(June 5) – “Michael Parness, a day trader who operates out of New York City’s Tribeca district, is looking for what he calls ‘big dramatic moves’ as he kicks his legs up on an L-shaped desk and monitors the Nasdaq Composite Index on a computer screen. ‘That’s the only time it’s worth playing them,’ he says, referring to one of the trendiest investment products around, the Nasdaq 100 Tracking Stock,” writes Aaron Lucchetti in today’s Wall Street Journal.
“Several states away, Thomas Mench, a Cincinnati investment adviser, ponders whether to shift his investors’ money back into the Nasdaq-100 shares, as one of many market-timing moves he takes over a period of weeks. And 600 miles away in Charlotte, N.C., homemaker Ann Jones is sitting tight, despite many down market days, on the purchase of the Nasdaq-100 shares she made 14 months ago.”
“Some say they’re the latest, greatest investment gadgets. And with $40 billion in assets, even most detractors grant that they’re starting to reshape the world of index mutual funds.”
“‘They’ are exchange-traded funds, or ETFs. And a look at three investors in the $11 billion-in-assets Nasdaq 100 Tracking Stock, among the most popular of the new breed, sheds light on the appeal they hold for individuals — and the threat they pose to the traditional mutual-fund industry.”
“These new funds seemingly could have been spooned out of an alphabet-soup can: SPDRs, iShares and QQQs (the shorter alias of the Nasdaq-100 stock). But what are they, exactly? Unlike mutual funds, which can be bought only at a price set at 4 p.m. Eastern time each trading day, tradable funds can be bought and sold at market prices throughout the day, just like a stock. They tend to have lower costs than their conventional cousins because the asset-management firms that sponsor them don’t deal directly with investors; securities brokers and financial advisers pick up the slack.”
“For some investors, tradable funds don’t make sense. For instance, commissions paid to the brokers and advisers eat deeply into the returns of those investing small sums. Another drawback: Even though Barclays Global Investors is rolling out 40 new tradable index portfolios, funds that use professional stock pickers to identify holdings aren’t available yet. Also, the newish products remain untested in periods of intense market stress.”
“Still, fund firms are closely watching the growing interest in this new investing vehicle. Indeed, mutual-fund behemoth Vanguard Group last month filed to add tradable-share classes to five of its most-prominent stock-index funds. And about a half-dozen mutual-fund companies are exploring versions that would be headed by stock pickers, a senior official with the American Stock Exchange told a big industry conference several days after Vanguard’s announcement. Tradable shares were pioneered and most are traded on the Amex.”
“Still, it isn’t entirely clear whom the tradable funds appeal to — those who would ordinarily invest in mutual funds, or those who otherwise would buy hot stocks.”
“There is a lot of evidence that the latter are among the biggest holders of the Nasdaq-100 stock. Exhibit No. 1: The average holding period for an investor is a mere three days, according to numbers crunched by Bogle Financial Markets Research Center in Malvern, Pa. That means, on average, the entire investor base of the Nasdaq Cube (another alias for the Nasdaq-100), changes more than once a week.”
“Investors hold on to other tradable funds a little longer, at least 10 to 30 days, according to Amex officials. The Nasdaq-100 fund appeals more heavily to hyperactive individual investors, the thinking goes, because the index itself is among the most volatile. And the number of such trigger-happy investors may be smaller than the turnover suggests, boosters say. Still, the typical mutual fund is owned for about 400 days, a significantly longer period. ‘These are not long-term investors’ going into the tradable funds, argues John C. Bogle, Vanguard Group’s founder and former chairman.”
@page_break@”It is ‘not your father’s index investing,’ agrees John Roberts, head of marketing for Barclays’s asset-management unit, but officials at the company dispute that the funds don’t draw large numbers of long-term investors.”
“Neither side is wrong, really. In fact, Messrs. Parness and Mench and Mrs. Jones — the three users of the Nasdaq-100 product — demonstrate that tradable-fund followers are an eclectic crowd.”
“Just 10 blocks from the Amex trading floor, Michael Parness, the Tribeca daytrader, discovered the Nasdaq-100 fund and started trading it last spring. One morning this past March, tech stocks slide as Mr. Parness, a bald, husky bachelor, sits in his dimly lit second-floor apartment. The Nasdaq Composite Index, from which the Nasdaq-100 index of big companies is culled, drops 100 points. Sensing a rebound, Mr. Parness, 36 years old, quickly taps his keyboard and buys several thousand shares of the Nasdaq-100 stock.”
“In the afternoon, the index bounces back, and Mr. Parness pockets a few thousand dollars. “I go the opposite way of the market opening’ he explains, reading chat-room messages as he speaks.”
“Often wearing little more than black underwear, the former bartender and baseball-card dealer sometimes buys and sells stocks 100 or more times a day. Meanwhile, on his Web site, trendfund.com, Mr. Parness, as ‘Waxie,’ shares an opinion on any stock that’s moving.”
“On another day, in early April, Mr. Parness keys in an order for his million-dollar-plus portfolio to sell short 2,000 shares of the Nasdaq-100 stock — essentially, a bet that tech stocks would fall. This is something that can’t be done in a run-of-the-mill mutual fund. ‘I don’t get attached to any stock,’ says Mr. Parness, his eyeglasses reflecting the stock quotes on his blinking monitor.
“At this moment, Mr. Parness is hoping an upward move in biotech stocks will be short-lived. As he sells more, his eyes dart between Web pages and news reports. A gray mouse scurries across the hardwood floor, disappearing behind the computer’s hard drive. Oblivious to this real mouse, Mr. Parness bemoans, to hundreds of Web onlookers, the stocks that are rising. ‘Die, you dog!’ he begs of one particular stock.”
“A few hours later, with biotechnology stocks still lifting the Nasdaq index, Mr. Parness quits his Nasdaq-100 bet, cutting his losses. ‘It’s days like this you wish you didn’t trade,’ he says. ‘My philosophy is, take small losses and big gains.’ Closing out the losing position, he writes to the chat-room audience: ‘That’s what you get for being a day trader.'”