ARBITRAGE: SPYDRS < and other insects >
Here's a good summary of these products
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LOS ANGELES (CBS.MW) -- Recently I attended The Money Show in
Vegas, at the glitzy Bally Resort. One of the more fascinating discussions I
had was with the Amex staff, focusing on spiders, diamonds, Webs and
qubes, those relatively new indexing instruments rapidly growing in
popularity at the recently merged Nasdaq/Amex exchange. Now comes
news of some soon-to-be-launched financial products that are destined to
shift even more power to America's individual investors and away from
Wall Street.
Two leading financial institutions, a major international bank and a large
mutual fund family, are about to launch new indexing products that, in my
opinion, will substantially accelerate the online trading revolution, giving
investors at least 60 more exchange based index instruments to choose
from. That's more than twice the existing number!
The alternatives will include indexing instruments that track old favorites
like the Russell 2000 Index, the Wilshire 5000 and the Wilshire 4500
indexes, plus some other popular indexes like the S&P/BARRA Growth
Index and the S&P/BARRA Value Index.
And, given the intense competition in the hi-tech driven financial services
business, these bold actions are almost certain to encourage the creation
of other similar Spider-type indexing products from other major banks,
insurance companies and mutual fund families, if for no other reason than
as a defensive move to avoid being locked out of this phase of the online
revolution.
Little-guy effect
This trend is particularly fascinating because the exchanges are at a
disadvantage in competing against Wall Street brokers and the big fund
families who have huge budgets for marketing, advertising and
distribution. The exchanges are not promoting spiders and their siblings
-- and yet, individual investors are finding them anyway, thanks to
word of mouth and wonders of Internet technology! I hear Wall Street
brokers are so afraid of spiders and similar indexing products (they can't
charge high enough commissions on these simple products) that they have
become one of the "best kept secrets" on Wall Street!
For years I have been predicting that within the next decade individual
investors will be buying and selling directly from one another, through
virtual exchanges -- that the shift from power from Wall Street's
full-commission brokers to online discount brokers is only an interim
phase. Eventually, even the exchanges will be obsolete -- a theme
articulated by Ivy Schmerkin in 1992.
Net technology has been driving this paradigm shift, and the rising
popularity of the index funds is merely one of many aspect of the bigger
revolution. We are already in the leading edge of the next phase -- with
crossing networks, expanded trading hours, virtual exchanges like
WitCapital, fund supermarkets like Schwab's OneSource and E-Trade's
mutual funds center, and now Merrill Lynch finally joining the revolution.
Now the revolution is quietly entering a new phase as a host of new
spiders clones are about to flood the market. And that will not only give
the actively managed funds a run for their money, but the entire major fund
industry, specifically competing with index funds in general.
Beating index funds
Experts are saying that index fund redemptions could accelerate a major
bear market correction, that naive investors are being set up by the
growing popularity of today's index mutual funds, coupled with the
quixotic belief that the bull market will be with us forever, something I
review in my new book, "The Winning Portfolio."
In spite of this blind spot, we know that bear markets do occur
periodically, usually when we least expect them and before we can
protect our portfolios. Unfortunately, the illusion may be creating a new
breed of naive investor being set up for a fall as they pour money in index
mutuals. Most investors have had no downside experience, and they may
well get caught off-guard, frightened, and then trampled in a rush to the
exits during a major correction. Worse yet, the entire market could be
negatively affected if mass disillusionment were to set in for a sustained
period.
So I'm a cock-eyed optimist, but this scenario could very well have broad
market implications. In any event, individual investors should review the
table below before deciding to buy any index funds, because spiders,
diamonds, Webs and qubes may better serve your purposes -- especially
if you're conservative or concerned about a short-term downturn or a
longer-term bear market.
What's the big deal? Well, let's take a closer look at the benefits and
drawbacks, specifically with the spiders, because many of the same
pros-and-cons apply to diamonds, Webs and qubes. So, how do spiders
compare to a standard index mutual fund like the popular Vanguard Index
500 with its $87 billion in assets? Here's our checklist of comparative
advantages:
COMPARISON of
FEATURES
AMEX Spider
Vanguard 500
Annual fees
0.185%
0.190%
Broker's commissions
Yes
No-loads
Buy/sell at Intraday prices
Yes
No
When price is set
9:30 am to 4:15 pm
4:00 pm EST only
Type of orders
Unlimited
Market close only
Dividend reinvestment
Maybe
Yes
Portfolio turnover ratio
Low
Low
Taxable capital gains
Yes
Yes
Tax-efficiency: bull mkt
excellent
excellent
Tax-efficiency: bear mkt
excellent
high capital gains
Short selling
Yes
No
Options writing
Yes
No
Three year av. returns
approx. 27%
approx. 27%
Legal structure
Closed-end unit
trust
Open-end fund
So which one really make the most sense for the average investor? One
of our readers raved abut these new Amex index "funds" this way, "I
chuckle at the investment gurus that push mutual index funds or non-index
mutual funds in spite of their lower returns, inflated expenses, and tax
liabilities when compared to these new Amex trusts. I'll continue to hold
SPDR's for the long haul. They just make so much sense." But are they
the right tool for all investors:
- Are spiders mainly a traders tool? Well, for the more active
investor -- that is anyone engaged in even modest day-trading -- spiders,
diamonds, qubes and Webs apparently make a lot of sense. After all, you
can buy and sell anytime during the day, a major advantage. And you can
place all kinds of orders, not just at market; limit orders, at close, at open,
percentage, scale, stop, switch, time, and without many restrictions. With
a fund you're stuck making an order at the closing price at the end of the
trading day -- while you helplessly watch the market move until then.
- Are index funds better for passive investors? On the other
hand, for the more passive, long-term buy'n'hold investors who is a
dollar-cost averager not tracking the market on a daily basis, a simple
no-load index fund makes the most sense. Most investors with IRAs,
401(k)s and brokerage accounts virtually park their money at a fund
family or fund supermarket for safe keeping and centralized accounting,
aren't into active trading, and rebalance only periodically, independent of
intraday price changes.
Big threat
Moreover, the wider selection of index funds provides a more
comfortable environment protected from the anxiety ridden day-trading
world. Still, I hear may savvy investors is also buy'n'hold buying spiders
for the long-haul. So, it is quite possible that as Internet technology
continues to raise the general level of investor intelligence, more and more
investors will prefer the advantages of spiders, and their siblings,
diamonds, Webs and qubes.
Vanguard, Schwab and the other major fund families and fund
supermarkets that sell index mutual fund have such a powerful vested
interest in protecting their index fund market niche that they will
out-compete the Nasdaq/Amex exchange for the average investor's
dollars, in an effort to keep index funds ahead of exchange "funds" as the
preferred tool. But with major banks rushing into the game, the fund
families are now very vulnerable.
Here's the Internet's ultimate directory of these instruments, with links to
both a current quote and charting information, as well as links to the new
Nasdaq/AMEX site:
Nasdaq/Amex Indexes
TICKER
SPIDERS "S&P Depository Receipts"
(SPY)
S&P MIDCAP-400
(MDY)
NASDAQ-100 Shares "Qubes!"
(QQQ)
DOW-30 "DIAMONDS"
(DIA)
SECTOR SPIDERS
--
- BASIC INDUSTRIES
(XLB)
- CONSUMER SERVICES
(XLV)
- CONSUMER STAPLES
(XLP)
- CYCLICALS/TRANSPORTATION
(XLY)
- ENERGY
(XLE)
- FINANCIALS
(XLF)
- INDUSTRIAL
(XLI)
- TECHNOLOGY
(XLK)
- UTILITIES
(XLU)
WEBS (World Equity Benchmark Shares)
--
- AUSTRALIA
(EWA)
- AUSTRIA
(EWO)
- BELGIUM
(EWK)
- CANADA
(EWC)
- FRANCE
(EWQ)
- GERMANY
(EWG)
- HONG KONG
(EWH)
- ITALY
(EWI)
- JAPAN
(EWJ)
- MALAYSIA
(EWM)
- MEXICO
(EWW)
- NETHERLANDS
(EWN)
- SINGAPORE
(EWS)
- SPAIN
(EWP)
- SWEDEN
(EWD)
- SWITZERLAND
(EWL)
- UNITED KINGDOM
(EWU)
Also, please note that the new Nasdaq/Amex exchange site now has its
new information on the above Webs, and the links are now included
above. However, the tables on the Morgan Stanley Capital International
site appear to have more complete statistics, with performance and quote
data covering over 50 MSCI equity and 30 fixed-income indexes
worldwide. And soon, if our intelligence from the exchange is correct this
arena will explode with many new index instruments to compete with the
index funds.
Tough competitors
Even though the new spiders are available today, I suspect most
long-term buy'n'hold investors will probably still want to limit their
portfolios to mutual funds. Why? Well, that way they get the benefit of
working with well-known fund families, their managers and some familiar
top no-load index funds, as well as getting access to the fund family's
actively-managed funds.
However, regardless of what happens, Main Street investors will be the
winners as a result of this increased competition -- competition which is
likely to grow exponentially in the next few years as the fund families
themselves, as well as major banks, are forced to enter this dangerous
spidery web of competition.
EOM ----------------------------------------------------------------- |
