What Is a Universe of Securities?

What Is a Universe of Securities?

Let me explain what a universe of securities means to you as an investor. It's basically a group of securities that all have something in common. For instance, if you're a U.S. investor, your broad universe of stocks might include every listed company out there, big or small, and even foreign ones traded as American depositary receipts (ADRs). But you could narrow it down to just value stocks or those with a market cap over a certain level, depending on what you're after.

Key Takeaways

Here's what you need to remember about this. A universe of securities is the full set of securities that share some common feature or features. The features defining it can be broad or narrow, based on your goals and preferences as an investor. These universes often start with an asset class and get more specific by filtering things like company size, credit quality, type, or sector.

Understanding Universe of Securities

You can use security universes for various reasons. If you're managing investments institutionally, you might define one to set parameters for a fund. On a personal level, you could split your portfolio across different universes with varying risk-reward setups.

Your universe can be as broad or narrow as the parameters you set, and it differs from one investor to another. The investable universe, or market portfolio, covers all tradable assets. But in practice, most of us don't go that wide; we focus on securities within a particular asset class. Within those classes, we often zero in on factors like capitalization or industry.

When you're building a diversified portfolio, you might look at broad universes and separate them by fixed income and equity. If you're conservative, you could consider any fixed income security for that part of your portfolio, since the risk of loss is generally lower than in other markets. If you're after higher returns with more risk, you'd focus on the full universe of equities.

In fixed income, there are several universes to think about. Many investors and funds divide them by term to maturity—shorter terms mean lower interest rate risk, longer ones higher. Other divisions include government, municipal, or corporate bonds. You can further break them down by credit quality or location. Often, a specific index serves as the basis for a universe.

For equities, segregation parameters are plentiful. You'll commonly see divisions by market capitalization, creating large, mid, and small-cap universes. Others might be by geography, growth versus value, or sector. Indexes are frequently used here too to define universes.

Universe Analysis

Security universes are often the subject of research and analysis that can help investors like you. If you're an active trader zeroing in on specific universes, you'll analyze their historical characteristics to guide future trades.

Take a technical trader focused on small-cap stocks, for example. You'd want to analyze the small-cap universe, not something broad like the S&P 500 or Russell 3000. You could run historical time series on the Russell 2000 to spot characteristics and tendencies. There's plenty of software out there for forecasting prices too.