BusinessWeek had an article about Enhanced Index Funds. The general idea is to replicate the S+P 500 Index with futures contracts instead of stocks and then use the remaining cash to buy various types of fixed income. You would capture the return of the SPX with the futures and the yield from the fixed income would layer on top as the enhancement. There are also other ways to manage an enhanced index fund.
The article mentions six different open end fund that do this, there may be more. The six symbols are AXLVX, MWATX, PYMRX, PSPAX, PTOAX, and VQPNX.
I think this type of thing is worth learning about as far as learning different types of strategies. The concept seems to be in the same general area as something I have written about a few times which is buying zero coupon bonds and an index fund. Specifically if an investor has $100,000 and is generally uncomfortable with equities they could buy $100,000 face value of treasury zeros maybe maturing in 20 years for maybe $0.60 on the dollar and put the remaining $0.40 into an index fund.
Clearly there are differences but it seems to me to be a little similar.
I have no plans to buy an enhanced index fund nor do the zeros/index fund combo but learning the process here is worthwhile.
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1 comments:
I find it absurd that the sell side community is complaining about risk. Not that it isn't a problem, but possibly the issue is control.
I think reasonable investors have been traditionally told to put a few percent of resources into something like gold. So making it convenient is not a problem.
The fact that these etfs must subtract some cost to mantain their stores would be more persuasive if the article compared these costs with safe deposit storage and commissions and inconvenience of selling the physical product. I suspect the etf is better for smaller amounts held for the short and medium term and if you otherwise woudn't hold a safe deposit box, the physical stuff better for larger amounts held a long time.
The etf also has advantages because one can chose when to sell. It seems to me that several percent fluctuations in the course of the day are common.
I personally think it very convenient that in response to currency and/or inflation fears one has a very easy method of shifting to metals or commodities.
As for the balancing and diversification of various funds, there are arguments for 50% oil and all sorts of other distributions. Tools such as ETFs that let intelligent buyers or their advisors distribute or rebalance easily are quite simply power.
If previous tools had a record of protecting buyers and keeping them within conservative parameters, i might shudder at the new ones that diversify the potential array of easily acquired and easily sold investments, but they didn't necessarily provide this. People who didn't have basics were blown apart with mutual funds doing things like choosing risky ones or "diversifying" by selecting sets that had essentially the same holdings, they were blown apasrt by lousy stock choices, they have been bankrupted by conservatively dressed brokers who spoke with authority...
people are dropping fortunes into hedge funds.
Warnings that certain processes and products are fraught with risk are valid, but they need to be applied consistently. Tools which extend their range of investments and increase the capacity to customize are good. They can not be blamed for the propensity of many to behave like idiots.
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