A “universe of securities” simply refers to any grouping of securities that shares a common feature. Dividing your portfolio into universes (or considering your whole portfolio one universe) can help with analysis and asset allocation.
In simple terms, a universe of securities is any set of securities that shares a common feature or features.
Because there’s no set definition of “universe” in investing, you can make this category as broad or narrow as you’d like. The only “qualifier” is that the assets have enough in common to count as a single category.
As a result, analysts and investors often define their own universes for analytical, speculation, or allocation purposes.
The entire investment universe contains all possible tradable assets: stocks, bonds, real estate, commodities, cryptos, forex, trusts and so on.
However, it’s rare for investors to invest in every asset conceivable. Generally, investors define their broader universe of securities as the securities within their portfolio, and then subdivide into smaller universes from there. There are literally dozens of ways to dissect investments this way, such as by:
As you can see, each universe can contain multiple sub-universes, allowing investors, analysts and fund managers to segregate assets minutely. For example, an investor may consider bond universes based on time to maturity, dividends paid or issuing entity.
And oftentimes, specific indices form the backbone of a universe of securities. Consider the S&P 500 Index, the Nasdaq Composite or the Dow Jones Industrial Index. Of course, you can also consider smaller or less well-known indices like the Russell 3000.
Investment managers, analysts and investors use their universes in different ways.
Fund managers may specify their universe’s parameters before putting together an ETF or mutual fund. When the fund strays from its mandated universe, it’s said to experience “style drift.”
Analysts rely on universes to backtest various strategies, which helps them narrow down testing parameters.
Meanwhile, investors consider universes when allocating assets within their personal portfolios. They may choose from any of the universe parameters mentioned above or define their own. One common theme for most investors is that each sub-universe comprises a different risk-reward profile to introduce diversification into their portfolio.
For example, more conservative investors may prefer fixed-income securities to produce income in their portfolio. These assets typically carry a lower risk of loss than other investable assets.
On the other hand, investors who are willing to stomach extra risk may focus on the entire universe of equities – or even seek trades in high-risk, high-reward markets like forex or futures.
You can build your own universe of securities to suit your investment style, risk tolerance and long-term goals. In the process, you’ll want to focus on the asset allocation and diversification profile that makes your portfolio great.
From there, you can divide your universe into smaller segments for analysis purposes – or let a super-smart AI do it for you.
Q.ai is the trade name of Quantalytics Holdings, LLC. Q.ai, LLC is a wholly-owned subsidiary of Quantalytics Holdings, LLC ("Quantalytics"). Quantalytics offers automated financial advice tools through Quantalytics Investment Advisors, LLC ("QAI"), an SEC-registered investment advisor. QIA’s investment advisory services are ONLY available only to residents of the United States. Disclosures concerning QIA’s investment advisory services are available on its Form ADV filed with the SEC. The content in this newsletter is for informational purposes only and does not constitute a comprehensive description of Q.ai's investment advisory services.
