Global vs. International

1. Global vs. International • Global – includes U.S. • International – does not include U.S. • Diversification with U.S. stocks

2. 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

3. 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

4. Currency risk • Bad if dollar strengthens • Good if dollar weakens • Political risk • Operational risk • Less developed markets • More fraud

5. 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

6. 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

7. New UIT • Short term • 1 year even • Example: Dogs of the Dow • Highest 10 dividend Dow stocks • Jan 1 to Dec 31

8. Exchange Traded Funds (ETF) • Hybrid • UIT and closed end fund • Generally indexed • Possibility of actively managed • Low management fee

9. Advantages • Trade during day • Short sell • Margin • Limit order • No load – transaction fee

10. Sale price can differ from NAV • Generally close because of arbitrage – redeem or create shares

11. 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

12. Mutual Fund Abuses • Late trading • Front running

15. MF distributions • Record date • Ex-dividend date – usually one day later • Fund drops by distribution • Reinvestment date • Usually ex-dividend date • Payable date

16. Taxes • Don’t buy distributions

18. 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

19. 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

20. What’s the problem? • You pay taxes on $333.33 • If you bought on October 31 • $4,000/ $10.667 = 131.246 shares

21. Turnover • Lesser of: • Total Sales / Avg. Daily Assets • Total Purchases / Avg. Daily Assets

22. 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

23. 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

24. Distributions • Ordinary dividends • Capital gains • Long-term • Short-term • Nontaxable distributions • Return of principal (rare)

25. Selling Shares • FIFO • Specific identification • Average cost - single category • Average cost – double category • Short-term shares • Long-term shares

26. Taxes • Don’t buy distributions • Step-up at death • Kiddie tax • First $650 of passive income free • At 14, kid’s tax rate

27. Tax Efficiency • Size of income distributions • Turnover • Biased • 40-50% - Damage is done • Total return • Fund flows

28. Lock in losses • $3,000 per year • Can’t buy 30 days before or after • Step up at death

29. Embedded Capital Gains

30. What to Look For • Expenses, expenses, expenses • Turnover not important • No capital gains