The U.S. Treasury Secretary Would Like to Get Rid of Penny Coins

I have previously written about how I have been collecting U.S. nickel and pre-1982 penny coins because their the value of the metals in such coins (i.e., the "melt value") exceed the face values of those coins. [See my posts from February 2006, April 2006, and October 2006.]

Coinflationis an interesting website that I periodically visit because it gives the melt values of a number of coins currently in circulation, as well as the melt values of silver coins no longer in circulation, but which are fairly widely held by collectors. According to Coinflation, as shown in the image below (click on the image for a larger view) a pre-1982 copper penny has a melt value of about 2.55 cents (i.e., 255% of face value), a copper nickel has a face value of about 7.04% (i.e., 140.8% of face value), and a 1982-2008 zinc penny has a face value of about 0.711 cents (i.e., 71.1% of face value).

Given the rapid rise in the price of commodities such as copper and nickel metals, the U.S. Mint has been losing many millions of by making nickels and pennies. Even though zinc pennies currently have a melt value below their face value, when transportation and other miscellaneous manufacturing costs are taken into account, the Mint loses quite a bit of money making some 7-8 billion pennies each year.

Treasury Secretary Henry Paulson was recently interviewed and stated that he personally would like to get rid of the penny due to its minimal value and usefulness. However, Paulson concluded that it would not be politically doable at this time because the penny coin does have its fans.

Even if the penny coin is not eliminated anytime soon, it seems highly likely that the base metal compositions of nickel and penny coins will likely be changed to less expensive metals at some point in the near future, as I have previously speculated. The Bush administration is currently pushing to give the government the authority to change the metal content of all of the country's coins in order to save money.

If the government does pass legislation to change the metal contents of coins, I expect the Mint to quickly change the base metals of at least the U.S. nickel and penny coinage. If that happens, it is likely that collectors will eventually, over time, snap up much of the older coins currently in circulation. I personally don't want to see the penny coins go away, but I do think that changing the base metal content of U.S. coins would be a good idea so that the U.S. Mint doesn't have to lose money simply by making pennies and nickels.

1980 - 2007 Stock Market Returns for Various Indices

Last year, I posted a chart of the annual stock market and bond market returns for various indices for the time period from 1980-2006. The chart I previously posted included returns for small cap indices (Russell 2000, Russell 2000 Value, and Russell 2000 Growth), large cap indices (S&P 500, S&P/Citi 500 Value*, and S&P/Citi 500 Growth*), a broad-based foreign stock index(Morgan Stanley Capital International Index for the developed stock markets of Europe, Australasia, and the Far East ("MSCI EAFE index")), and an index of bonds (Lehman Brothers Aggregate Bond Index ("LB Agg.")). I have updated the chart (click on the image for a larger view) to reflect returns for 2007 and have also added historical returns for the Nasdaq Composite Index.

As shown in the chart below (click on the image for a larger view), all of the indices tracked have provided returns far in excess of inflation (inflation has averaged somewhere between 3 and 4 percent since 1980). The Russell 2000 Value index has outperformed all other investment styles over the time frame, returning 4070%, which is an average annual return of about 14.25%. This is total return is excepially impressive when one considers that Small Cap Value stocks were the worst performers of the tracked indices, losing close to 10% in 2007.

The Russell 2000 Growth Index is the worst performer since 1980, on the other hand, providing a total return of just 1011% over the time period, or about 8.98% per year. Overall formidable return of the Russell 2000 Value index is to be expected, given that Small Cap Value stocks have routinely outperformed other investment styles over long periods of time as I have previously discussed.

International stocks were the strong performers last year, with the MSCI EAFE Index providing the only double-digit returns of all of the indices tracked. The MSCI EAFE Index has now outperformed the S&P 500 Index for 6 consecutive years. This is to be expected, given that the U.S. runs an enormous trade deficit with the rest of the world and the U.S. dollar will inevitably weaken.


* I acquired most of the returns in this chart from old versions of the Callan "Periodic Table" of investment returns. The older charts I found provide data for the S&P/Barra 500 Value Index and the S&P/Barra 500 Value Index, instead of the S&P/Citi 500 Value and Growth Indices, respectively, during the time period from 1980-1986. I'm not sure whether the older S&P/Barra indices are substantially the same as the S&P/Citi indices, but they appear to be so.

** Edit - January 2, 2017 ***
I have updated this chart with results through 2016.

Updated "Periodic Table" of Equity Style Investment Returns Through 2007

Posted below is an updated version of the "Periodic Table" of equity style investment returns from 1988-2007. (Click on the image below to see a larger version of the Periodic Table.) This chart was originally posted on the website for Callan Associates.

*If the image is too difficult to see, you can view a .pdf of the image here.

I have written a new post with results from 1989-2008.

Proshares Offers a Wide Variety of Interesting Leveraged ETFs

ProShares offers a wide variety of interesting Exchange Trade Funds ("ETFs") that may be suitable to some inventors. The investment company applies financial leverage to implement trading strategies that would be prohibitively difficult for most small investors to replicate. The company’s most interesting offerings are its Short ProShares and Ultra ProShares ETFs.

The Short ProShares ETFs track the inverse of certain indices. ProShares offers Short ETFs that track the inverse of indices such as the Nasdaq 100, the Dow Jones Industrial index (i.e., the Dow 30 index), the S&P 500 index, the S&P 400 MidCap index, and the Russell 2000 index. The ProShares ETFs hold financial instruments such as futures contracts, options, and swap agreements to track the inverse of the respective indices.

The Ultra ProShares are designed to return twice the daily performance of the respective indices being tracked. Some of the more popular Ultra ProShares ETFs include ones that track twice the performance of the Nasdaq 100, the Dow 30 index, the S&P 500 index, the S&P 400 MidCap index, and the Russell 2000 index. The Ultra ProShares ETFs also hold a variety of financial instruments in an effort to achieve their intended strategies.

ProShares also offers UltraShort ETFs that track twice the inverse of select indices, such as the Nasdaq 100, the Dow 30 index, the S&P 500 Index, the S&P 400 MidCap Index, and the Russell 2000 index.

The ProShares ETFs are not for the faint of heart, as they are extremely volatile. However, they are suitable for more experienced investors who wish to make plays on movements of certain indices, such as the S&P 500 index.

Although investors can ordinarily sell short ETFs or purchase or sell futures contracts to profit on the fall in price of indices, the ProShares ETFs offer some advantages. For example, a typical investor selling short an ETF would be subject to potential margin calls and potentially unlimited losses in the event that the ETF that was sold short rapidly increases in value. By purchasing a Short ProShares ETF, on the other hand, the same investor would not be subject to margin calls and the potential losses would be limited to the investor's purchase price of the Short ProShares ETF.

I personally like some of the Ultra ProShares ETFs, such as the Ultra MidCap 400 ETF. The long-term annual returns of MidCap stocks are somewhere around 11-12%, and the Ultra MidCap 400 ETF should exceed those returns over time.

It should be appreciated that due to transaction costs (e.g., the cost of purchasing the futures contracts and options, as well as the cost of running and advertising the various ETFs), it is not possible to return exactly the inverse of an index or twice the return of the index. Moreover, the Ultra ProShares ETFs, for example, are designed to return twice the daily return of a tracked index, as opposed to twice the annual return. Accordingly, in flat markets the Ultra ProShares ETFs may substantially trail double the returns of the tracked index over extended periods of time, although the returns are much closer to that of twice the tracked index during volatile markets.

November 2007 Returns For My Model Long-Term Portfolio

The October 2007 results for my Hypothetical Model Portfolio were the worst performance (on a % basis) since I created the portfolio back in 2006. The returns were very volatile throughout the month, as recession fears permeated through the market.

As of the market close on November 30, 2007, the Hypothetical Model Portfolio was down $9045, or about 5.51% during November. However, the Hypothetical Model Portfolio is still up about $9522 in 2007, a gain of 6.556%, as shown on the table below (click for a larger image of the table). The 2007 returns for the Hypothetical Model Portfolio are currently slightly ahead of the 6.15% return of the Vanguard S&P 500 Index fund (VFINX), my benchmark proxy for the S&P 500 index.

All of the holdings were down in November, with financials and emerging markets leading the charge downward. The SPDR Financial components ETF (XLF) dropped 8.09%, likely due to that large position it holding in Citigroup, a company that performed very poorly during the month as it announced huge losses and the exit of its chairman and CEO. Emerging markets dropped due the overall stock market turbulence, as the riskiest equities tend to plummet the most during times of uncertainty. The Templeton Russia closed-end fund (TRF) dropped 8.0% and the iShares Emerging Markets ETF (EEM) dropped 7.65%. Tech stocks also struggled, with the Nasdaq 100 ETF (QQQQ) dropping 6.76%.

Small caps and midcaps struggled during the month. The Vanguard Small Cap Index mutual fund (NAESX) dropped 6.79% and the Vanguard Small Cap Value Index fund (VISVX) fell 6.74%. The Vanguard Midcap Index mutual fund (VIMSX) was the only other holding to fall more than 5% during the month.

The results of the portfolio holdings for the first 11 months of 2007 have varied substantially, with six holdings showing gains and four showing losses. The biggest gainer so far is EEM, which is up about 35.24% for the year. The biggest loser is TRF, which has fallen about 16.58%, primarily due to premium compression, as I have previously discussed.

I anticipate that the portfolio returns will continue to be volatile in December and expect the portfolio to close out 2007 with a small gain of 5-10% for the year. It would not surprise me if the U.S. economy slips into recession in early 2008. If a recession does occur, I expect it to be a very mild recession. Global growth is strong and should help support the U.S. economy even in the face of recessionary winds.

*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.

October 2007 Returns

Best Posts Over The Past Year (2006-2007)

I started my Finance and Investments blog on November 8, 2005. I have posted 118 times since then, including 41 times during the past year, discussing a number of topics primarily focusing on stock market investing (including tracking a model portfolio), basic coin collecting, and general personal finance issues. Here are some of my favorite posts from 11/2006 - 11/2007:


Best posts relating to Stock Market Investing:
(1) 1980 - 2006 Stock Market Returns for Various Indices
(2) The First BRIC ETF Was Launched In September
(3) How To Construct a BRIC-Tracking Portfolio
(4) Barclays Offers the Only Indian Stock Market ETF
(5) The First Russian Stock ETF Was Launched In April
(6) S&P 500 Dividends (Updated through January 2007)
(7) Historical Earnings and P/E Ratios for the S&P 500 Index


Best posts relating to Coin Collecting:
(1) How to Collect Pre-1982 Pennies and Nickels
(2) New Designs For The U.S. Penny Will Be Introduced In 2009 To Commemorate Lincoln's 200th Birthday
(3) The U.S. Mint Is Implementing A New Rule Abolishing the Melting of Pennies and Nickels
(4) The Melt Value of U.S. Nickel Coins Is Still Increasing


Best posts relating to Miscellaneous Personal Finance Issues:
(1) The Motley Fool Has Lost A Lot Of Credibility Over the Past Few Years
(2) The iShares Emerging Markets ETF Does a Poor Job of Tracking the MSCI Emerging Markets Index
(3) Emigrant Direct Has Onerous Money Transfer Rules


*** See also: Best posts from 11/2005 - 11/2006

The Evolution of the Russian Stock Market From 1995-2005

Russia is one of my favorite emerging markets and its stock market has delivered incredible stock market returns over the past few years. In research the Russian stock market, I recently discovered an interesting paper analyzing the evolution of the Russian stock market, and its associated risk factors, during the period from 1995 and 2005.

Here is a hot link to a .pdf of the article: Risks of investing in the Russian stock market: Lessons of the first decade

This is the abstract for the paper:

The modern history of the Russian stock market has mirrored ups and downs of the country’s transition as well as swings in investor perceptions. In this paper, we describe the evolution of the Russian stock market over its first decade, with particular attention to the risk factors driving stock returns. First, we analyze the development of the institutional infrastructure and dynamics of the market’s size and liquidity measured by the number of listed and traded stocks, depositary receipts and IPOs as well as trading volume in the local stock exchanges and abroad. Then, we examine major political and economic events, which influenced the investor perceptions of the country risk and were reflected in stock prices. Finally, we carry out quantitative analysis of risk factors explaining considerable time and cross-sectional variation in Russian stock returns. We document a significant role of corporate governance, political risk, and macroeconomic risk factors, such as global equity markets performance, oil prices, and exchange rates, whose relative importance varied a lot over time.

Fidelity Offers a Low Margin Rate for Wealthy Investors

Some investors attempt to enhance their portfolio returns by using financial leverage, such as options or margin borrowing. Margin borrowing is probably the more popular leverage-enhancing technique used by individual investors. By borrowing "on the margin," i.e., from one's brokerage firm to purchase shares of stock, the investor can achieve large returns in a short amount of time if shares of the stock held rise rapidly. Downside risk is also enhanced for the same reason.

Despite its relatively common use, margin borrowing is unsuitable for many small investors, primarily because the margin interest rates charged by brokerage firms tends to be very high. For example, the FED recently cut its overnight lending rate to banks to 4.50%. However, most brokerages are still charging margin interest rates exceeding 10%.

Fidelity, for example, currently charges a margin interest rate of 10.325% to anyone borrowing less than $10,000. Fidelity, however, provides a great incentive to wealthy investors who want to borrow on the margin. As of October 31, 2007, Fidelity only charges a margin interest rate of 5.25% to anyone borrowing $500k or more, as shown in the chart below:

If I had a large brokerage account, I would certainly consider borrowing from Fidelity to purchase shares of certain equities. For risk tolerant investors, 5.25% seems like a small price to pay for the potential returns possible from margin borrowing. If I were to borrow on the margin, I would probably use the borrowed money to purchase shares of an index-tracking ETF, such as the S&P MidCap 400 Index ETF (symbol: MDY) or the S&P 500 Index ETF (symbol: SPY), to minimize individual company-specific risk.

There may be additional tax benefits that further enhance the desirability of margin borrowing. Qualified dividends are currently taxed at a maximum rate of 15% per year. If one has enough deductions to itemize on one's federal tax returns, one can deduct margin interest against one's federal income taxes, giving the person an additional benefit. If the person is in the highest marginal tax bracket, that person will effectively be deducting the margin interest against income that would be taxed at a rate of 35% per year.

October 2007 Returns For My Model Long-Term Portfolio

My Hypothetical Model Portfolio had its second strongest performance (on a % basis) of 2007 during October. Although the month was volatile, the Portfolio rallied on October 31st when the Federal Reserve cut its benchmark overnight interest rate by 25 basis points to 4.50%. The FED released a statement indicating that it now thinks the risks of recession and higher inflation are in "balance," a signal that the FED is less likely to make another cut down the road.

As of the market close on October 31, 2007, the Hypothetical Model Portfolio was up $5637, or about 3.56% during October. The Hypothetical Model Portfolio is now up about $18567 in 2007, a gain of 12.76%, as shown on the table below (click for a larger image of the table). Based on the strong October returns, the 2007 returns for the Hypothetical Model Portfolio are now ahead of the 10.83% return of the Vanguard S&P 500 Index fund (VFINX), my benchmark proxy for the S&P 500 index.

International stocks generally led the way again in October, most likely due to the FED's interest rate cut, which devalues the U.S. Dollar, and consequently increases the value of foreign-denominated assets such as international equities. The iShares Emerging Markets ETF (EEM) was my best performing holding, rising about 11.87%. The Templeton Russia closed-end fund (TRF) rose about 8.74%, and the Vanguard Developed Markets Index mutual fund (VDMIX) rose about 4.41%.

Tech stocks were also strong performers during October - the Nasdaq 100 ETF (QQQQ) rose an impressive 7.09%. Small caps also performed well, with the Vanguard Small Cap Index mutual fund (NAESX) rising 2.62% and Vanguard Small Cap Value Index (VISVX) returning about 1.34%.

Financials were laggards again - the SPDR Financial components ETF (XLF) dropped 0.97%, whereas the iShares Dow Jones U.S. Select Dividend Index Fund (DVY) rose a scant 0.93%.

The results of the holdings in the Hypothetical Model Portfolio have been very disparate through the first 10 months of 2007. EEM, QQQQ, and VDMIX are leading the way with phenomenal returns of 46.44%, 27.71%, and 18.62%. Four of the holdings, on the other hand, have had abysmal returns - TRF, XLF, DVY, and VISVX have returns -9.92%, -6.54%, 0.49%, and 1.03% respectively for the year. The winners have more than made up for the weak performance for the poor performers, and the portfolio is currently nearly a full two percentage points ahead of the 10.83% return of the Vanguard S&P 500 Index fund (VFINX), my benchmark proxy for the S&P 500 index, as discussed above.

Three of the holdings in my Hypothetical Model Portfolio paid dividends during October. As I mentioned in a previous post, I reinvest the dividends from mutual fund holdings when distributed. I allow dividends from closed end funds or the ETFs to accumulate in the "CASH" column until it reaches at least $100, at which point I invest the CASH in the mutual funds lagging my benchmark asset allocation by the largest amount at the time. The reason why I wait until $100 is accumulated is because that is the minimum amount required to invest in a Vanguard mutual fund at a time.

At the end of September, the CASH column totaled $66.05. On October 1st, DVY paid a dividend of $0.59722/share (a total of $59.72). This dividend payment was immediately moved into CASH, and the CASH column accumulated a total of $125.77 as of October 1, 2007. As of that date, the most underperforming mutual fund holding was VISVX. Accordingly, on the following date, October 2, 2007, $125.77 was invested in VISVX to purchase an additional 7.207 shares at $17.45/share.

Two other holdings paid dividends in October. On October 3, 2007, XLF paid a dividend of $0.2554/share (a total of $25.03), which was moved to "CASH" on the table shown below. QQQQ paid a dividend of $0.026/share (a total of $5.46) on October 31st, which was also moved to "CASH" on the table shown below.

I anticipate that the portfolio returns will continue to be volatile for the rest of 2007 and will probably be slightly higher by the end of December, 2007.

*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.

September 2007 Returns

Historical Earnings and P/E Ratios for the S&P 500 Index

The S&P 500 index is one of the most famous and widely followed U.S. stock market indices. It was created in 1957, although data for stocks representative of the index have been determined by backdating the index into the 19th century, as I previously discussed in an earlier post about historical dividends for the S&P 500 index.

The chart below illustrates the end-of-year closing values for the S&P 500 index, the earnings of the index, and the trailing P/E ratio for the index. The earnings shown below are "as-reported" earnings that take into account all of the various write-offs or other non-recurring expenses, as opposed to "operating earnings," which omit non-recurring expenses. There are supposedly non-recurring expenses for most of the companies in the index almost every year, so it makes sense to account for them.

Year	Index Closing Value (EOY)	Index Earnings	Trailing P/E Ratio
1957	39.99	$3.37	11.87
1958	55.21	$2.89	19.10
1959	59.89	$3.39	17.67
1960	58.11	$3.27	17.77
1961	71.55	$3.19	22.43
1962	63.10	$3.67	17.19
1963	75.02	$4.02	18.66
1964	84.75	$4.55	18.63
1965	92.43	$5.19	17.81
1966	80.33	$5.55	14.47
1967	96.47	$5.33	18.10
1968	103.86	$5.76	18.03
1969	92.06	$5.78	15.93
1970	92.15	$5.13	17.96
1971	102.09	$5.70	17.91
1972	118.05	$6.42	18.39
1973	97.55	$8.16	11.95
1974	68.56	$8.89	7.71
1975	90.19	$7.96	11.33
1976	107.46	$9.91	10.84
1977	95.10	$10.89	8.73
1978	96.11	$12.33	7.79
1979	107.94	$14.86	7.26
1980	135.76	$14.82	9.16
1981	122.55	$15.36	7.98
1982	140.64	$12.64	11.13
1983	164.93	$14.03	11.76
1984	167.24	$16.64	10.05
1985	211.28	$14.61	14.46
1986	242.17	$14.48	16.72
1987	247.08	$17.50	14.12
1988	277.72	$23.76	11.69
1989	353.40	$22.87	15.45
1990	330.22	$21.34	15.47
1991	417.09	$15.97	26.12
1992	435.71	$19.09	22.82
1993	466.45	$21.88	21.32
1994	459.27	$30.60	15.01
1995	615.93	$33.96	18.14
1996	740.74	$38.73	19.13
1997	970.43	$39.72	24.43
1998	1229.23	$37.71	32.60
1999	1469.25	$48.17	30.50
2000	1320.28	$50.00	26.41
2001	1148.08	$24.69	46.50
2002	879.82	$27.59	31.89
2003	1111.92	$48.74	22.81
2004	1211.92	$58.55	20.70
2005	1248.29	$69.93	17.85
2006	1418.30	$81.51	17.40

From 1957 through 2006, the average end-of-year trailing P/E ratio for the index was 17.58. However, as shown in the chart above, the trailing P/E ratio of the S&P 500 index fluctuated widely during the past 50 years.

During the 1960s, the average end-of-year trailing P/E ratio for the S&P 500 index was about 17.90. During the 1970s, the average end-of-year trailing P/E ratio plummeted to 11.99 during the inflationary economic conditions prevalent during that decade. The average end-of-year trailing P/E ratio rose slightly to 12.25 during the 1980s, and soared to 22.55 during the stock market boom of the 1990s. From 2000-2006, the average end-of-year trailing P/E ratio rose to an unsustainable 26.22 as economic conditions in the U.S. deteriorated and the stock market bubble burst. The data from 2000-2006 is skewed due to the substantial pullback in corporate earnings during 2001 and 2002.

The chart below (click on the image for a larger view) illustrates the annual trailing P/E ratio for the S&P 500 versus the average end-of-year trailing P/E ratio of 17.58 between 1957 and 2006. As shown, the trailing P/E ratio at the end of 2006 was below the average end-of-year P/E ratio of the index over the past 50 years. Accordingly, although valuations have clearly changed over time and are influenced by external events such as deteriorating or improving economic conditions, an argument can certainly be made that the S&P 500 had a reasonable valuation at the end of 2006 based on the S&P 500 data over the past 50 years.

September 2007 Returns For My Model Long-Term Portfolio

My Hypothetical Model Portfolio registered its strongest performance (on a % basis) in nearly a year during September. The Portfolio was down for the month until the Federal Reserve unexpectedly cut interest rates by 50 basis points on September 18th, sparking a strong stock market rally. The FED said the rate cut was intended to "help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets."

As of the market close on September 28, 2007, the Hypothetical Model Portfolio was up $6173, or about 4.06% during September. The Hypothetical Model Portfolio is now up about $12929 in 2007, a gain of 8.89%, as shown on the table below (click for a larger image of the table). The 2007 returns for the Hypothetical Model Portfolio still slightly trail the 9.10% return of the benchmark Vanguard S&P 500 Index fund (VFINX), my benchmark proxy for the S&P 500 index.

International stocks led the way in September, with the iShares Emerging Markets ETF (EEM) rising about 11.57%, the Templeton Russia closed-end fund (TRF) rising sbout 9.61%, and the Vanguard Developed Markets Index mutual fund (VDMIX) rising about 5.39%. The FED's rate cut weakens the U.S. currency relative to foreign currencies and was a major cause of the strong returns for foreign stocks during September.

Tech stocks were also strong performers during September - the Nasdaq 100 ETF (QQQQ) rose a strong 5.20%. Large caps also performed well, with VFINX rising 3.72%.

Financials were laggards - the iShares Dow Jones U.S. Select Dividend Index Fund (DVY) rose a scant 0.30% and the Vanguard Small Cap Value Index (VISVX), a fund holding many financial stocks, rising just 1.69%.

Through the first 9 months of 2007, foreign and tech stocks have been carrying the Hypothetical Model Portfolio. EEM has led the way, with a return of about 30.9%, QQQQ has returned about 19.26%, and VDMIX has appreciated about 13.58%.

One of the holdings in my Hypothetical Model Portfolio, VFINX, paid dividends during September. As I mentioned in a previous post, the dividends from mutual fund holdings are reinvested. VFINX paid a dividend of $0.62/share (a total of $153.38) which was reinvested on September 21 to purchase an additional 1.091 shares at a price of $140.49/share.

I was glad to see decent returns during September. I anticipate that the portfolio will rise a few more percentage points over the last three months of the year and will close out 2007 up 10-15% for the year.

*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.

August 2007 Returns

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.

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.

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

How To Construct a BRIC-Tracking Portfolio

I have previously written about the tremendous projected growth of the emerging markets of Brazil, Russia, India, and China (see posts from January 2007 and May 2007). Rapid economic development in each of these countries is projected for decades to come. As I mentioned back in January 2007, Goldman Sachs published a report in 2003 on the BRIC countries and projected that the economies of these countries will grow much faster than any of the current developed markets (including the U.S., Japan, Germany, the U.K., Italy, and France) and the local currencies of the BRIC countries will appreciate some 100-300% against those of the developed markets.

There are popular relatively low-cost emerging markets ETFs currently being offered, such as the iShares MSCI Emerging Markets Index Fund (symbol: EEM), which tracks the MSCI Emerging Markets Free Index. Another popular emerging markets ETF is the Vanguard Emerging Markets ETF (symbol: VWO), which tracks a slightly different emerging markets index, MSCI Emerging Markets Select Index. Both the iShares and the Vanguard ETFs are a good way to invest in emerging markets. However, both invest only around 40% of their assets in the BRIC countries.

I have been waiting for some time for a good BRIC ETF to be introduced that invests only in the BRIC countries. So far, two BRIC ETFs are trading on the market. The oldest is the Claymore BRIC ETF (symbol: EEB), which tracks the Bank of New York's BRIC Select ADR Index, as I discussed back in January 2007. The other BRIC ETF is the SPDR S&P Bric 40 ETF (symbol: BIK), which was introduced in June 2007 and tracks the S&P BRIC 40 Index.

Although I am glad that BRIC ETFs are finally available, I do not like either of the currently available BRIC ETFs. According to ETFconnect, the Claymore ETF invests in the BRIC countries according to these allocations:

• India - 13.56%
• China - 35.79%
• Brazil - 45.88%
• Russia - ???? (possibly 4.77%)

The S&P BRIC ETF invests in the BRIC countries according to these allocations:

• India - 6.70%
• China - 40.05%
• Brazil - 26.75%
• Russia - 25.05%
  

I don't like either of these BRIC ETFs because they both over-allocate investments in certain BRIC countries at the expense of other investments in other BRIC countries. For example, I fail to see the logic behind the index tracked by the Claymore ETF investing less than 5% in Russia stocks, or the index tracked by the S&P BRIC ETF investing only about 6.7% of assets in Indian stocks.

I would prefer to see a BRIC ETF that invests about 25% of assets in each of the BRIC countries. Country-specific ETFs and ETNs are available for small investors to create their own relatively low-cost BRIC-tracking portfolio. I personally would invest according to the following allocation:

• Brazil - 25% - iShares MSCI Brazil Index Fund (symbol: EWZ)
• Russia - 25% - Market Vectors TR Russia ETF (symbol: RSX)
• India - 25% - iPath MSCI India Index ETN (symbol: INP)
• China - 25% - iShares FTSE/Xinhua China 25 Index Fund (symbol: FXI)
  

In order to minimize transaction costs, I would invest via a low-cost brokerage, such as Ameritrade Izone, which only charges $5 per trade. I would also purchase a minimum of $1500-2000 of each security at the time I create the portfolio, and I would rebalance once per year. Because of the inherent volatility of emerging markets, I would probably limit a BRIC investment to 5-10% of my overall portfolio.