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Global vs. International Global – includes U.S.
International – does not include U.S.
Diversification with U.S. stocks
Global Categories Large, developed economies
U.K., France, Germany, Japan
Second tier markets South Korea, Switzerland, Belgium
Emerging or Developing markets Brazil, China, Russia, India
Issues in International Funds
Investment issues Analysis is more difficult
Trading costs Usually higher
Regulatory issues May prohibit foreign investors Even if allowed, often more difficult,
limited foreign ownership
Currency risk Bad if dollar strengthens Good if dollar weakens
Political risk Operational risk
Less developed markets More fraud
Unit Investment Trusts Generally bought and sold through
brokerages Generally passive, bond, often tax-
free bond Generally for large investors Generally long-term
10+ years
UIT Negatives Front end load as high as 5.5% Sponsors (broker) often has market
Spreads from 1.5% to 5.5% “Dribble back” of principal as
bonds redeemed No manager to restructure if
needed Available information is limited
New UIT Short term
1 year even
Example: Dogs of the Dow Highest 10 dividend Dow stocks Jan 1 to Dec 31
Exchange Traded Funds (ETF)
Hybrid UIT and closed end fund
Generally indexed Possibility of actively managed
Low management fee
ETF Names Diamonds – DJIA Spyders – S&P 500 Cubes – NASDAQ 100 WEBS – World Equity Benchmark Series iShares – Barclays Global Investor HOLDRS – sector Vipers – Vanguard Real assets – Gold & Silver
http://www.amex.com
Stock Shares P0 P1
X 500 $20 $40
Y 300 $30 $31
Cash $0 $0
Shares 1,000 1,000
Total assets $19,000 $29,300
NAV $19.00 $29.30
Return = ($29.30 – 19.00) / $19.00 = 54.20%
Stock Shares P0 P1
X 500 $20 $40
Y 300 $30 $31
Cash $9,500 $9,500
Shares 1,500 1,500
Total assets $28,500 $29,300
NAV $19.00 $25.81
Return = ($25.87 – 19.00) / $19.00 = 36.41%
MF distributions Record date Ex-dividend date – usually one day
later Fund drops by distribution
Reinvestment date Usually ex-dividend date
Payable date
Stock Shares 1-Nov 30-Oct 31-Oct
A 100 $20 $30 Sell @$30
B 100 $30 $40 Sell @40
Cash $0 $1,400 $1,400
MF shares 500 600 600
MF assets $5,000 $8,400 $8,400
NAV $10 $14
You buy 100 shares on Oct 30 $1,400
Stock A 100($30 – 20) = $1,000
Stock B 100($40 – 30) = $1,000
$2,000 in capital gains distributed CG distribution = $2,000/600 =
$3.333
Fund NAV $14 – 3.333 = $10.667
You have 100 shares @ $10.667 = $1,066.67 100 dividends @ $3.333 = $333.33 Portfolio = $1,400
What’s the problem?
You pay taxes on $333.33
If you bought on October 31 $4,000/ $10.667 = 131.246 shares
Traditional vs. Roth IRA Traditional
$2,000/year, 30 years, 10% return, 30% tax
Value in 30 years = $328,988 Annual withdrawal for 20 years =
$38,642.81 Taxes @ 30% = $11,592.84 Aftertax withdrawal = $27,049.97
Roth Deposit = $2,000(1 - .30) = $1,400
Value in 30 years = $230,291.63 Annual withdrawal (tax-free) =
$27,049.97
The advantage of a Roth is increased deposits, not the tax-free withdrawals
Distributions Ordinary dividends Capital gains
Long-term Short-term
Nontaxable distributions Return of principal (rare)
Selling Shares FIFO Specific identification Average cost - single category Average cost – double category
Short-term shares Long-term shares
Taxes Don’t buy distributions Step-up at death Kiddie tax
First $650 of passive income free At 14, kid’s tax rate
Tax Efficiency Size of income distributions Turnover
Biased 40-50% - Damage is done
Total return Fund flows
Embedded Capital Gains
Shares
P0 P1
A 100 $40
$4,000 $45
$4,500
B 200 $80
$16,000
$87
$17,400
C 300 $35
$10,500
$39
$11,700
Total $30,500
$33,600
Shares
100 100
NAV $30.50 $33.60
Embedded CG = ($33.60 – 30.50) /$30.50 = 10.16%