WEBS: They can help you

Why invest internationaly? First, Canada and the U.S. represent a shrinking portion of the global pie. Second, by adding international assets to your portfolio, you will increase diversification thereby potentially reducing risk; foreign markets generally have a low correlation to Canadian and U.S. markets. Thus, while returns possibly increase, volatility is likely to decrease. However, these risk-reducing benefits apply mostly to international stocks that are held for the long term. In the short run, individual markets, especially emerging ones, are more volatile than domestic ones.

Once you’ve decided to give international investing a try, you face another decision: the choice between active management and passive. Active managers select and trade a portfolio of stocks which they believe will maximize performance. Passive management, on the other hand (often called indexing) means investing in a group of stocks designed to represent a broad index. The object of indexed investing is not to outperform the underlying index but merely to track it, closely.

One indexed investment alternative is WEBS. WEBS offer an uncomplicated, low-cost way to gain broad exposure to interional markets. These are indexed instruments that are purchased just like a stock. WEBS offer efficient, flexible, and affordable access to foreign markets with much less complexity and cost than is typically encountered when investing directly in foreign equities.

With over 97% of the world’s stock market value outside of Canada, there are plenty of opportunities for global investors.

WEBS are listed and traded on the American Stock Exchange (AMEX). Closing prices are published in major newspapers. In addition, unit values are low (usually under $20) making them accessible to small investors.

On the flip side, investors should be aware of the risks involved with WEBS. First and most important, WEBS are succeptible to negative returns when their underlying benchmark indexes perform poorly. Second, because each WEBS series is traded in U.S. dollars and no hedging is employed, investors have foreign currency exposure with respect to the underlying securities. For instance, recent currency devaluations in emerging Asia led to sharp market declines. WEBS tracking markets in Malaysia and Singapore declined some 20% in early July. Third, WEBS are country specific. Thus they do not offer the broader diversification benefits associated with international mutual funds. As such, WEBS are vulnerable in times of national crisis

The information contained herein was obtained from sources which we believe to be reliable, however, we cannot represent that it is accurate or complete. Neither the information nor any opinion expressed constitutes a solicitation by us of the purchase or sale of any securities or commodities.

WEBS may not be suitable for all investors, please consult your Financial Advisor for appropriate placement in your portfolio.

Financial Tips courtesy of Merrill Lynch Canada Inc.