AssetPreserver News

2009. What a year.

TLT, which lead the pack last year, was dead last this year. It is almost as if last year’s return chart was turned upside down.

Returns are before taxes.

Distributions are reinvested.

7 day or 30 day SEC yield is used when possible.

BSR Alerian MLP index was delisted. AMZX substituted.

The investment lists at AssetPreserver.com are now free.

The idea behind these lists is to show the major stocks in an industry, some examples of low-cost funds and ETFs, and the relevant indexes. These are not investment recommendations.

The Ryan Labs 3 year GIC index is the benchmark comparison index for stable value funds. You can see how the average stable fund performed on the average since 1993.

Annual Performance at Year End

Tired of housing prices going down? Happy when they go up? Investors can now bet for or against a recovery in the residential real estate market with new exchange-listed securities designed to mimic the movement of U.S. home prices.

Investment manager MacroMarkets on Tuesday launched exchange-traded products on the NYSE Arca (Archipelago Securities Exchange) designed to track housing values.

MacroShares Major Metro Housing Up and MacroShares Major Metro Housing Down are benchmarked to the S&P/Case-Shiller Composite-10 Home Price Index. The paired securities will feature a 300% leverage factor.

“For the first time, the market will have available exchange-traded benchmarks as an indication of where investors believe U.S home prices are headed,” said Robert Shiller, MacroShares chief economist.

“Our current financial crisis is largely due to a failure to manage housing risk,” Shiller added. “At approximately $20 trillion, U.S. housing is a large and important asset class that has suffered from the lack of liquid, transparent markets.”

The MacroShares Major Metro Housing Up is designed to rise when U.S. housing prices climb. Its counterpart, MacroShares Major Metro Housing Down, profits when real estate values fall.

MacroShares exchange-traded products (ETP) don’t invest directly in an underlying asset such as stocks, bonds or commodities futures. Instead, MacroShares are issued in pairs, and an equal number of shares for each fund are created. The funds invest in short-term Treasury securities and overnight repurchase agreements.

The paired trusts have a binding agreement to pledge assets to one another over time, based on the movement of housing prices. This transfer of Treasury securities back and forth between the funds changes their values and gives investors exposure to the direction of U.S. home prices. The structure resembles a see-saw as the assets are shuffled between the paired trusts. The arrangement has also been compared to total-return swaps.

Because of the leverage factor, the MacroShares will experience changes of three times, or 300%, of the S&P/Case-Shiller Composite-10 Home Price Index.

The MacroShares, which can be traded intraday, have key differences from traditional ETFs. MacroMarkets warns that the prices of the funds may diverge from underlying value.

“Premium or discounted prices for these securities reflect a variety of market factors and expectations,” the firm says. “For example, the market price of MacroShares Major Metro Housing Down will reflect supply, demand, and investor expectations regarding the future path of home prices over the remaining term of the security.”

The funds will make quarterly distributions of net income, if any, on the Treasury securities.

MacroMarkets had tried to launch the home-price products through a public auction, but no bids were accepted because there was insufficient demand for an equal number of Down and Up MacroShares at the prices at which such shares were offered in the auction.

Last year, MacroMarkets liquidated a pair of funds linked to crude oil prices when the “down” version ran out of assets when prices spiked. The oil funds saw premiums and discounts to net asset value. The company followed up with MacroShares $100 Oil Up Trust and MacroShares $100 Oil Down Trust, but the funds were recently shut down due to lack of assets.

The new MacroShares tied to home prices will be followed closely by ETF observers. The products’ backers say the structure can give investors exposure to inaccessible asset classes or economic indicators.

Note the shares are a in a trust and mature in November, 2014.

Summary

UMM – MacroShares Metro Housing up. 300% leverage. 1.25% expense ratio (expensive).

DMM – MacroShares Metro Housing down. 300% leverage. 1.25% expense ratio (expensive).

According to MacroShares website, they are a publicly-traded partnership which means all income will be reported on a K-1 form (rather than a 1099 form).

The standard Standard & Poor’s 500 is capitalization-weighted; that is, each stock’s percentage of the index is based on its market capitalization. The other S&P 500 is equal-weighted; that is, each stock has the same percentage of the index so no stock dominates the index’s influence. Is this good?

Not bad, so far.

In 2009, the equal-weighted S&P 500 is up 17% while the cap-weighted index is up about 5.5%.
From 1990 through June, 2009, the equal-weighted index was up 9.1% vs. 7.5% for the cap-weighted index.

Disadvantages

There are some caveats with equal-weighted index:

1. Higher transaction costs.

The equal weight indexes are rebalanced every quarter (which adds to higher cost) whereas the cap-weighted index requires balancing only if the stocks of the S&P 500 index changes.

2. More volatile. This is primarily due to the propensity of smaller companies to be more volatile than larger. Since there is equal weighing, the small company volatility is amplified.

3. The dividend yield tends to be smaller than the cap-weighted index.

All is not perfect. In 2007 and 2008 the equal-weight index performed worse than the cap-weighted version.

Indexes

RSP – Rydex S&P Equal Weight Index (ETF). Replicates the S&P 500 Equal Weight Index. Inception date: May, 2003. 0.40% expense ratio.

SPY – Cap-weighted S&P 500 Index (ETF). Replicates the S&P 500 Capitalization Weighted Index. 0.10% expense ratio.

There are a few mutual funds that emulate the equal weight index but their expense ratios are more than 1.00% which is outrageous for an index.

As usual, this article is for informational use only.

The United States Gasoline Fund, LP (UGA) is an interesting fund that tracks the price of unleaded gasoline.

To quote:

The trust will invest in the futures contract on unleaded gasoline delivered to the New York harbor traded on the New York Mercantile Exchange that is the near month contract to expire.

The trust is organized as a limited partnership meaning you will get K-1 forms (around March)  instead of 1099 forms. The expense ratio is 0.60%.

Gasoline prices are volatile and are dependent on many factors:

• crude oil price
• refining capacity
• supply and demand
• seasonality
• government regulations
• government taxes

Here is a link to the United States Gasoline Fund home page. The fund is managed by United States Commodity Funds, LLC.

Remember, the fund tracks gasoline prices, not oil prices. Also, no dividends are paid.

We have no holdings or vested interest in this fund nor is this a recommendation.

Doug

As we espouse all year long, index funds beat most managers over the long term.

Investors in actively managed mutual funds the last five years have reason to wonder what they’ve been paying for: A new study from Standard & Poors finds that 70% of large-cap fund managers who use the S&P 500 as a benchmark for comparison have failed to match the performance of the index over that time.

The time period covered in the latest report is year 2004 to 2008. The study does its best to make relevant comparisons by taking into account things such as survivorship bias, data cleaning, and style consistency to name a few. A listing of the study’s attributes are found in the link (in Resources).

The failure of active management is replicated across almost all categories, not only U.S. stock funds but also bond funds and emerging-markets funds. What’s more, those numbers are similar to the previous five-year cycle.

Though some managers beat the indexes sometimes it is important to understand the risks and to know your odds of beating the index.

Things were even worse for small-cap active managers, said Dash. The S&P SmallCap 600 outperformed 85.5% of small-cap funds. That index was down 0.6% over the five years to Dec. 31.

Even among emerging-markets funds, for many years the darlings of mutual fund investors, most lagged their comparable S&P index. The S&P/IFC Emerging Markets Index bested 89.8% of actively managed emerging-markets stock funds in the past five years.

Actively managed bond funds also struggled. Except for high-yield funds, at least 80% of bond funds lagged their comparable benchmarks across all categories. Because of liquidity issues, bond benchmarks are not as easy to replicate by index funds. Fund cost is even more of a factor in the bond world.

Even better, the numbers from S&P are supported by research from Morningstar Inc.

Resources

S&P Studies – Standard & Poor’s Index Versus Active (SPIVA)

Returns are before taxes.

The long term treasury interest rate dropped about 2% in 2008 which is why the total return was so remarkable.

7 day or 30 day SEC yield is used when possible.

Notes

APY = annual percentage yield

VBMFX – proxy for Barclays US Aggregate Bond Index. The broadest measure of the taxable U.S. bond market, including most Treasury, agency, corporate, mortgage-backed, asset-backed, and international dollar-denominated issues, all with investment-grade ratings (rated Baa3 or above by Moody’s) and maturities of 1 year or more.

Stable Value Index – Heuler Stable Value Pooled Index. The average of top quality stable value trusts.