Monday, August 01, 2005
Day-Trading Currencies, 24/7
CURRENCIES TEND TO BEFUDDLE MOST AMERICANS.
Accustomed to being able to use the same, simple greenback from sea to shining sea, we don’t have the same facility in trading currencies as Europeans, who historically had to swap francs for marks or lira. While the euro has eliminated much of that need, there’s more interest than ever in trading currencies, especially following China’s decision to loosen its tether on the yuan.
Because of the global nature of currency trading, the market is open 24 hours a day, seven days a week, so you can day trade all night long. It’s an extremely liquid market, with daily transaction volumes of $1.5 trillion to $2.5 trillion, and with players ranging from world banks to individual traders.
Since much of the volume is speculative, the spreads vary, which leads to arbitrage opportunities: There is no restriction on short-selling since you’re buying, or going long, one currency when you sell another. Forex Capital Markets (http://www.fxcm.com), which offers online currency trading to institutions and retail investors, states in its “Why Trade Currency?” leaflet that currencies rarely spend much time in tight trading ranges, and have the tendency to develop strong trends. The firm further states that a technically trained trader can identify trends and breakouts that provide multiple opportunities to enter and exit positions. Indeed, currencies tend to have the best-defined trends of any market, perhaps because they aren’t free of governments’ manipulation.
If you’re going to make money trading in foreign exchange, it’s good to have some education and training before you jump in.
You’ll hear the brokers who specialize in forex bang the drum of trading on margin, leveraging a small amount of money to make a huge pile, and so on. Do yourself a favor before following that seductive song: Learn as much as you can before opening an account. As each brokerage service is required to state in its customer information packets, “Forex trading on margin carries significant risk and is not suitable for all investors.” (It’s no surprise that it was the money changers—the biblical equivalent of currency brokers—that Jesus threw out of the temple for turning it into a den of thieves.)
To gain more practical knowledge about currencies, check out “All About...The Foreign Exchange Market in the United States,” published by the Federal Reserve Bank of New York at http://www.ny.frb.org/education/addpub/usfxm/ for some basic information on the structure of the market and the main players.
One way to get into gear is through mock trading. Several online brokers that offer currency trading post trading games, and it’s in your best interest to try out mock trading before you try doing it with real money.
OANDA FXTrade (http://www.oanda.com/), headquartered in New York City with offices in Zurich and Toronto, offers foreign-currency tools and applications as well as foreign-exchange-related content targeted at investors, businesses and travel clients. OANDA’s currency-conversion and localization services cover 164-plus currencies and are available in seven languages. Their mock-trading application is FXGame or fxtrade.oanda.com/fxgame/, and it credits the player with $100,000 in “play” U.S. dollars—and it’s free of charge. It’s a good way to get familiar with OANDA’s platform, and to decide it if will work for you when you start trading real money.
Forex Day Trading (http://www.forex-day-trading.com) provides a good basic introduction to currency trading under its “Education” tab off their main screen. One point the authors make when they discuss taxes is, “Forex traders don’t receive 1099 forms from their broker at the end of the year like stock and futures traders do.” The firm also notes: “Currency traders involved in the forex spot (cash) market can choose to be taxed under the same tax rules as regular commodities [IRC (Internal Revenue Code) Section 1256 contracts] or under the special rules of IRC Section 988 (Treatment of Certain Foreign Currency Transactions). IRC 988 applies to cash forex, unless the trader elects to opt out.”
You can sign up for a 30-day demo account at http://www.forex-day-trading.com/forex-simulated-trading.htm to check out the tools available at Forex Day Trading.
The majority of online forex brokers are market-makers, so they don’t charge commissions on transactions. They make their money on the spreads, and are often taking the opposite side of a trade from yours. Spreads are defined in “pips,” which is a unit of price change in the bid/ask price of a currency. For most currencies, a pip denotes the fourth decimal place in an exchange rate and represents 1/100 of 1%.
FXDirectDealer (http://www.fxdd.com) provides real-time margin-monitoring capability in numerical and graphical format, allowing clients to know where they stand in real time. FXDirectDealer has a charting package with tick charts, and minute, hourly, daily and weekly charts. Chart types include candlestick, tick and bar charts. Bollinger Bands, Moving Averages, Stochastic, MACD and Momentum can also be added. In mid-July, FXDD announced a two-pip spread on the EUR/USD (euro-to-dollar) and nine new currency pairs. The firm says it does not trade against its customers, due to parent-firm Compagnie Financière Tradition’s policies. FXDD allows a 60-day trial of their trading platform, accessible by clicking “Trading Platforms” on their main page.
OPTIONSXPRESS IS ROLLING out futures trading to existing customers, with a subtle “Futures” link added to the selections available under their “Trade” tab. They wrote their own futures-trading interface, rather than borrowing code from a futures house as do most other brokers. Some brokers require you to open a separate account to trade futures, but optionsXpress has figured out a way to allow trading of futures in the same account with stocks and options.
To be eligible to trade futures in an optionsXpress account, an investor must be located in the U.S., have account equity of $100,000, one year of prior futures-trading experience, minimum liquid net worth of $150,000, minimum income of $50,000, and speculation as an investment objective. Existing optionsXpress customers who want to take advantage of this new feature must indicate their interest. Applicants are reviewed on a case-by-case basis, and if approved, can trade financial and currency futures, interest rates, metals, and single stock futures. Commissions are $3.99 per contract plus exchange fees.
ONLINE BROKER NEWS: Ameritrade’s takeover of TD Waterhouse, announced in late June, is scheduled to close by year-end. Joe Moglia, Ameritrade’s CEO, says that he anticipates maintaining the majority of brick-and-mortar branch offices that Ameritrade (ticker: AMTD)will pick up with the TD Waterhouse takeover. One of Ameritrade’s strategies for continued growth is to become a major player in the long-term investor space; its Amerivest subsidiary is evidence of that strategy. Moglia believes that branches are worthwhile for the long-term investor, noting, “We may approach them a little differently because there might be some that don’t make sense.”
Published in Barron’s August 1, 2005
Monday, July 18, 2005
Closing in on Closed-Ends
CLOSED-END FUNDS HAVE FEW FRIENDS. Oh, sure, brokers like them, especially when they get to flog new issues with the pitch that there’s no commission. But they may not tell you that you’re paying a buck for perhaps 92 cents’ worth of underlying assets. And that, after the fund starts trading in the aftermarket, its share price could well head to that net asset value—or lower.
At that point, the critics of closed-ends can carp about what a lousy investment they are. And, to be sure, many are. Some have high expense ratios—higher, in fact, than the 1%-plus that their open-end mutual-fund counterparts levy. And if you don’t buy them during their initial offering (when you’re paying the underwriters, whether you know it or not), you must pay brokerage commissions, as you would with a stock. With many fine no-load and low-cost mutual funds available, plus an ever-expanding array of exchange-traded funds, who needs closed-ends?
Well, sometimes, there are excellent reasons to buy them. The funds sometimes trade at prices below the value of their underlying holdings. Thus, it’s possible to pay 90 cents or less for a dollar’s worth of assets. That’s always been the attraction of closed-ends, and shopping for funds at a discount is one of the oldest investment tacks. And now, various Websites provide ready access to information that used to take a lot of digging, while low-cost online brokers minimize transaction costs.
Closed-end funds issue a set number of shares and trade like stocks and exchange-traded funds. Closed-ends, however, can and do change hands at prices above or below their net asset value. ETFs, in contrast, rarely stray from their NAVs, and open-end mutual funds continually issue and redeem shares at their net asset value. Closed-ends are actively managed, often by the same firms that offer open-end funds, while ETFs are based on some broad market index or a certain sector.
One advantage that closed-end fund managers have over their open-end counterparts is that they don’t have to worry about shareholder redemptions when the market goes south. That makes them more suitable for relatively illiquid asset classes, such as foreign securities. How can you seek out these attractive closed-end funds? One way is to go through Barron’s lists of the funds with a highlighter pen, and take a closer look at those trading at a deep discount. Then there’s the Web. You’d think that the best sites to research closed-end funds would be the same as those for open-ends. But Morningstar (http://www.morningstar.com) no longer does active research on individual closed-ends, although its premium site offers screens based on asset class, returns, premiums or discounts. Just don’t expect detailed writeups like those the firm provides for open-ends.
The Closed-End Fund Association, a trade group, offers the Closed-End Fund Forum. You’ll find its Website at http://www.closedendfundforum.com; it’s worth a look. Forget the dated news and research, but check out the array of useful statistics, which appear on the right side of the home page. Scroll down to find Fund Statistics in the right-hand column. Click on Premium/Discount and, when the table comes up, click the Sort by Premium/Discount heading. Scroll to the bottom of the list to find the most deeply discounted funds. Other handy listings include daily winners and losers, which may present opportunities in this often-inefficient market.
The same trade group runs http://www.closed-endfunds.com, which offers timely press releases from funds and weekly roundups of fund performance, including the biggest winners and losers. The site’s listing of recent initial public offerings is especially useful. That’s not to suggest you chase hot IPOs; in most cases, quite the opposite. Once the underwriting of a new fund ends, it typically falls from its offering price. It’s like buying a car right after it leaves the showroom. Its price is markedly cheaper, even though it’s just as good as new. The losers’ list, meanwhile, might point to some ideas for bargain hunting, but you’ll want to do some research before buying.
Our favorite site for closed-ends is ETFConnect (http://www.etfconnect.com). Notwithstanding its name, it offers extensive current information on closed-ends, as well as on ETFs. The site is run by Nuveen Investments, a leading issuer of closed-end municipal-bond funds, but it plays no favorites.
Look under Closed-End ETFs in the left-hand column, which lets you sort closed-ends based on such criteria as size of discount. ETFConnect has another feature that is a great help to closed-end investors—the Multi-Fund Review, which lets you check out funds by sector.
You can click on an individual fund to see the basic data, including NAV, most recent closing price, biggest holdings and recent dividends. It will also show how much leverage, if any, the fund is using. Leverage can improve a fund’s returns but increase its risk.
There’s also a neat little chart showing the trend in the fund’s discounts. Some have remained at discounts forever, so they might not be a bargain, even at 90 cents or less on the dollar. On the other hand, the fund might suddenly have fallen out of bed for a good reason—say, a dividend cut. By then, the bad news may already be fully discounted in the closed-end’s market price.
ETFConnect also provides links to a particular fund’s own Website, which often is the best source of information. While some funds’ sites may only show marketing materials and recent reports, most of the better ones list the details of the portfolio. ETFConnect can help illuminate a fund’s expenses. A closed-end fund has little incentive to minimize expenses, as might an open-end fund looking to market more shares. Indeed, outrageous expenses may account for a closed-end fund’s discount, in which case a discount may represent no bargain at all.
One other thing to watch with muni closed-ends: the percentage of bonds subject to the alternative-minimum tax, an increasingly important consideration as more investors get snagged by this insidious levy.
Closed-ends also can be researched like stocks, using the tools of your online broker or sites such as Yahoo! Finance (finance.yahoo.com).
One thing to look for is insider buying. Most of the time, it will take the form of small purchases by fund directors. But sometimes, you can pick up more significant trends. For instance, the CEO of a fund complex might be scooping up a closed-end that had dropped to a discount. Last year, Nuveen Investments’ chief executive, Timothy R. Schwertfeger, bought some 35,000 shares of Nuveen Tax-Advantaged Total Strategy Return Fund (ticker: JTA) at about $17 to $18 a share—below the $20 price Nuveen charged the public in the fund’s IPO on Jan. 27, 2004. The fund since has climbed back to within pennies of the initial offering price.
There are also a few firms specializing in closed-end investing. One is Thomas J. Herzfeld Advisors (http://www.herzfeld.com) of Miami, which provides the index at the start of Barron’s closed-end listings each week.
Most of these Websites are free of charge, and include educational content about how closed-end funds are formed and managed. More importantly, they provide a wealth of information for investors looking to take advantage of this often mispriced and misunderstood sector.
Published in Barron’s July 18, 2005
Monday, June 20, 2005
Over There, Online
AMERICAN INVESTORS INCREASINGLY ARE HEEDING the long-time advice to diversify their portfolios internationally. In the past, that’s meant mutual funds, most of which carry fairly hefty expenses. As with domestic funds, exchange-traded funds have been making major inroads in the global arena. A glance at the size rankings of ETFs shows that the iShares MSCI EAFE Index Fund (ticker: EFA), is No. 3, surpassed only by the Standard & Poor’s Depositary Receipts (SPY) and the Nasdaq 100 Trust (QQQQ).
EFA, which tracks the Morgan Stanley Capital International EAFE (Europe, Australasia and the Far East) Index, provides exposure to the globe’s developed (as opposed to emerging) markets in one fell swoop. And since exchange-traded funds can be bought and sold throughout the trading day, just like a stock, it’s easy to trade. Its expense ratio is a low 0.35%, making it an attractive buy, especially compared with mutual funds that invest abroad, which have an average expense ratio of 1.77%.
THERE IS ALSO AN ARRAY of ETFs that each provide exposure to a single country—say Brazil, or South Korea—as well as regional indexes, which give individuals an efficient means to pinpoint opportunities around the globe.
At MSN Money (http://www.moneycentral.msn.com), check out the ETF section, found under mutual funds. There you’ll find a complete list of exchange-traded funds, broken down by category, including non-U.S., global and emerging-market funds. On the main ETF page, enter a ticker to get a snapshot of a fund from Thomson Financial.
In addition, at MarketWatch (http://www.marketwatch.com), you check the ETF Center. There, the Quick Screener breaks down funds by regions, among other criteria. (Like Barron’s, MarketWatch is published by Dow Jones.)
So far, there aren’t any international fixed-income ETFs, but there are several closed-end funds in this category, most of which trade at a discount. (We’ll examine resources for closed-ends in a future issue.)
There’s more to investing in international equities, of course, than buying and selling ETFs of other funds. Several dozen Barron’s readers responded to our requests for their wish lists and gripes concerning the subject. As always, I’m impressed by the thoughtful responses crafted by those who wrote to our online mailbox; thanks to all of you who took the time to share your thoughts.
Quite a few readers of this column have given international trading a go, only to run into obstacles.
Only one online broker earned a grudging compliment; the rest were found wanting. Among the problems: an inability to submit limit orders in foreign currencies to be executed in foreign markets, and the lack of visible and predictable commission schedules on foreign currency exchanges. Unlike the U.S., where public companies face shareholder-communication requirements, some other lands impose no such rules. Our intrepid explorers found that it is difficult to learn about corporate reorganizations or to get copies of annual reports.
Interactive Brokers (http://www.interactivebrokers.com) has a lot to offer investors in foreign shares. Its “Trader Workstation” provides direct access to stocks, options, futures, foreign exchanges and bonds that can be bought and sold in more than 50 markets in 14 countries, with more on the way. IB’s wide range of offerings and low fees earned it the top spot among direct-access brokers in Barron’s 2005 review of online brokers ("Speed or Comfort,” March 7.)
To trade abroad, a U.S.-based customer would open an account in dollars, then generate a margin loan in the foreign currency. To eliminate the loan, the customer has to trade currencies through the IB IDEAL network, or deposit funds in another currency.
One Barron’s reader who responded to our e-mail request for comment on international-trading experiences said he had executed more than 100 trades since opening his account last fall, and noted that IB offers, “very low commissions, powerful trading software with available data feeds from many countries, excellent currency contracts, low-cost margin and three types of excellent help services.”
On the downside, our reader comments that IB seems interested in professional traders, not amateurs. He says that the company’s software is solid, frequently upgraded with features that clients ask for, and is very flexible, with quite a bit of trade-oriented reporting—but it doesn’t have much in the way of long-term investment analysis, or links to research. “It’s called Trader Workstation, with the emphasis on Trader,” he concludes.
Several readers who have traded Canadian stocks are customers of TD Waterhouse (http://www.tdwaterhouse.com), owned by Toronto-Dominion, the big north-of-the-border bank. One wrote in with a list of pros and cons. Prominent among the cons was that a customer couldn’t trade Canadian securities online—orders must be placed by phone, and charges are higher than they would be if the transaction is done over the Internet.
Several Charles Schwab (http://www.schwab.com) customers complained about buying or selling shares through its international desk, because they had to do so by phone and pay fees that they viewed as on the high side.
A Uruguay-based Schwab customer complimented the firm’s Spanish-language assistance, noting that he had tried to open an Ameritrade (http://www.ameritrade.com) account as well, but ended up closing it, owing to a lack of help in Spanish. However, this customer complained about Schwab’s lack of transparency in online bond trading, lack of international bonds and lack of currency trading. Plus, as noted, the international trades had to be conducted over the phone, rather than online.
E*Trade has branded Websites in 12 countries. Outside the U.S., those sites let customers trade in their own local markets, as well as on U.S. exchanges. But Americans still can’t “cross the borders” and place trades on foreign exchanges.
JARRETT LILIEN, E*TRADE’S president and chief operating officer, plans to launch an International Center on the Website that is similar to the existing exchange-traded fund center. He says that customers will be able to get quotes and content, and information on American depositary receipts and international ETFs. “Eventually, we’ll have direct access to international markets on that tab,” Lilien adds.
Lilien came to E*Trade in 1999, after it purchased his firm, TIR Securities. TIR was headquartered in Hong Kong, and focused on the institutional markets, with trades being placed on 35 exchanges around the world. He says that 68% of E*Trade customers surveyed said they’d like to place international trades, and he likens the current interest in international trading to that in options just a few years ago.
According to Lilien, E*Trade’s current infrastructure, with internal order-routing, gives it a direct connection to the exchanges. Before year’s end, he would like to add five or six global markets where customers can have direct access, and is considering Canada, the U.K., Germany, France, Hong Kong and Japan. His vision is to offer direct access to all global markets, and to facilitate trading and investing on local exchanges.
Published in Barron’s June 20, 2005
