Scandal-free mutual funds: exchange-traded funds can shelter investors from mutual fund abuses.For a while late last year and early this year, it seemed that one mutual fund family after another was being implicated im·pli·cate tr.v. im·pli·cat·ed, im·pli·cat·ing, im·pli·cates 1. To involve or connect intimately or incriminatingly: evidence that implicates others in the plot. 2. in some sort of scandal. In fact, the widening scandal included some of the nation's most recognizable fund companies, including Janus Capital Management and Alliance Capital Management. (See "How Do the Mutual Fund Scandals Affect You?" on blackenterprise.com.) Investors began asking themselves, "Is there any place we can turn to avoid being ripped RiPPED are an alternative rock band from Burlington, Ontario, Canada on Sextant Records/EMI Distribution. The band formed in 1994, and were originally called "Ripped Emotions". off?" "We prefer exchange traded funds Exchange Traded Funds (ETF) Also known as ETF. A basket of stocks similar to an index mutual fund. However, there are a number of important differences between ETFs and mutual funds. , or ETFs, relative to mutual funds," says Sean Clark Sean P. Clark is a game designer, director and programmer who worked on a number of notable LucasArts adventure games from early 1990 through to 2002. Game development history
A risk management technique that mixes a wide variety of investments within a portfolio. It is designed to minimize the impact of any one security on overall portfolio performance. Notes: Diversification is possibly the greatest way to reduce the risk. and professional portfolio management, yet there are many reasons to invest in ETFs instead of mutual funds." As the name suggests, ETFs trade on stock exchanges, usually the American Stock Exchange American Stock Exchange (AMEX) Stock exchange in the U.S. Originally known as “the Curb,” it began as an outdoor marketplace in New York City c. 1850. It moved indoors to its present location in the Wall Street area in 1921. . There are hundreds of listed ETFs, but they generally fall into one of two categories: closed-end funds Closed-end fund An investment company that issues shares like any other corporation and usually does not redeem its shares. A publicly traded fund sold on stock exchanges or over the counter that may trade above or below its net asset value. Related: Open-end fund. and index ETFs. Closed-end ETFs tend to be actively managed by an investment adviser, meaning that the sponsoring company picks out certain stocks or bonds for the fund. They are also not generally redeemable Redeemable Eligible for redemption under the terms of an indenture. . For example, the newly formed Nuveen Tax-Advantaged Total Return Strategy Fund invests in floating Rate loans as well as in stocks that pay low-taxed dividends. Other closed end ETFs might hold virtually any type of investment vehicle, from California-issued municipal bonds to stocks issued by companies in Thailand. Their performance can be excellent. The Website www.etfconnect.com reports that one of last year's leaders, Thai Fund, returned more than 150% through November 2003. Index ETFs track a particular index, from the Dow Jones Industrial Average Dow Jones Industrial Average The best known U.S. index of stocks. A price-weighted average of 30 actively traded blue-chip stocks, primarily industrials including stocks that trade on the New York Stock Exchange. to Morgan Morgan, American family of financiers and philanthropists. Junius Spencer Morgan, 1813–90, b. West Springfield, Mass., prospered at investment banking. Stanley's index of issues trading on the Tokyo Stock Issue. Unlike closed-end ETFs, shares for an index ETF ETF See Exchange Traded Fund. ETF See exchange-traded fund (ETF). can de redeemed re·deem tr.v. re·deemed, re·deem·ing, re·deems 1. To recover ownership of by paying a specified sum. 2. To pay off (a promissory note, for example). 3. daily. "These ETFs go by names such as iShares iShares Index funds that trade like stocks on stock markets. Each share represents a proportion of ownership in each stock that makes up an index. Notes: iShares are a great way for smaller investors to get the diversification of 50 or more companies without having to buy , SPDRs [spiders], and HOLDRS [holders]," says Clark. "They tend to be less expensive and more tax efficient than index mutual funds. ETFs trade all day long, which precludes the illegal trading practices that caused the mutual fund scandals." Again, some index ETFs enjoyed a spectacular year in 2003 with returns as high as 104%, such as iShares' Goldman Sachs The Goldman Sachs Group, Inc., or simply Goldman Sachs (NYSE: GS) is one of the world's largest global investment banks. Goldman Sachs was founded in 1869, and is headquartered in the Lower Manhattan area of New York City at 85 Broad Street. Networking Index Fund, which holds technology stocks. HOW ETFs DIFFER FROM MUTUAL FUNDS With a mutual fund, investors buy and sell shares from and to the fund itself. Investors trade ETFs among themselves. "Some mutual funds impose redemption fees Redemption fee A fee some mutual funds charge when an investor sells shares within a specified short period of time. if you buy and sell the fund within, say, 90 days," says Clark. "That's not the case with ETFs." However, you will incur To become subject to and liable for; to have liabilities imposed by act or operation of law. Expenses are incurred, for example, when the legal obligation to pay them arises. An individual incurs a liability when a money judgment is rendered against him or her by a court. transaction costs Transaction Costs Costs incurred when buying or selling securities. These include brokers' commissions and spreads (the difference between the price the dealer paid for a security and the price they can sell it). with ETFs (similar to making a stock trade). So if you elect to buy them, you may do better working with a low-cost discount broker. Another benefit: "With an ETF, you're not buying someone else's basis. This helps them to be tax-efficient, says Clark. To give an example, suppose you buy a small-cap index fund. The best performing stocks will grow to become mid-caps, so they won't be eligible for that small-cap fund any more. A mutual fund wilt have to sell those stocks, take profits, and pass on the taxable gains Taxable Gain The portion of a sale that is liable to taxation. Notes: When redistributing mutual fund shares that have increased in value, returns may be subject to taxation. See also: Capital gain, Income Tax to shareholders. You might purchase shares in a mutual fired April 1 and owe tax on a trade that the fund makes April 2, even though you didn't participate in the gain that's being taxed. By comparison, ETFs are allowed to use techniques that minimize such phantom taxation. "Your basis is the price you pay for the shares," explains Clark. "You'll have a taxable gain or loss depending on the price you get when you sell the ETF shares. You control your tax obligations." THE CASE FOR CLOSED-END FUNDS William Adams William Adams may be:
http://www.nuveen.com Nuveen's Corporate Website in Chicago, asserts that closed-end ETFs offer additional benefits to investors: "Managers don't have to be concerned with redemptions so they needn't hold a great deal of cash." Over a long time period, cash holdings, such as money market funds, will likely have lower returns than the stocks and bonds where closed-end funds put their money. "Closed-end funds also avoid the timing issues that redemptions can bring." says Adams. That is, money often flows into mutual funds at market highs, leading to high-priced buys, and flows out near market bottoms when the fund could use extra cash to buy bargains. That's not an issue with redemption-free closed-end ETFs. What's more, closed-end ETFs generally sell at a premium or discount to the securities they hold. a fund might hold $100 million worth of stocks (at current market prices) and have 10 million shares outstanding for a pershare value of $10. Funds trading on an exchange, however, might be priced at $10.50 per share, $9.50, or even $9. "Buying closed end funds at a discount can be a major advantage to investors," says Adams. "Currently, many closed-end funds sell at a discount," says Thomas Herzfeld of Herzfeld Research in Miami. "Investors have pulled money out of some closed-end funds managed by the same companies that have been named in the mutual fund scandals. As demand for these funds has dropped, discounts have grown larger. Buying closed-end funds at, a discount may be the best choice for investors."
TOP 10 CLOSED-END ETFs BY 3-YEAR
NAV RETURN (THROUGH FEB. 29, 2004)
NAV
Exchange: 1-Year
Fund Name Ticker Category Return
Templeton Russia NYSE: TRF Europe Stock 67.05
MS Eastern Europe NYSE: RNE Europe Stock 82.34
Thai Fund NYSE: TTF Pacific/Asia Stock * 108.31
China Fund NYSE: CHN Pacific/Asia Stock * 78.95
First Financial NYSE: FF Specialty-Financial 55.71
Indonesia Fund NYSE: IF Pacific/Asia Stock * 114.14
Thai Capital NYSE: TF Pacific/Asia Stock * 101.06
Korea Fund NYSE: KF Pacific/Asia Stock * 58.82
Renaissance G&I III NAS: RENN Mid-Cap Blend 140.99
Templeton Dragon NYSE: TDF Pacific/Asia Stock * 83.61
NAV NAV
3-Year 5-Year
Fund Name Return Return
Templeton Russia 40.85 35.03
MS Eastern Europe 36.59 25.98
Thai Fund 35.56 19.89
China Fund 33.81 29.42
First Financial 33.23 27.67
Indonesia Fund 32.08 11.57
Thai Capital 31.29 8.39
Korea Fund 26.44 25.74
Renaissance G&I III 25.77 22.79
Templeton Dragon 24.99 23.40
SOURCE: MORNINGSTAR INC. MORNINGSTAR MAKES EVERY EFFORT TO ENSURE THE
COMPLETENESS AND ACCURACY OF THIS DATA BUT CANNOT GUARANTEE IT.
* FUND EXCLUDES JAPAN.
TOP 10 INDEX ETFs BY 3-YEAR RETURN
(THROUGH FEB. 29, 2004)
Exchange: 1-Year
Fundname Ticker Category Return
iShares S.Korea Index AMEX: EWY Pacific/Asia Stock * 62.49
iShares Austria Index AMEX: EWO Europe Stock 72.89
iShares C&S Realty AMEX: ICF Specialty-Real Estate 46.11
iShares DJ RE Index AMEX: IYR Specialty-Real Estate 46.93
streetTRACKS SmCap V AMEX: DSV Small-cap Value 61.41
iShares Australia AMEX: EWA Foreign Large Blend 55.98
iShares R2000 Value AMEX: IWN Small-cap Value 63.48
iShares Mexico Index AMEX: EWW Latin America Stock 70.65
iShares Malaysia AMEX: EWM Pacific/Asia Stock * 39.17
iShares S&P 400 BA V AMEX: IJJ Mid-cap Value 55.68
3-Year 5-Year
Fundname Return Return
iShares S.Korea Index 25.29 NA
iShares Austria Index 23.19 11.06
iShares C&S Realty 19.31 NA
iShares DJ RE Index 18.52 NA
streetTRACKS SmCap V 17.88 NA
iShares Australia 17.26 10.37
iShares R2000 Value 14.50 NA
iShares Mexico Index 13.64 14.20
iShares Malaysia 11.90 21.22
iShares S&P 400 BA V 11.82 NA
SOURCE: MORNINGSTAR INC. MORNINGSTAR MAKES EVERY EFFORT TO ENSURE THE
COMPLETENESS AND ACCURACY OF THIS DATA BUT CANNOT GUARANTEE IT.
* FUND EXCLUDES JAPAN.
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