RightSide Commentary -Internationals

Following on our report yesterday condemning the investment strategy of owning a little bit of everything in a period of stock market drops, we are selling out of a tracker exchange traded fund aiming to move with European markets. We don't want to continue to have our performance move with European market indexes, which are going down.

   This is because the European central bank authorities are not able to adopt stimulus measures to encourage a recovery, while the U.S. can do this. The Maastricht Treaty creating the European Central Bank set as its unique and sole mission the battle against inflation. If this results in recession, under the rules, the ECB does not have the right to do anything like cutting interest rates.

    The position was confired by ECB member Axel Weber today, who hinted that rather than cutting interest rates, the ECB would be more likely to begin raising them once there were signs of a recovery from the economic slump. The impact, of course, would be to immediately nip the recovery in the bud. However, his remarks did have the effect of strengthening the euro, the common currency for many countries in the EU. So it looked like a good time to bail out.

    Another reason for worrying about Europe is that it is closer and more likely to be affected by Russian saber-rattling and irridentism in the Caucasus, the Balkans, the Black Sea, the Danube. The U.S. may be the hegemon Russia is challenging, but the place the challenges are hitting are at the edge of Western Europe.

    There are two quick and easy ways to invest or divest internationally without having to study and pick stocks. One way is the older one, using closed-end funds. These are managed pools of investment money which are placed in individual stocks the manager thinks will go up. 

    The other way is buy an exchange-traded fund, or ETF, which is attempting to track an index. For international investors, this means picking a country or region (or event he whole world) outside the U.S. and buying an ETF tracking its index.

    We reported yesterday about the futility of index investing in a stock market downturn. While a CEF manager can also be wrong, he can change strategy to overcome mistakes, buying stocks he thinks will do better.  He is there to manage money.

    But an ETF manager is not allowed to stop trying to track an index. His fund exists solely to mechanically track an index and he doesn't have the liberty to switch. Management input (also by outside institutions) does not aim to enhance performance. Managements is there solely to maximize the correlation with an index without actually buying every position in it, and to redeem or create shares to keep the price of the ETF stock close to the value of its portfolio.

    Another reason to dump ETFs is that they trade at net asset value. CEFs, on the other hand, reflect market perceptions and in days like these most of them trade at a discount to net asset value. That means you get more money working for you when you buy CEFs, even if the discounts persist.