Cash drag

The return lost by holding uninvested cash, such as dividends awaiting reinvestment or a buffer for redemptions, while the market rises. Equitising the cash with futures reduces it.

Where you will meet it

Cash drag appears in 2 learning outcomes on the CFA syllabus. A few of them:

• Set out where ETF tracking error comes from
  CFA Level II · Portfolio Construction

  “Transaction costs when the index changes and cash drag from dividends awaiting reinvestment widen the gap, while securities lending income, which can offset costs, narrows it.”

• Explain why an index portfolio can drift from its benchmark and how that tracking error is kept in check
  CFA Level III · Portfolio Management Pathway

  “Sources include fees and commissions, cash drag from dividends and inflows not yet invested, index reconstitutions and corporate actions that force trades, sampling or optimisation that falls short of full replication, and market impact when trading illiquid names.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with C · Glossary