The World. In One Ticket.
by Richard
Now that the market is bruised and bleeding after a very rough start during the first quarter, most investors are shell shocked.
This has been a tumultuous decade. Starting with the 1997-98 cycle that began with the Asian currency crisis, that morphed into the Russian Ruble crisis, that precipitated the Long Term Capital hedge fund implosion…
Then to the bursting of the Tech bubble in 2000, and the sickening slide in the broader markets through 2002…
Then to the housing bubble precipitated by the fed driven free and easy monetary policy…
Leading to the recent sub-prime crisis and the virtual evaporation of liquid, functioning credit markets…
Contributing to a tidal wave of foreclosures and bankruptcies now underway….
Culminating now with the semi-bear market of 2007-2008.
Semi, in the sense that the Dow and S&P 500 retraced over 15% from October highs to March lows, but not the 20% decline that officially defines a bear market.
But a bona fide bear decline of over 20% in small cap and NASDAQ indexes, not to mention the frothy markets of India and China.
All of which speaks to the contrarian in me, telling me that so much unrelenting pain is wringing the excess out of global markets, and so we need to take another look. From a global perspective…
Introducing: Global Index Funds
Check out the April 3 Wall St Journal s (C13) article “Vanguard Will Offer a Global Index Fund“. Imagine one fund that tracks the FTSE All-World Index, which tracks 2,800 large cap and mid cap stocks in 48 countries.
Reflecting global market cap allocations, the fund will split 45/55 in it’s domestic/foreign percentages. This is a more aggressive foreign share than that found in most U.S. portfolios, but that is more a reflection of innate investor comfort, timidity and caution.
Advisors have been trying to nudge their clients into a healthier foreign weighting, but they don’t push the point when they encounter resistance.
The fund should hit the street in the 2nd quarter, and like most of Vanguard’s index funds, it can be purchased as a traditional mutual fund or in the alternate share class as an ETF (exchange traded fund).
Which Structure is Best for You?
The quick and dirty decision point is whether the invested sum is a one-time lump sum, or a stream of investments over time. The ETF structure, due to recurring commissions, is best suited to the one bulk trade, while traditional mutual funds will better accommodate multiple investments over time.
The estimated management fee for the ETF share class will be just 0.25%, at a time when the average managed world-stock fund is 1.55%.
This will put the wind at your back, having such a pronounced head start without carrying the dead-weight of the higher fee.
Barclay’s iShares ETF fund family has a look-alike fund that was brought to market last month. The symbol is ACWI, and it tracks the MSCI All Country World Index.
The differences are slight. Like the FTSE All World Index, it also tracks 48 developed and emerging countries, encompassing 2500 securities representing approximately 85% of world equity capitalization. The expense ratio is 0.35%.
I would be comfortable with either product, but the penny pincher in me always likes to give the nod to the rock bottom fee structure, just to send a message to Wall Street.
Both are orphan products. You may hear about them if you have a fee-only advisor, but no commission driven broker would touch these with a ten-foot pole.
Now, if you could just wrap this new product into a closed-end fund, sold with a hefty load, then leveraged with debt to goose the volatility and return, resulting in an after market trading price that values the underlying securities below fair market value…well…now we have something that might tease out the interest from your friendly broker.
You can take any simple, low cost product and re-engineer it to Wall Street Standards. The formula is simple enough. Introduce some complexity, throw in a pinch of opacity, add in some illiquidity, and leverage with borrowed money and derivatives, and you have….our most recent and chastised market .
Who Among You are Best Suited for these new Global funds?
They have obvious merit for the Rip Van Winkle, file and forget type of investor. One order buys the whole world.
Trigger finger investors will likely find them too stodgy and all-encompassing for their tastes.
Place your bet now. Tortoise or Hare.
