What Are WEBS?
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by Valerie Putchaven | Have a hunch that Malaysia will soar in
2000--want to play countries like a daytrader plays stocks? Or are
you a long-term investor who believes in the benefits of international
diversification? (Check out the on-going debate over foreign investing
on our Socialize boards.)
Either way, World Equity Benchmark Shares are worth a gander.
WEBS are three years old this month, and have gained acceptance as
an easy way to invest abroad.
Austraila
Hong Kong
Singapore
Austria
Italy
Spain
Belgium
Japan
Sweden
Canada
Malaysia (Free)
Switzerland
France
Mexico (Free)
United Kingdom
Germany
Netherlands
WEBS are traded on the American Stock Exchange, and can be
bought and sold through a broker. Thus, they make moving in and out
of specific countries as simple as trading in and out of stocks, while
providing access to a diversified group of securities the way a mutual
fund does. Their unusual packaging may make you to want to run in
the other direction at first, but WEBS are easily understood once you
consider the characteristics they share with other security types.
When you buy WEBS, you are basically buying shares of one of 17
different funds, each representing a different country. Barclays Global
Fund Advisors attempts to track the performance of the countries'
stock markets, as benchmarked by the appropriate Morgan Stanley
Capital International (MSCI) index. In most cases, the funds don't
actually hold every stock that belongs to the index. (Some of the
stocks in the index might be illiquid, for example, or so heavily
weighted in the index that they push the rules of diversification of a
U.S. mutual fund.) WEBS may also include some securities that are
not in the corresponding MSCI index; Barclays uses a quantitative
model to get a "representative sample" of each index. Thus WEBS do
not necessarily move in lockstep with their indexes, but the tracking
error is expected to be less than 5%.
WEBS vs. Funds
WEBS aren't a challenge to the open-end fund market; there isn't
much overlap. In fact, WEBS fill a niche left almost empty by mutual
funds by providing access to single-country funds. To be sure, the
average WEBS expense ratio is around 1%, rather high for an index
fund. And it is questionable whether ordinary investors actually need
single-country foreign exposure: The risks are greater and the
prospects of greater rewards dubious. But for those investors who
insist on single-country investing, or are eager to rack up quick-trade
profits (or losses), mutual funds can't compete.
There is more competition in the closed-end arena. Closed-end funds
also trade on an exchange, and there are a number of actively
managed single-country offerings. But for index options, WEBS win
hands-down.
Further, WEBS have so far avoided trading at the extreme discounts
and premiums that can spell opportunity but also disaster for
closed-end fund investors. (Like exchange-traded stocks, closed-end
funds and WEBS can be bought at any time for their going rate, or
market price. Yet, like mutual funds, they also have a net asset value,
or NAV, representing the actual value, per share, of their underlying
basket of stocks.)
WEBS' market values have remained close to their NAVs because
they have a large institutional audience that can always buy and sell at
NAV. Institutional investors purchase WEBS in large groups (called
Creation Units) that they are able to sell back to the fund at NAV,
regardless of market price. If a particular WEBS index is trading at a
discount, for example, institutional investors will, in theory, buy blocks
of WEBS at the lower price on the stock exchange and redeem the
underlying shares of the stock to profit from the price discrepancy.
Trouble Ahead?
WEBS offer a convenient way to invest in another country's stock
market, but there are suggestions that some of these new offerings
may not prove timeless. Several of the WEBS indexes are tied to
countries now part of Economic and Monetary Union. As we
explored in our Euro series, EMU may lead to the obsolescence of
single-country investing in member countries, as these countries'
economies and markets converge. For now, though, most money
managers still see potential in single countries within EMU. In fact,
some of these countries have shown quite a performance divergence
so far this year.
There are also stumbling blocks for emerging-markets WEBS. The
WEBS Index series that invests in Malaysia has run into a stumbling
block that shows how WEBS can't always evade the liquidity issues
that affect closed-end funds. The Malaysian government placed
restrictions on foreign investors in September 1998 that have made it
impossible for institutional investors to create new shares of WEBS
Malaysia. The fund is not accepting new assets, though its shares are
still trading on the American Stock Exchange. Every developing
market isn't subject to the political interference Malaysia's faces, but
the future of emerging-markets WEBS is still cloudy: There are only a
few such offerings because the SEC hasn't approved proposals for
new ones.
A Healthy Balance
The examples above needn't dissuade investors from investing in
WEBS entirely. Rather, they are a reminder that sensible
diversification is the best way to buy. An array of WEBS investing in
Belgium, Germany, and Austria--all EMU countries--may not provide
much variety. But the three combined with exposure to, say, Japan
creates a broader portfolio that might also be able to withstand a dash
of risky WEBS such as the Malaysia index.
That said, it will be tough to make a case for WEBS with Vanguard
Diehards, and other fans of diversified indexing. After all, why worry
about figuring out your own country allocations, when a fund like
Vanguard Total International Stock Index VGTSX will do it for you?
Valerie Putchaven is a reporter on Morningstar.Net's news team.
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