Growing interest in foreign investing sparked the creation of a new class of exchange-traded securities in March 1996, called WEBS — World Equity Benchmark Shares. Currently, 17 such securities exist, each designed to approximate the performance of the overall stock market of a major foreign country. Designed by Morgan Stanley Dean Witter & Co., managed by Barclays Global Fund Advisors and traded on the American Stock Exchange, WEBS are constructed from a sampling of stocks representing a broad cross-section of the national markets they track. The sampling is designed to correlate as closely as possible with the Morgan Stanley Capital International (MSCI) Index for that country. In practice, WEBS have correlated an average 95 percent with their respective MSCI indices.

WEBS: Investing in an Entire Country in One Trade

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WEBS Available Today

Country Symbol

Australia EWAAustria EWOBelgium EWKCanada EWCFrance EWQ

Germany EWGHong Kong EWH

Italy EWIJapan EWJ

Malaysia EWMMexico EWW

Netherlands EWNSingapore EWS

Spain EWPSweden EWD

Switzerland EWLUnited Kingdom EWU

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Advantages: Access and Trading Flexibility

• With very few mutual funds offering indexed investments in specific countries' stock markets, WEBS fill a niche in the foreign investing market. For instance, no open-end funds currently exist that offer exclusive exposure to Austria, Belgium, Canada or Singapore. However, you can invest in WEBS for these countries. Because WEBS are exchange-traded, they offer two distinct trading advantages not available with most open-end mutual funds.

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WEBS Can Be Sold Short

A practice in which shares are sold in anticipation of buying them back at a lower price and profiting from the decline. Short selling can be employed defensively, to help lower the exposure that an investor's portfolio may already have to a particular country's stock market.

For example: An investor owns a broad portfolio of Japanese securities. At some point, the investor may think that Japan's stock market has run too far too fast. As an alternative to selling the securities (and incurring possible capital gains taxes), the investor can short sell a similar amount of WEBS Japan. While the WEBS portfolio and the Japanese securities are not identical, the investor may be removing much of the risk of a general decline in Japan's stock market by offsetting a loss in the securities with a gain from the short sale of WEBS Japan. This strategy, however, may work against an investor if the stock market rises, causing them to miss out on any potential gains.

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WEBS Can be Bought and Sold Intra Trading Day

• Most open-end funds set their price just once per day; they can be traded only at the day's closing net asset value (NAV). But a WEBS investor may be able to exploit volatility during the trading session to buy at a lower price — or sell at a higher price — than might be obtainable at the close.

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Weaknesses: Cost, Liquidity and Foreign Currency Risk

• WEBS have low expenses compared to international funds — but not compared to open-end international index funds. As of June 30, 1999, the average expense ratio for WEBS was 1.19 percent, compared to 1.70 percent for the average international fund in Morningstar's database. Open-end international index alternatives, which offer a more diversified foreign investing opportunity, checked in much lower. Because they are traded on an exchange,

• WEBS incur transaction costs — both stock commissions and "slippage." To understand slippage, you need to know about the bid-ask spread. Any stock price you see as a buyer is different than what a seller sees. This is called the bid-ask spread. For example, a spread may be 10 – 10 1/8. A public buyer will usually pay 10 1/8 for a share, but sell it at 10. The one-eighth gap (the bid-ask spread) amounts to more than 1 percent of the stock price in this example. Slippage describes the cost of this gap over time to the public investor.

• Some WEBS — such as those for Sweden and Belgium — have been unpopular and show low daily trading volumes. As with most thinly traded stocks, this lack of liquidity can mean especially wide spreads — often as much as 2.5 to 5 percent of the stock price.

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Foreign Currency Risk

• An investor in WEBS Switzerland, for instance, is exposed to the Swiss franc's fluctuations relative to the U.S. dollar. That exposure can be costly — the Swiss franc lost 17 percent of its value against the dollar in 1996, and 12 percent in 1997, before gaining 7 percent in 1998.

• This extra layer of risk is present in most foreign investments, but not in the WorldWide Funds, which seek to hedge their currency risk in each of their funds. In the WorldWide Switzerland Index Fund, for instance, the managers sell short Swiss francs in a quantity large enough to offset the securities loss that would result from a drop in the value of the Swiss franc.

• There is no guarantee that such a strategy will be successful, however. Of course, foreign currency fluctuations may work in the investor's favor, but investors in WEBS have no choice but to assume such risk.

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Summary

• Despite several weaknesses and risks, WEBS offer country-specific exposure to several markets not normally accessible to the average investor, as well as a measure of investment flexibility not found in

open-end funds.