Americans have traded and invested in foreign securities for years, either through domestic receipts on foreign stocks or U.S. mutual funds that invest outside U.S. borders.
A third venue — World Equity Benchmark Shares — allows you to trade foreign markets like individual stocks while enjoying the diversification of an index mutual fund.
Barclays Global Fund Advisors operates 17 WEBS funds. Each one enables traders and investors to target the index of a specific country. Each WEBS series tracks the foreign equity securities index compiled for that country by Morgan Stanley Capital International. They are traded on the American Stock Exchange.
The foreign markets covered are Australia (EWA), Austria (EWO), Belgium (EWK), Canada (EWC), France (EWQ), Germany (EWG), Hong Kong (EWH), Italy (EWI), Japan (EWJ), Malaysia (EWM), Mexico (EWW), Netherlands (EWN), Singapore (EWS), Spain (EWP), Sweden (EWD), Switzerland (EWL), and the United Kingdom (EWU).
The WEBS series fits into a broader category of instruments called exchange-traded funds. Because ETFs differ from mutual funds in important respects, TM tracks each class of
investing instrument in a separate database.
Like mutual funds, ETFs spread their assets among many separate securities, thereby reducing your exposure to company-specific risk.
But ETFs hold two key advantages over mutual funds. First, though taxed under the same laws as mutual funds, ETFs have figured out a way to get rid of all their capital gains. So they avoid annual taxable distributions of those gains to their shareholders.
Second, ETFs trade on exchanges. At present, all WEBS securities trade on the American Stock Exchange. As a result, these “tradable funds” are quoted just like stocks, their bid and ask prices adjusting throughout the day. This differs from mutual funds, which price once a day after the market closes, preventing an investor from buying or selling mutual fund shares during the trading session at an intraday market price.
Transacting WEBS entails none of the loads or redemption fees encountered in many mutual funds. However, you do have to pay a brokerage commission to buy and sell them, just as you would with stocks or American Depository Receipts, or ADRs, which amount to U.S. listings of foreign stocks.
In this regard, mutual funds hold the advantage. The fund trader or investor can sidestep the brokers and establish accounts directly with the fund families.
Who should use WEBS?
WEBS are best suited for the position trader, who seeks to carry trades over weeks or months, and the active investor, who may stay in positions over longer terms but has a strategy for entering positions in hopes of a profit, and exiting positions to take profits or stop losses.
They probably make less appropriate vehicles for intraday and short-term traders and buy-and-hold investors.
Why? First, the daily trading volume in these instruments can be highly erratic, varying from, say, as few as 10,000 shares in, say, the WEBS France Index to as high as 100,000 or more on another day. This volatile liquidity often produces volatile price action, typified by lots of gaps, up and down, at the market open.
In the short term, these movements can exceed the price moves that an intraday or short-term trader can reasonably expect for their trading time horizons. If you insist on trying intraday- or short-term-trading in these instruments, the WEBS Japan Index (EWJ) has the most reliable volume.
As for the buy-and-hold investor, be aware that WEBS investing or trading means betting on the prospects of a single country. This is a fairly focused level of risk, especially when dealing with certain emerging economies.
Most international mutual funds invest in regions rather than confining their portfolios to companies originating in single countries. A U.S. investor using WEBS to diversify outside the U.S. economy would need to balance his or her overseas money among a number of WEBS in order to gain the full benefit of global diversification. Why not just allocate the same amount of cash into a truly diversified international fund like Vanguard Total International Stock Index (VGTSX)?
WEBS do trend nicely over the intermediate-to-long terms. This lends them to the more active strategies of intermediate-term traders and active investors. Charting techniques familiar to the stock trade — for example, consolidation and breakout setups — can be used effectively with WEBS.
For instance, the week of Oct. 9, 1998, the Japan WEBS (EWJ) performed a classic bottom reversal. After breaking above its 200-day linear moving average, shares found found support at that level through early March 2000. If you don’t play reversals, you could have played the breakout on March 12, 1999.
If you want to add a dash of fundamental analysis to your WEBS trading, check out the currency for the country of your target shares. A country’s currency, of course, is a key barometer of the strength of its economy. More important, it’s a way of measuring the relative strength of that country vs. others in terms of attracting foreign capital. And it’s the flow of foreign capital moving into a country’s stocks, or the flight of that same capital from those stocks, which can ultimately steer the price direction of that country’s WEBS index shares.