether the fund uses full or partial swing and, for partial, whether inflow and outflow thresholds differ.
The share of net assets in assets whose real dealing cost is hard to estimate (private credit, small-cap, frontier debt), where the factor is most likely to be wrong in one direction.
How dealing at a swung price is shown on contract notes; an investor who sees a price below the published NAV has been swung, not mispriced.
For US funds, whether the prospectus reserves the right to swing at all; nearly all say no, which means the dilution cost falls on continuing holders in a run.
Frequently asked questions
- What is swing pricing in simple terms?
- A fund charges the people who cause trading costs on a given day by moving that day's price against them. If a lot of money is leaving, the price everyone deals at that day is set slightly below the true NAV, so the sellers absorb the cost of the fund selling securities to pay them. If a lot of money is arriving, the price is set slightly above NAV. Investors who do not trade that day are unaffected.
- What is a swing factor?
- The percentage by which the dealing price is moved, set to approximate the cost of buying or selling the fund's securities: bid-ask spreads, commissions, taxes and estimated market impact. Typical factors are 0.05 to 0.3 percent for large-cap equity funds, 0.2 to 1 percent for corporate bond funds and 1 to 3 percent for high yield, emerging markets or small-cap funds; in March 2020 many European bond funds raised factors well above their normal levels. The US rule caps the factor at 2 percent of NAV.
- What is a swing threshold?
- The level of net flow, expressed as a percentage of the fund's net assets, above which the swing is applied. A threshold of 1 percent means the price swings only on days when net subscriptions or net redemptions exceed 1 percent of the fund. Below the threshold the fund absorbs the small trading cost as ordinary expense. Thresholds are not disclosed in advance in most jurisdictions, to stop investors sizing orders just under them.
- What is the difference between full and partial swing pricing?
- Full swing moves the price on every dealing day in the direction of that day's net flow, however small. Partial swing moves it only when net flow crosses the threshold. Partial swing is the norm because it avoids constant small price adjustments that make performance harder to read; full swing is used by some funds in less liquid markets where any flow has a cost.
- Does swing pricing change the fund's performance?
- Reported NAV performance is calculated on the unswung NAV, so a fund's track record is unaffected by whether it swings. The swing benefits continuing investors by leaving trading costs out of the fund's assets, which shows up as slightly better performance than the same fund without swing pricing would have delivered. The investor who trades on a swing day receives or pays a price that differs from the published NAV by the factor.
- Do US mutual funds use swing pricing?
- Almost none. The SEC permitted it in 2016, effective November 2018, but US funds receive most of their orders through intermediaries after the 4 p.m. pricing time and cannot know net flows when they strike NAV, which makes the swing decision impossible in practice. The SEC proposed in November 2022 to require swing pricing together with a hard 4 p.m. close for orders; the industry objected that the hard close would break retirement plan and intermediary processing, and the proposal was not adopted. Money market funds were given mandatory liquidity fees instead in 2023.
- Do interval funds or non-traded REITs use swing pricing?
- No. Their liquidity is periodic rather than daily, and their tools are different: interval funds may charge a repurchase fee of up to 2 percent under Rule 23c-3, tender offer funds and non-traded REITs commonly charge an early repurchase deduction of 2 to 5 percent on shares held under a year, and some UK and European semi-liquid funds apply an anti-dilution levy, a separate charge added to or deducted from the dealing price. All of these shift trading cost to the trading investor, as swing pricing does, but as a fee rather than as an adjustment of the price.