Sunday, September 30, 2007

The iShares Emerging Markets ETF Does a Poor Job of Tracking the MSCI Emerging Markets Index

The iShares Emerging Markets ETF (symbol: EEM) and the Vanguard Emerging Markets ETF (symbol: VWO) both track the same index, the MSCI Emerging Markets Index. However, iShare's EEM has underperformed the underlying index by about 5% so far in 2007 due to a tracking error. Through the end of August 2007, EEM had appreciated about 17.33% for the year, whereas Vanguard's VWO had appreciated about 22.10%. The reason for the performance difference from the two ETFs that track the same index is due primarily to sampling techniques and, to a lesser extent, the larger expense ratio of EEM (0.75%) versus that of VWO (0.30%).

Index funds often fail to purchase all of the securities in the index being tracked. As I understand it, the funds often do this because some of the securities in the index are not very liquid and the purchase of even a small number of shares can substantially move the price of some securities. Moreover, the transaction costs can theoretically be reduced by purchasing a smaller number of different securites in a smaller number of trades.

There are 830 different securities in the MSCI Emerging Markets Index. iShares' EEM holds shares of 552 securities of the MSCI Emerging Markets Index. VWO, on the other hand, holds shares of 858 securities (i.e., VWO holds shares of some securities that are not even in the index in an effort to better track the index).

I'm not sure how iShares decides which of the securities to hold and which to avoid. However, EEM's 5% tracking error this year is very disconcerting. I own shares of EEM in my own accounts. I purchased them a couple years ago because EEM had a much larger trading volume than VWO and the bid/ask spread was lower. However, the trading volume of VWO has definitely increased over the past year or so and the bid/ask spread has been decreasing. From now on, I will probably only purchase shares of VWO because it does a much better job of tracking the MSCI Emerging MArkets Index.

Thursday, September 27, 2007

New Designs For The U.S. Penny Will Be Introduced In 2009 To Commemorate Lincoln's 200th Birthday

The U.S. Mint is changing the designs on the Lincoln penny in 2009 to commemorate the 200th anniversary of Abraham Lincoln's birthday and the 100th anniversary of the Lincoln penny. The face of the penny has remained the same since its introduction in 1909. The design on the reverse side, however, was changed in 1959 from wheat stalks to the current design of the Lincoln Memorial.

The U.S. Mint recently revealed that it will introduce four rotating designs on the 1-cent coin for 2009 that will depict different aspects of Lincoln’s life. Here are some of the designs being considered:

The commemorative coins will only be made in 2009; in 2010, news pennies will include a new permanent design.

I expect that the 2009 pennies will become collectors’ items, just like the 2004 and 2005 Westward Journey nickels have become. When 2009 rolls around, I will be sure to purchase a few rolls of the new pennies from my local bank branch.

*** Update - September 23, 2008 ***

The U.S. Mint revealed the four new designs for the U.S. penny in a ceremony on September 22, 2008. The four designs shown above in this post were merely among the proposed designs. The designs that are actually going to be used are discussed in a recent post I wrote discussing the new designs for the 2009 U.S. penny.

Saturday, September 22, 2007

August 2007 Returns For My Model Long-Term Portfolio

My Hypothetical Model Portfolio rebounded in August after registering negative returns in June and July. As of the market close on August 31, 2007, the Hypothetical Model Portfolio was up $1324, or about 0.88% during August. The Hypothetical Model Portfolio is now up about $6756 in 2007, a gain of 4.64%, as shown on the table below (click for a larger image of the table). The 2007 returns for the Hypothetical Model Portfolio now slightly trail the 5.14% return of the benchmark Vanguard S&P 500 Index fund (VFINX).

Tech stocks led the way in August, with the Nasdaq 100 ETF (QQQQ) rising 2.82%. QQQQ is now up an impressive 13.38% this year. I certainly never would have predicted at the beginning of the year that QQQQ would be one of the top performing U.S. stock market indices for the year.

Financials also performed very well in August, gaining back some of the ground they lost in June and July. The SPDR Financial components ETF (XLF) rose about 2.58% and the iShares Dow Jones U.S. Select Dividend Index Fund (DVY) rose about 2.05%.

Other broad U.S. stock market indices also registered decent returns. The Vanguard S&P 500 Index fund (VFINX) returned about 1.50%, the Vanguard Small Cap Value Index (VISVX) returned about 1.45%, and the Vanguard Small Cap Index mutual fund (NAESX) returned around 1.34%.

International stocks struggled during the month, with the Templeton Russia closed-end fund (TRF) dropping about 6.46% and the Vanguard Developed Markets Index mutual fund (VDMIX) dropping around 0.66%. TRF's return this year has been awful. As I have previously discussed, the primary reason for TRF's subpar returns has been due to premium compression of its closed-end shares due to the introduction of the first Russian stock market ETF. The Net Asset Value ("NAV") for TRF was actually up around 4% as of the end of August, but the shares were down more than 20% because the NAV premium fell from around 38% at the beginning of January 2007 down to about 0.67% as of the end of August.

The Model Portfolio's returns have been very volatile so far this year. Many pundits apparently think that the country is headed for recession. The FED will do everything in its power to prevent the U.S. economy from contracting and if the FED is successful, I expect the markets to soar much higher. On the other hand, if the FED is not successful, we will probably experience the first bear market since the awful contraction between 2000 and 2002.

*The Hypothetical Model Portfolio was created with an investment of $100,000 in securities as of the closing values on December 30, 2005 and an additional $25,000 was invested n securities as of the closing values on December 29, 2006. The reason why the total cost in the chart is greater than $125,000 is because the total cost accounts for the value of distributions reinvested into the mutual funds in the portfolio.

July 2007 Returns