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

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

Sale price can differ from NAV Generally close because of arbitrage –

redeem or create shares

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

Mutual Fund Abuses Late trading Front running

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

Taxes Don’t buy distributions

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

Turnover Lesser of:

Total Sales / Avg. Daily Assets Total Purchases / Avg. Daily Assets

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

Lock in losses $3,000 per year Can’t buy 30 days before or after

Step up at death

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%

What to Look For Expenses, expenses, expenses Turnover not important

No capital gains