Arachnophilia (More Spiders)

“Recently you wrote about the S&P 500 Index stock on the Amex. [Symbol: SPY, acronym SPDR, otherwise known as “spiders.”] I would like to know whether there is/are similar stock for the NASDAQ composite or other foreign market indices? Thank you in advance.” — Vichai Rojanavanich

So far as I know, there are two SPDRs and 17 WEBS, all traded on the Amex. The SPDR I wrote about (symbol: SPY) mimics the performance of the S&P 500. The other (symbol: MDY) — which may be an even more interesting choice now that the S&P 500 has had so many indexers piling into it — mimics the S&P MidCap Index of somewhat smaller companies. WEBS, meanwhile, are geared to mimic the performance of various single-country markets overseas. I don’t know of anything like this on the NASDAQ has just now.

Okay, okay, there aren’t any indexes on the Falklands or Newark — but wouldn’t those be the symbols if there were?

At the risk of repeating most of my earlier points, I think these “index stocks” are outstanding.

• Their low annual expenses are comparable to Vanguard for similar products. This gives them a hefty built-in advantage over actively managed funds, not to mention the tax advantages they share with index funds (i.e., they rarely sell, and thus rarely expose their owners to as much taxation as actively managed funds do).

• Unlike closed-end country funds, they are designed to keep premiums and discounts from developing, which gives you one fewer uncertainty to try to weigh. (Not that I mind buying country funds at a big discount. But buying them at a small discount is risky, because it could become big.)

• These index stocks also have the advantage of being marginable and shortable (or is that a disadvantage?).

My friend Less Antman opines: “There are, of course, brokerage costs for buying and selling these index stocks, but I think they make great buy-and-hold investments for IRAs. And WEBS, in particular, give one the chance to bet on certain countries. I may experiment personally with the ‘mean reversion’ data I’ve talked about — this notion that over time, strong outperformers or underperformers revert to their historic average performance. The current Journal of Finance reports a study that confirms that a valuable investment strategy may be to invest for the next 3-5 years in the countries with the worst performance of the last 3-5 years: WEBS are the perfect vehicle for executing this strategy. I’m going to figure out which 4 countries had the worst results over the past 3-5 years; I think Japan is going to be on the list and the United States isn’t!”

So maybe Japan and the U.S. will do a little “reverting to the mean” over the next few years, and Less will be the richer for it. This ties in a bit with what I was saying yesterday.

“And though I’m not the one to do it,” Less continues, “I wonder if there is a low-risk arbitrage available on the WEBS to buy one of the actively managed closed-end country funds selling at a deep discount (Germany comes to mind) and short the related WEBS stock. The problem is that these discounts often persist for a long time. Also, while waiting for the gap to close on a discount, the annual expenses and extremely high brokerage costs incurred by the actively managed closed-end product may eat away at profits. And those sickening rights offerings dilute shares as well.”

It’s an arbitrage, in short, Less is smart to recognize and even smarter to avoid. But not the WEBS and SPDRs themselves. They are a good deal.