New Fund Launches
Sarcastically-Toned New ETF Launch Review
The great new ETF (exchange traded fund) stamped continues unabated. Who'd have thought there was so many wonderful investment opportunities that hadheretofore been ignored? This past week alone we've seen:
Claymore launch the Claymore/MAC Global Solar Energy Index ETF (Ticker 'TAN' - ha ha ha), which owns around 25 solar related stocks. Because frankly investing in the dozen or so existing alternative energy funds is just too darn diversified. This fund offers a hedge against Birkenstock-wearing 'no nukes' politicians screwing up your investment in the recently launched PowerShares Nuclear ETF (PKN) or Market Vectors Nuclear Energy ETF (NLR). Alternatively consider the ELEMENTS Credit Suisse Global Warming Index ETN (GWO) as a hedge against do-gooders.
Northern Trust launch the NETS™ TOPIX ETF (TYI) based on the Topix Japanese stock index, in addition to a smattering of other country funds. Hey at least they got the nerve to launch an ETF for the down and out Japanese market, most ETFs chase trends.
The debut of DB Agriculture Double Short ETN (AGA), DB Agriculture Double Long ETN (DAG), DB Agriculture Short ETN (ADZ), DB Agriculture Long ETN (AGF). Nothin says laissez-faire capitalist like four new ways to gamble on agriculture while residents of other countries riot over food shortages.
Yep, what a week. There hasn't been this many ETFs launched since...well since the week before last.
New Fidelity Long Short Fund
While most of the new fund launches are ETFs these days, certain categories of mutual funds are popular breeding grounds for new old-fashioned funds. Funds that ‘short’ stock (borrow shares and sell them with the hope of buying them back at a lower price in future) are becoming increasingly popular with investors, and therefore fund companies are lining up with new offerings.
So far this category of ‘long-short’ funds is riddled with expensive but mediocre funds. Fidelity hopes to change all that with their new Fidelity 130/30 Large Cap Fund (FOTTX), launched this past week:
The main differences between a 130/30 fund structure and other funds is the use of leverage and shorting. 130/30 Funds employ a strategy of holding investments both "long" (or bought with the expectation that the stock will outperform the market) and "short" (or those borrowed and sold with the expectation that they will under-perform the market). This gives the fund manager the ability to further capitalize on stock selection skill by allowing him to fully express both positive and negative views on stocks...…Fidelity has a 15-year history of shorting stocks, mainly in institutional market-neutral portfolios.”
The fund’s minimum is an above average $10,000 for regular accounts, $2,500 for IRA’s and for purchases made through an investment advisor.
Keep in mind such a fund is NOT safer than a stock fund that is invested 100% in stocks. The core fees include management fees of 0.86% and other expenses of 0.37% for a 1.23% expense ratio BEFORE considering dividends owed on shorted stocks and other expenses related to shorting. With these fees total expenses are 1.89%. Note that dividends earned buying stocks with short proceeds is not deducted from quoted expenses so the 1.89% in some cases is a bit of an overstatement.
If this fund were to short stocks and invest the proceeds in say, government T-bills, investors could see some risk reduction as their overall portfolio would have net exposure to the stock market of under 100% (though there would still be risk the shorts would go up while and the longs down resulting in a risk profile of 100% long).
However, this fund and many like it take the proceeds of the shorts and buy more stock. This is even riskier than borrowing the 30% to buy more stocks (130% long) like many closed end funds do because there is a risk that both the shorts and the longs will lose money – in some cases an investor could have the risk profile of being 160% in stocks if the longs and shorts picks by the fund manager both perform poorly. In fact, since an investor can lose more than 100% of their money on a short, in theory this fund could approach the risk profile of being 200% in stocks, though I’m sure Fidelity would disagree with this assessment.
Risk warnings aside, this and other similar funds have a key advantage over individuals shorting stocks: use of short proceeds. Most investors not only have to keep the proceeds of the short with the broker, they may have to pay margin interest or put some of their own cash up against the short to cover the risk to the broker. Funds get to invest the proceeds of the short and put up the rest of the portfolio as collateral.
We expect this fund to perform in the top 20% of similar funds over the next year because the fees are lower than many others and Fidelity will be doing everything in its power to make sure this new small fund performs well.
For more on this new fund check out Fidelity’s website.
New Vanguard Global Index Fund - It's About Time
Everybody loves indexing, and indexing pioneer Vanguard certainly doesn't shut their yap about the benefits of indexing, but for some strange reason Vanguard has yet to deliver a global stock index fund. Vanguard offers dozens of index funds - now in ETF format as well as traditional open-end funds - to cover U.S. stocks and foreign markets, but they don't have a one stop product that lets a truly passive investor buy a single stock fund that invests in world equity markets.
Well, soon they will:
Vanguard filed a registration statement on Wednesday, April 2, 2008, with the U.S. Securities and Exchange Commission (SEC) to offer a global equity index fund—Vanguard Global Stock Index Fund. The fund will offer three share classes—Investor, Institutional, and ETFs—that are expected to be available in the second quarter of 2008. This will be Vanguard's first passively managed global index fund.
The new fund will seek to track the performance of the FTSE All-World Index, a float-adjusted, market capitalization-weighted index designed to measure equity market performance of large- and mid-capitalization stocks worldwide. The fund will invest in a broadly diversified sampling of securities from the target benchmark, which comprises more than 2,800 large- and mid-cap stocks of companies in 48 foreign countries. Approximately 55% of the index is made up of stocks from outside the U.S."
The index fund open-end version's 0.45% expense ratio is not as cheap as other Vanguard U.S. index funds, and is just 0.19% cheaper than Vanguards actively managed global stock fund, Vanguard Global Equity (VHGEX).
Vanguard is also adding purchase fees to buy the open-end version of this new index fund, along with the usual redemption fees:
To offset the transaction costs associated with global investing and to protect the interests of long-term fund shareholders, the fund will assess a 0.15% purchase fee on all non-ETF share purchases and a 2% redemption fee on all non-ETF assets redeemed within two months of purchase."
This front and back fee levy should lead to slightly better quoted performance of the open-end fund than the closed end fund, even factoring in higher fund expenses (the ETF costs 0.25%).
Vanguard is really just playing catch-up here. Barclays iShares unit just launched a global stock ETF, iShares MSCI ACWI Index Fund (ACWI), which started just last week. Barclay's fund owns 711 holdings to mimic an index of 2,884 stocks and comes with an 0.35% expense ratio - more than the Vanguard ETF but less than the Vanguard open-end fund.
Global indexing made more sense before foreign stocks outpaced U.S. stocks, as they have for the past several years. At this point we expect U.S. stocks to beat foreign stocks going forward. Our predictions aside, for those looking for a one stop stock fund they can buy and ignore for twenty years, this is it. No word on where the one stop global stock AND bond index fund is - we need that even more, especially in 401(k) plans.
Foreign TIPS ETF
Terrified the U.S. economy is going into a death spiral of low economic growth and inflation? Normally Treasury Inflation-Protected Securities, or TIPS, would be the right choice for you.
Slow or negative economic growth can mean lower interest rates (as we've seen lately) and rising defaults on corporate debt. TIPS are default risk-free, and the inflation adjusting feature of TIPS means investors don't have to worry about rising inflation.
But what if you also think the U.S. Dollar is about as sound as the Mexican Peso used to be (in other words, not very)? Then the mutual fund industry has a new exchange traded fund (ETF) for you:
SPDR DB International Government Inflation-Protected Bond fund (WIP) [is a] new exchange traded fund launched Wednesday on the American Stock Exchange. It's the first international TIPS ETF available in the U.S.
State Street launched the fund to meet rising demand as investors try to hedge against inflation and dollar exposure, says James Ross, senior managing director at State Street.
The fund tracks the performance of the Deutsche Bank Global Government ex-U.S. Inflation-Linked Bond Capped Index. The index includes 120 inflation-indexed bonds from 18 developed and emerging countries outside the U.S. Investors will also have exposure to 15 currencies. It has a 21% return over the last year...."
One thing to watch out for are high fees:
...This ETF will cost 0.50%. That's almost double the cost of the two domestic inflation-protected bond ETFs available: iShares Treasury Inflation-Protected Securities (TIP) and the SPDR Lehman Barclays Treasury Inflation-Protected Securities (IPE). But the international coverage is the SPDR fund's draw."
Bottom line, if the sluggish U.S. economy remains so, this new ETF will do well. If however the future holds falling inflation rates, rising interest rates globally, and a rising U.S. dollar, this new ETF could perform so poorly you'll wish you had left your money in a boring ole U.S. dollar denominated CD at your local bank. We expect the latter scenario over the former. Investor demand for TIPS has recently reached ridiculous proportions - we've even seen negative yields on some TIPS recently as investors clamor for an inflation hedge. As most investors usually do the exact opposite of what they should be doing, this probably means rough times for TIPS investors ahead.
New Global Dodge & Cox Fund On Horizon
Last Friday Dodge & Cox filed with the SEC to launch a new global stock fund - their first new fund since 2001 when they launched Dodge & Cox International Stock (DODFX).
When investors are able to buy Dodge & Cox Global Stock in about three months, the fund will be more expensive than other Dodge & Cox funds, with a 0.60% management fee and total expenses capped at 0.90%. Currently the other Dodge & Cox funds are in the 0.44% - 0.65% total expense ratio range. We expect the total expense ratio of this new fund to reach around 0.80% in the next couple of years, and ultimately settle at roughly 0.65% once assets take off (which might take a little longer now that the market is weak and other Dodge & Cox funds have reopened). These extra fees in the near term will more than likely be offset by increased performance (relative to other Dodge & Cox funds) due to the benefits of a much smaller asset level (you will notice a low fat fund index on this fund's data page during its formative years). But should you buy? ...read the rest of this article»
New GendeX Mutual Fund is Cooler Than You
Ultra-hip mutual fund company Thrasher Funds takes aim at the long-coveted young investor market with their just-launched and peculiarly capitalized GendeX Mutual Fund.
According to the firm's website:
The GendeX Mutual Fund was developed and is managed by young adult investors for young adult investors. A group of more than 60 million Gen X and Y'ers largely untapped by the financial market place...until now.
The GendeX Mutual Fund offers this demographic the opportunity to leverage their youth, along with a disciplined investment and savings strategy to help use what they already know to engage the stock market. We provide this Next Generation of investors the opportunity to invest in markets near to them, while providing the structure, fundamentals, and diversity currently available in investment products aimed at older generations.
We created The GendeX Fund for any investor who does not feel a connection to the traditional investment establishment. Welcome Home."
Besides a website featuring photos of attractive twenty-somethings and even an original soundtrack, the new no-load fund attempts to woo young investors by offering an initial minimum investment requirement of just $100 with enrollment in an automatic investment plan ($2,500 minimum for non-AIP investments). The fund is on the expensive side with a 1.5% (capped) total expense ratio. There is also a a $2 per month maintenance fee for accounts under $2,500, and a 2% redemption fee shares sold within a year of purchase – a bit high and long for a fund that owns mostly actively traded U.S. stocks... ...read the rest of this article»
Fidelity's New Funds Give You Your Money Back
Last week we told you about three new 'managed payout' mutual funds from Vanguard, which promise an up-to 7% yearly payout with minimal reduction of initial investment principle. The funds will be marketed to retirees who want a steady stream of income.
The Wall Street Journal reports on eleven new funds from Fidelity aimed at those same investors.
Fidelity's new funds build on the success of the company's target-date funds, says Boyce Greer, president of asset allocation at the company. The Income Replacement funds are also portfolios of Fidelity stock and bond funds, with a mix that grows more conservative over time.
But instead of building toward a target date -- like retirement -- these funds make payments to you until a date you choose. The 11 funds range from Income Replacement 2016 to 2036.
How much do you get? That changes every year. The company will figure your monthly payments as a percentage of your annual account balance. If your portfolio grows, so will your payments.
The percentage of money you get also rises closer to your horizon date.
At 20 years out, you get 6.4% of your balance spread over 12 monthly payments; by the time you're 10 years away, you'll be getting 10%. In the last year, the fund pays 100% of what's left."
The Fidelity funds are structured to behave more like annuities than the new Vanguard funds in that Fidelity's funds are basically giving investors back their own money over a period of time (along with the underlying investment returns). The payouts of the new Fidelity funds are more aggressive than the Vanguard funds but can erode the principal more aggressively as well.
See also: Vanguard’s 7% Forever Funds
Vanguard’s 7% Forever Funds
Vanguard recently announced plans to launch three new managed payout funds. Managed payout, managed distribution, or level-rate dividend policies mean the mutual fund company decides how much the fund’s distributions will be, or manage the portfolio specifically to create a certain distribution payment stream. With most mutual funds irregular capital gains and dividend distributions are the result of income and realized capital gains building up in the fund portfolio. According to Vanguard, their highest payout fund is:
…geared toward investors who seek a higher payout level to satisfy current spending needs while preserving their capital over the long term. This fund is expected to sustain a managed distribution policy with a 7% annual distribution rate…"
This move by Vanguard brings a little legitimacy to a sometimes questionable strategy used primarily by closed end funds to give investors the illusion of steady yield.
As investors retire, they want regular returns so they can live off their portfolio. Stocks offer growth to beat inflation, but little in the way of regular income – even a fund made up of the highest yielding common stocks in the market delivers under 4% today. Bonds offer slightly more yield, but no principal growth to offset 30 retirement years of inflation.
Vanguard’s new funds will attempt to address this problem. They will be formulated with the right asset mix to allow monthly liquidation at a rate as high as 7% a year with minimal principal downside... ...read the rest of this article»
PIMCO To Launch Bond ETF
The firm known most for active fixed income management is launching a rather dull bond index-based Exchange Traded Fund according to Dow Jones:
Bond mutual fund giant Pacific Investment Management Co. plans to dip its toe into the fast-growing exchange-traded fund business.
The Newport Beach, Calif. firm, often known as Pimco, said its initial ETF would follow the Lehman Brothers U.S. Aggregate Index, a broad bond market benchmark that is already the basis for popular ETFs from Barclays PLC (BCS), State Street Corp. (STT), and Vanguard Group."
PIMCO - the home of famed bond fund manager Bill Gross - actually manages several ETFs - if you define an ETF as a fund that trades on an exchange...they manage closed-end funds. Closed-end funds are actively managed with higher fees, and are often leveraged, but lack the snazzy arbitrage process that keeps the fund market price in check with the actual value of the fund (net asset value or NAV).
As more fund money goes to ETFs, big actively managed firms are damned if they do, damned if they don't: they don't want to manage lower fee index ETFs, but don't want to see their higher fee actively managed money go out the door either. PIMCO has their work cut out for them. Second and third versions of existing ETFs don't gather the trading volumes or assets of the earlier to market funds. Perhaps the target customer is other PIMCO clients.
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