global vs. international
DESCRIPTION
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 - PowerPoint PPT PresentationTRANSCRIPT
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Global vs. International Global – includes U.S.
International – does not include U.S.
Diversification with U.S. stocks
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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
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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
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Currency risk Bad if dollar strengthens Good if dollar weakens
Political risk Operational risk
Less developed markets More fraud
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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
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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
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New UIT Short term
1 year even
Example: Dogs of the Dow Highest 10 dividend Dow stocks Jan 1 to Dec 31
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Exchange Traded Funds (ETF)
Hybrid UIT and closed end fund
Generally indexed Possibility of actively managed
Low management fee
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Advantages Trade during day Short sell Margin Limit order No load – transaction fee
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Sale price can differ from NAV Generally close because of arbitrage –
redeem or create shares
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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
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Mutual Fund Abuses Late trading Front running
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Stock Shares P0 P1
X 500 $20 $40
Y 300 $30 $31 Cash $0 $0
Shares 1,000 1,000Total assets $19,000 $29,300 NAV $19.00 $29.30
Return = ($29.30 – 19.00) / $19.00 = 54.20%
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Stock Shares P0 P1
X 500 $20 $40 Y 300 $30 $31
Cash $9,500 $9,500
Shares 1,500 1,500Total assets $28,500 $29,300 NAV $19.00 $25.81
Return = ($25.87 – 19.00) / $19.00 = 36.41%
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MF distributions Record date Ex-dividend date – usually one day
later Fund drops by distribution
Reinvestment date Usually ex-dividend date
Payable date
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Taxes Don’t buy distributions
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Stock Shares 1-Nov 30-Oct 31-OctA 100 $20 $30 Sell @$30B 100 $30 $40 Sell @40
Cash $0 $1,400 $1,400
MF shares 500 600 600MF assets $5,000 $8,400 $8,400NAV $10 $14
You buy 100 shares on Oct 30 $1,400
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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
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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
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What’s the problem?
You pay taxes on $333.33
If you bought on October 31 $4,000/ $10.667 = 131.246 shares
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Turnover Lesser of:
Total Sales / Avg. Daily Assets Total Purchases / Avg. Daily Assets
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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
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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 and income flexibility.
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Distributions Ordinary dividends Capital gains
Long-term Short-term
Nontaxable distributions Return of principal (rare)
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Selling Shares FIFO Specific identification Average cost - single category Average cost – double category
Short-term shares Long-term shares
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Taxes Step-up at death Kiddie tax
First $650 of passive income free At 14, kid’s tax rate
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Tax Efficiency Size of income distributions Turnover
Biased 40-50% - Damage is done
Total return Fund flows
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Lock in losses $3,000 per year Can’t buy 30 days before or after
Step up at death
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Embedded Capital GainsShare
sP0 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 $33.60Embedded CG = ($33.60 – 30.50) /$30.50 = 10.16%
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What to Look For Expenses, expenses, expenses Turnover not important
No capital gains