My 79-year -old mother was referred to an investment adviser (CPA/CFP) who made some amazing investment suggestions. She told him that she is not a millionaire and primarily invests in CDs with a few no-load mutual funds at Vanguard or Fidelity. She has no debt, hates risk but wants good return, and doesn't like to pay taxes. When I spoke with the Dallas-based adviser about his top two choices for my mother, here is what he suggested:
• Section 42 Fund: Invests in low income housing credits, requires a 10 to 12- year time horizon, has a 25% load and an IRR (internal rate of return) of 7 percent.
• Senior Subordinated Debt Unit Investment Trust Fund: Requires a 5-year time horizon, has a 10% load and is currently earning 5.4 to 5.9%.
I told him thanks but no thanks and told my mother to never speak with this gentleman again! I thought I'd pass along a most amazing tale since this advisor is working with some of my mother's friends.
Q. A friend recently told me about a fund company called Rydex that is offering funds that "short" certain indexes, such as the S&P 500 and the Russell 2000. How do these funds work? Would you recommend them in general?
---B. J., by e-mail, from Dallas A. Rydex is an interesting fund company. It offers a number of funds that attempt to provide inverse but equal performance to major market indexes. Rydex Ursa, for instance, attempts to provide the same return as the S&P 500, but short. It lost money relentlessly in the late 90's bull market but, as expected, made money in the bear market of 2000, 2001, and 2002.
The fund can achieve its goal--- to perform the opposite of its target index--- by short selling individual securities or trading in futures contracts and options on futures contracts.
Other Rydex funds have goals of providing inverse performance of other indexes. Rydex Inverse Small Cap, for instance, is a negative duplicate of the Russell 2000 Index while Inverse Mid Cap is a negative duplicate of the S&P 400 Mid Cap Index.
Rydex Dynamic Dow is yet more aggressive, attempting to provide twice the inverse performance of the Dow 30 stocks. You can also make an inverse bet on interest rates through the Rydex Juno fund which attempts to move in opposition to long term Treasury bonds.
It has never been a good idea to bet against America and its stock market, so these funds aren't exactly taking the world by storm. Juno, a tool for making interest rate bets, has gathered the most assets, while the others lag significantly. Few people are prepared for the stress of negative bets so most people should ignore these funds.
For most of us the most interesting fund at Rydex will be its S&P Equal Weight fund. Unlike other S&P 500 Index funds this $700 million fund invests equal amounts in each of the 500 stocks in the S&P 500 Index. In 2004 the fund returned 16.5 percent to investors, beating the conventional index by a whopping 5.6 percentage points.
Some believe that equal weighting eliminates the systematic overinvestment in overvalued stocks that can occur with market capitalization based indexes. Equal weighting also means the fund is less concentrated in a few mega stocks than the S&P 500 Index is. General Electric, the most valuable company in the S&P 500, for instance, accounts for 3.41 percent of the entire index and the largest 25 stocks account for an incredible 46 percent. The stocks at the bottom of the list account for less than 0.01 percent of the index.
This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational puposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
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