**OT** Spiders/Diamonds/ Index Funds/Closed-End Funds/WEBS/MITTS -- & Etc.
Hello, Steve!
Thanks (or perhaps, no thanks!) to you, Monseiur, I have been spending this beautiful holiday-weekend day indoors at my dingy computer in my grungy office, researching the many ideas & suggestions you have posted. And I've come up with a few results you may possibly find interesting. Would like to hear your (or anyone else's) comments.
1) First of all, I think you may have misunderstood my question about the advisability of investing one's all in indices (whether they be index funds, spiders, diamonds, webs, or whatever).
Let me elaborate on it. When the broad market is up (as it has been about a decade now, with minor interruptions), indices tend to do better than managed funds. But they will tend to go down more on off days and off years than managed funds, for obvious reasons. First of all, the latter hold cash, sometimes a lot of it. Some of them hold bonds, too. And still others have a low-risk portfolio. Of course, Spiders, Webs, Diamonds, etc., have done well so far -- they were born in the midst of a bull market. But how will they do in a major correction, or (God forbid!) a major bear market? Therefore, holding nothing but indices might not seem like such a good idea to anyone who anticipates a downturn.
2) "Mutual funds" are not necessarily as pedestrian as you might think. - Although it is certainly true that most managed funds underperform index funds and Spiders/Diamonds/Webs, it is important to remember that a) most stocks underperform the indices, too (it is only the minority of high-flyers that pull the indices up); b) some managed funds have been outperforming the indices consistently over the years (e.g., Legg Mason Value, Weitz Hickory, and the very prosaic-sounding Fidelity Select Home Finance, which has whomped the S&P by huge margins every year since 1991, except this year so far).
I see two major disadvantages in mutual funds: a) you may have to pay an up to 5% load to purchase them (or to sell them), as well as pay sizeable management expenses, which of course reduces your returns; and b) you can't trade mutual fund shares during the day (you have to wait to the end), and you certainly can't short them. For a trader (as opposed to an investor), that's not good.
3) Closed-End Funds (CEFs). There are zillions of single-country CEFs and regional CEFs, as well as sector CEFs. CEFs are like mutual funds, in that they are managed, and they don't reflect indices. But they are like stocks and like Webs and Spiders in that they are traded on the exchange. You can short them, and I think (I'm not sure) you can even buy options on them. Unfortunately, they are rather thinly traded.
But CEFs have a major advantage over WEBS et al.: most are traded at a very large discount to their NAV (20% is not uncommon), others at a premium, and the discount (or premium) is constantly changing. This should make them attractive to traders, as well as to investors. As one guide to CEFs explains it, "CEFs offer exceptional opportunities to capitalize on short-term swings in the discount relative to the long-term historical discounts."
To take a specific example (and again I quote from the guide): "Consider a CEF with a NAV of $10 that is trading at a 20% discount (that is, $8). Suppose the market moves substantially, say 50%, over a period of time, and the NAV of the fund tracks the market performance, moving from $10 to $15. This performance may cause a shift in investor sentiment, and suppose the fund now trades at a 20% premium (that is, $18). An investor in the CEF would show a performance of 125% (from $8 to $18) over that period, even though the market and the NAV had moved only 50%." (And if the discount rate stays the same, the investor still benefits -- although less.)
4) MITTS, ComPs, Cubs, SUNS (see "index-linked notes," under Amex's "Capital Markets Equity Derivative Products). It's tough to get info. about these types of investment; I ransacked the Merrill Lynch (MITTS issuer) site for hours, to no avail. I do know a little something about MITTS, which I mentioned in my first post to you. They should appeal to the risk-averse: you buy a MITTS index for $10, say; when you sell it, you get the going market price, plus a bonus (no dividends or capital gains distributions, though); if the market price is below your $10, you get your original $10 back anyway. All upside, and no downside (if you buy the MITTS at the original $10 price; if you bought it at $12, you only get back $10 if the price has fallen).
Okay, now to some graphs & statistics!
1) SPY vs. VFINX (Vanguard S&P 500 Index). SPY is a Spider, and VFINX is a fund. But since both are tied to the S&P index, the price performance for both is identical.
This is particularly obvious when you chart their relative performance on a Telescan chart. You can chart up to 10 securities/funds/industry groups (separately, or together) on Telescan, in ten different colors. The colors for the first two are red and blue. Well, when you chart VFINX and SPY together, they track so closely you get a purple line. In a few spots (notably in the last few weeks), VFINX (the blue) pulls out a little ahead of SPY.
However, for the person who is buying a U.S. index for the first time, I would recommend SPY, because it's so much easier to buy it, sell it, trade it, play games with it, etc. If the person already owns an index fund like VFINX (as I do), it would be downright silly to sell it and pay all those capital gains taxes, just in order to buy another index with an identical price performance.
2) WEBS vs. VEURX (Vanguard European Index Fund) , top performing MMF (managed mutual fund), top-performing CEF (European Warrants Fund), and MITT (8 country European index). There is no WEBS for Europe as a whole. So I started by comparing VEURX to all the individual WEBS. As you would expect, VEURX, for all time periods, tracks somewhere in the middle, halfway between the top performer, the Italy WEBS, and the bottom performer, the Belgium WEBS.
When IF (Index Fund) VEURX is compared to MMF (Smith Barney), CEF (European Warrants) and MITT (8-country index), we get the following line-up, by category, in each of three separate time periods (1 year, 6 months, 1 month):
1-year: CEF (ahead by a mile), IF, MMF, MITT
6-months: CEF (ahead by a mile), MMF, MITT and IF tie
1-month: CEF(ahead by a mile), IF, MMF, MITT
Now, on to some comparisons with less of an apples & oranges character to them.
3) European country funds & indices: WEBS, CEFs, and MMFs.
There are very few MMFs concentrated on individual European countries, but 9 WEBS and scads of CEFs. I'll start with two countries where you have a choice of all three (Germany and Switzerland; I skipped the UK because there are so many CEFs there).
GERMANY. Actually, there are five Germany CEFs, so I'll just measure the performance of the top two against the Germany WEBS (EWG) and the Germany MMF (Fidelity).
1-year: CEF, MMF, CEF, WEBS
6-months: MMF, CEF, WEBS, CEF
1-month: WEBS, MMF, CEF, CEF
SWITZERLAND. One of each.
1-year: CEF, WEBS, MMF
6-months: CEF, WEBS, MMF
1-month: WEBS, CEF, MMF
ITALY (The High-Flyer of Europe) One WEBS, one CEF.
1-year: WEBS, CEF
6-months: A tie.
1-month: WEBS, CEF
SPAIN (Another high-flyer) One WEBS, one CEF
1-year: CEF, WEBS
6-months: A tie
1-month: WEBS, CEF
FRANCE One WEBS, one CEF
1-year: WEBS, CEF
6-months: WEBS, CEF
1-month: WEBS, CEF
And so on.
Conclusion? I'd say a bit of a toss-up between WEBS & CEFs. It all depends on what time period and what country you're looking at. WEBS (indices) may be the better over-all choice, because their performance has been overtaking the performance of the CEFs. Bear in mind, however, that the CEFs cited here all trade at a discount, and their NAV total return is better than their market price appreciation (which is all that is shown on the graphs).
Now, what would I choose if I were buying? I should say that I, personally, may not be buying, not because I don't think Western Europe is the best place for investing right now (it is), but because I am afraid Western Europe (like the US) is pooping out. Maybe this is just a temporary sideways market, but who knows? And what's going to happen with the introduction of the Euro??
Anyway, what would I choose, if I chose?
First of all, a CEF: the European Warrants Fund. (Its symbol is EWF, but don't let that confuse you; it is not a WEBS.) It has been outperforming everything, including the best WEBS - the Italy WEBS (EWI). Take its price total return: 1-year: 114%; 3-years: 327%; 5-years: 508%. And its NAV total return is even better: 1-year: 129%; 3-years: 427%; 5-years: 648%. And it still trades at a modest discount (and pays dividends and all that good stuff).
Secondly, the Italy WEBS (EWI). Outstanding.
Thirdly, I would buy CEFs in countries that do not have WEBS but have had much stronger growth than many countries that do: specifically, Portugal, Ireland, and Finland. (I already own the Portugal Fund, which is the top-performing single-country CEF, but it's been doing the sideways slide ever since I bought it!)
One more thought: unless you want to play with the individual WEBS, it might make more sense for someone with no present exposure in Europe to buy VEURX (the Vanguard European Index Fund), plus WEBS in countries that are under-represented in the VEURX basket (notably, Italy), as well as the CEFs in non-WEBS growth countries. Fewer commissions, less bother.
4) Asian WEBS.
EEEK! No way! Speaking for myself, of course. I traded in my draggy Vanguard Emerging Markets Fund for VFINX far ahead of the Asian tsunami. Then picked up a Southeast Asia fund and a Hong Kong Fund, which did swimmingly until the big wave hit. I got out just in time, before all my profits were washed away. Those Asian WEBS have been having just as tough a time as the managed funds and the CEFS in Asia -- why would anyone invest in them now??
5) LEAPS, SPOOS, OYSTERS, et al.
I haven't had time to look into this yet, but I will certainly do so! I have absolutely no knowledge of or prior exposure to options & the like. My question is: don't you have to be something of a mathematical whiz to do all these complex options plays? (I've even forgotten basic algebra, let alone all that other stuff.)
Final question: what does (^ - ^) mean?
Thanks!
jbe |
