Friday, June 22, 2007

New E*TRADE Offerings

A few months ago, E*TRADE announced that they will soon be offering global trading. According to their website, you will be able to trade stocks in six global markets: Canada, France, Germany, Hong Kong, Japan, and the United Kingdom. And, you'll be able to hedge U.S. dollar exposure with five global currencies. While I think that this is interesting, I personally believe that investing in individual foreign stocks is too risky for most U.S. based investors. I will and have invested in foreign mutual funds and ETFs, though. Actually, this notice has been on the E*TRADE website for a while, and I'm still waiting for them to implement the feature.

I had mentioned before that E*TRADE is one brokerage that I use which offers IPOs. The other broker that offers IPOs is TD Ameritrade (i.e. the broker formerly known as Waterhouse, not to be confused with the broker formerly known as Ameritrade which does not offer IPOs). Of course, to add to this confusion, all former Waterhouse accounts have now been merged into TD Ameritrade, which doesn't offer online access to IPOs. One of the E*TRADE IPOs that I was recently allocated shares in is Interactive Brokers (Nasdaq: IBKR).

One new thing that I recently noticed on E*TRADE's IPO Center page is "structured products." The one I was looking into was BNP Paribas 3.75 Year 100% Principal Protected Notes. These are bonds that mature on December 30, 2010. Unlike a regular bond the return on these bonds are linked to the quarterly averaged performance of the S&P 500 Index and have a minimum return of 5%.

That caught my eye! You get the performance of the stock market with no downside risk. I did a little more investigating, and it seems that the word average above is key. Assuming that the S&P goes up like a straight line (don't we wish), you won't be receiving the return of the stock market, but the Average Index Performance of the S&P 500 value during the term. The bond prospectus goes on to define the Average Index Performance by a somewhat intricate formula where they value the S&P every three months, and take the average value of the index during the term of the bond. Suffice it to say that the return in this case might be significantly less than the actual S&P performance. On the other hand, if the stock market goes down, you are assured that you will at least receive the 5%. And that is the other catch... The 5% is over the term of the bond, and not an annualized return. For the mathematically challenged here, this works out to the equivalent of about a 1.3% nominal annual rate.

It is clever wording on the part of the offering party here. In essence you can't really lose money on the investment, but you might not make as much as you would in either an index fund (if the stock market goes up) or a regular bond fund (if the market goes down). I can see that the worst case is that you get stuck with the 5% return (1.3% annually). The best case would be if the stock market goes up over the next 4 years, but tanks during the last year.


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